The LSM is best understood as a form of regulation on liquid staking providers. It enacts a safety framework and associated governance-controlled parameters to regulate the adoption of liquid staking.
The LSM mitigates liquid staking risks by limiting the total amount of ATOM that can be liquid staked to 25% of all staked ATOM. As an additional risk-mitigation feature, the LSM introduces a requirement that validators self-bond ATOM to be eligible for delegations from liquid staking providers or to be eligible to mint LSM tokens.
At the same time, the LSM introduces the ability for staked ATOM to be instantly liquid staked, without having to wait for the twenty-one day unbonding period.
Finally, stakers have an option to lock their stake to prevent it from being instantly tokenized without an unlocking period. This is designed as a security mechanism to enable coordinating recovery in the case of wallet compromise.
In sum, the liquid staking module equips the Cosmos Hub to thrive in a world with increasing demand for liquid staked ATOM. It proposes a safe, regulated path towards increasing capital efficiency.
ETH liquid staking has over 30% adoption, but despite its tremendous recent growth, ATOM liquid staking adoption is still around 1%. To support the integrations necessary for vibrant economic activity to flourish in Cosmos, liquid staking tokens need adoption. To bring Ethereum levels of liquidity to Cosmos, liquid staking in the Cosmos needs a sound regulatory framework – the LSM is that framework.
LSM is ready to be deployed on Gaia today. It has been in development for over a year and in early April, the Cosmos Hub community voted overwhelmingly to deploy it to mainnet.
To date, the LSM code has been developed in github repo under the iqlusion github org. Unfortunately actually deploying the forks of staking, slashing and distribution from the iqlusion github repo poses practical challenges with how the SDK is currently organized.
Finally, there is a strong consensus that eventually the right approach for the long term maintainability of the liquid staking module is a separate module within the release structure of the SDK as x/fungibility. This will require minor changes to core staking, distribution and slashing modules. This merger is several months out.
The Cosmos Hub’s mainnet currently runs on Cosmos SDK v0.45.16-ics, a branch of the 45 SDK with interchain security logic added. A software upgrade will be proposed that will point Cosmos Hub mainnet at the Cosmos SDK’s v0.45.16-ics-lsm branch. This *-lsm branch will contain both ICS and LSM changes.
The v0.45.16-ics-lsm branch is feature frozen and maintenance will only consist of security fixes. ICS-related bug fixes will be managed by the ICS/Hub team, LSM-related bug fixes will be managed by the Iqlusion team, and SDK bug fixes will be managed by the SDK team.
This plan allows the Cosmos Hub to deploy LSM in a safe and timely manner without ruffling feathers on other chains that may prefer to wait until the x/fungibility version of the LSM is ready before upstreaming it into the SDK.
When the Hub moves to its next release (0.46/0.47/TBD), we’ll follow the same pattern, with an SDK branch *-lsm. The expectation is that each of these releases will not see new features at the time and maintaining the additions will not be a huge overhead.
By the time SDK 0.50 comes around, possibly sometime in 2023 Autumn, there will be coordinated efforts to rewrite the staking module in a way that allows the LSM to be a modular part of the SDK, instead of a separate branch. At that time the SDK can retire the *-lsm branches.