Staking Derivatives Economics Research?

Taariq Lewis, a friend of mine and a very active member of the Cosmos community, recently asked me to study the staking derivatives (aka liquid staking) economics. I have studied in detail the research and experiment done so far by the Cosmos community from Delegation Vouchers by Sikka (@sunnya97) and Chorus One to B-Harvest’s (@bharvest) proposal to split delegation tokenization into fungible and non-fungible assets, and of course, the good research report published by Chorus One which is funded by a research grant from Interchain Foundation.

Staking derivatives have tremendous opportunities. However, it has been about a year and half since the Cosmos community started discussing staking derivatives, but so far, no solution is close to being launched. To make things even worse, as the report by Chorus One concluded:

“… At this point, it’s not entirely clear what the best solutions are, …”

I believe the bottleneck is definitely not caused by technical challenges as the Cosmos community has great technical talents. And it is unlikely related to legal issues either. Apparently the economic value has not been thoroughly analyzed and the value propositions to ATOM token holders have not been clearly articulated. The Chorus One report also indicated similar situation:

“… so far little systematic analysis around the best economic designs have been done …”

To drive staking derivatives product development and adoption, I believe further research on staking derivative economics is important and urgent. Taariq encouraged me to continue the great research work done by Chorus One and conduct further research on staking derivatives with focus on economics. He also suggested starting a post in the Cosmos Forum to solicit feedback from the Cosmos community. So here is the post.

I have been watching, with high respect, the development and growth of Cosmos even though I have not been active in the Cosmos community. However, I have a deep interest in blockchain economics and have done many independent research work. The latest work are:

COMP Distribution Design Will Incentivize Phantom Growth and Open Pandora’s Box

Challenges in Adoption of Rollup Solutions in Decentralization: An Analysis

Super excited that I finally found a topic that I can make a contribution to Cosmos. Love to hear your feedback and get your support!


Hey @hhe,

It’s a pleasure to have you participate in the Cosmos ecosystem discussions. You’ve mentioned that you’ve reviewed the various staking derivatives design proposed within the ecosystem from delegation vouchers to the non-fungible/fungible delegation token split design. What were your thoughts/concerns on it?

Personally, I believe the bottleneck will soon resolve once the DeFi ecosystem, which has a dependency on IBC, begins to boom and people see for themselves the total staked rate drop for Cosmos Hub.

Hello @dogemos, thanks for your kind words and questions.

IMHO, from technical design and implementation point of view, each proposal has its own pros and cons. However, these proposals could do better by analyzing how the outputs of the solutions (either vouchers or tokens) be used, e.g. what/how the market (for example, lending market or minting stablecoins using staking derivatives as collaterals) will be formed using these outputs, the economic incentives to attract customers to these markets, etc. Once we are clearer with the usage of the outputs and possibilities of success of these markets (for example, minting a new stablecoin faces the challenging of driving adoption of the new stablecoin, not an easy task), then it makes it easier to go back to analyze the potential risks of each proposal especially on the security of Cosmos hub, etc. Once people are clearer of both the economic benefits of staking derivatives and the risks of each proposal, then people will be more excited to drive the development and adoption of staking derivatives.

I agree with you that many projects depend on IBC and let’s get IBC out ASAP. We all know DeFi is developed on another chain … IMHO, Cosmos can only win by doing something different. Staking derivatives is a good start!

Hi! Is there any page or resource that sums or links to what is being proposed and the research done already, or a place that discusses just this issue of the economics of the Hub?

I suggest you started with this good report done by Chorus One: Bridging Proof-of-Stake and Decentralized Finance, which is funded by ICF. Cosmos was leading in staking derivatives and should continue lead this promising space!

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Hi @hhe, awesome that you’re thinking about these problems, they’re super interesting, and it looks like you have a good handle on things!

I’ve also been diving into this topic recently and I’m curious if you have any new insights to share with the class? I’ve only started to touch the surface of the topic but my first instinct was to pursue somthing similar to bharvest’s idea of a risk(?) balanced index of vouchers because having that seams to provide broader utility comparted to per validator vouchers that might create missaligned incentives when the different vouchers have different liquidity. But at the same time if the derivatives tend to be included in the index that also has a distinct fingerprint on how the system evolves.

But yeah like I’ve said I’m just scratching the surface of the topic but I’m super interested to hear what you’ve uncovered!