Author
Citadel One
Background
Last year, with prop 790, the community has voted in favor of adopting the Liquid Staking Module. The objective of the LSM is to regulate liquid staking as well as increase its adoption by introducing the following features:
- Cap the amount of $ATOM that could be liquid staked. The initially cap proposed by the LSM is 25% of total $ATOM staked but could be modified by on-chain governance.
- Imposing a Validator self-bond requirement to receive delegations from LSD providers with a 1:250 ratio.
- Enable instant liquid staking of staked $ATOM, without having to wait for the twenty-one day un-bonding period.
The 3rd feature introduced by the LSM is designed to address the opportunity cost incurred by users when switching to liquid staking from native staking:
Before, any user with natively-staked $ATOM will have to forego three-weeks worth of staking rewards in order to benefit from liquid staking. This is because they have to un-stake their $ATOM before being able to liquid stake, a process that takes 21 days. The LSM addresses this and eliminates the cost by allowing native stakers to instantly switch to liquid staking.
The Liquid Staking Module is enabled on all wallets by default but users could disable it at any moment. Once disabled, the LSM will take a period of 21 days to be enabled again.
While the instant liquid staking feature addresses the opportunity cost, its current opt-out design comes with a significant safety trade-off:
When an LSM-enabled wallet is compromised, there is no chance to recover natively-staked $ATOM. With the LSM, the attacker could instantly liquid stake and take custody of the assets.
This has led to a spike in phishing attacks targeting $ATOM stakers, primarily via spam proposals:
There has been a total of 55 spam proposals on the Cosmos Hub. A total of 50 of these props were posted after the LSM went live and 5 of which are actually in voting period.
All of these props were vetoed, leading to the loss of the proposersâ deposits totalling 11,250 $ATOM, which suggest that the profits from these attacks are higher than that. These phishing activities are liable to increase as most users are still unaware of the LSM and how it affects their staked $ATOM. Read more here.
Description
In this post, Iâd like to propose an adjustment to the LSM design to address the discussed safety risk: Make the LSM opt-in by default.
Switching to an opt-in design will require native stakers who seek to leverage the LSM for instant liquid staking to manually enable the LSM and wait a period of 21 days before being able to use it.
Below I present the arguments for this change:
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No opportunity cost
The goal of the instant liquid staking feature is to eliminate the opportunity cost of liquid staking. Making the LSM opt-in by default doesnât change that.This is because unlike the un-bonding period of 21 days where users forego any staking rewards, during the LSM enabling period (which also takes 21 days) users can still earn staking rewards. Thus, no opportunity cost.
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Safety over UX
The rationale behind the LSM is to ensure that liquid staking growth doesnât compromise the Hubâs security. This is done by imposing a cap on total LSTs market share and skin-in-the game requirements for Validators.It could be argued that an opt-out by default design isnât aligned with this rationale as it automatically compromises the safety of staked $ATOM: The current design requires native Stakers to manually disable the LSM to retain the same level of security for their assets.
Ideally, additional actions should be required by users seeking to benefit from the LSM features and not the other way around.Itâs also worth noting that number of native stakers seeking to leverage instant liquid staking is significantly smaller than those who donât. Therefore, it makes more sense to have it disabled by default.
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Complicated process of enabling/ disabling LSM
In an opt-out design, native stakers are required to manually disable the LSM, a process that is technically challenging for most. This means that users have to rely on front ends/ tools provided by third parties, which introduces additional safety risks.To my knowledge, there is a single trusted party (Cosmos Rescue, a Cosmos Hub validator) that allows the disabling of the LSM.
With an opt-in design, this risk is mitigated:
First because only users leveraging the instant liquid staking will have to interact with the LSM. Second, LSD providers will abstract away the process of enabling of the LSM. This eliminates any additional trust assumptions as users donât have to trust any third parties they donât trust already.
Technical implementation
My understanding from Zakiâs forum post is that due to implementation challenges with how the SDK is currently organized, the LSM currently runs on an SDK branch that is feature-frozen and only allows for security fixes. However, the plan is to implement the LSM as a separate module of the SDK in the future.
For these reasons I propose that, if the signalling proposal passes, the LSM transitions into an opt-in module once the x/fungibility module is shipped.
Conclusion
Itâs worth noting that the risks of phishing attacks could be greatly reduced via better screening measures at the wallets/ explorers level. However, I believe that the security risks introduced by the LSM should be addressed at the protocol level for the following reasons:
- Eliminates relying on any third parties to protect staked assets.
- Ensure that every user leveraging the LSM fully understands the risks and willingly participates in liquid staking.
- Guarantees the same security level of staked assets while still eliminating opportunity costs of liquid staking for native stakers.
FAQ
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What are the downsides of transitioning to an opt-in by default LSM?
An opt-in design by default will lead to a degraded DeFi UX as it will prevent users from instantly deploying their staked $ATOM to dApps leveraging the LSM. However my point of view is that DeFi UX is far outweighed maintaining the same level of security for staked assets, especially when considering the following:
- The LSM has been live for a long period, meaning that any users seeking to leverage the instant liquid staking feature have been able to do so.
- Users seeking to leverage the LSM will only need to enable it once, after that they can instant liquid stake anytime they want.
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I have used the instant liquid staking feature before, what will happen to my liquid staked assets if this gets implemented?
If implemented, this will not affect any liquid staked assets that users obtained via the instant liquid staking feature. Instead, it will prevent you from using the LSM in the future without enabling it.
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I plan to leverage the LSM in the future to liquid stake. If this gets implemented how do I do it? How long it will take?
If you have any plans to leverage the LSM in future, you will probably be able to do so directly from the front-end of your LSD protocol of choice. The process will take 21 days, during which you will be able to earn staking rewards. After that, you can revisit your LSD provider ( or any other dApp leveraging the LSM) to liquid stake your assets.