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According to the latest blog post, StaFi, the first DeFi protocol unlocking liquidity of staked assets, announces its monumental integration with the Cosmos Liquid Staking Module (LSM) on the Testnet. This collaboration promises to enhance the staking module by introducing a direct path to token liquidity, eliminating the hectic process of unstaking.
StaFi Limits Liquid Staking Of ATOM
StaFi stands as the pioneering DeFi protocol that liberates the liquidity of staked assets. With StaFi, users have the ability to stake their PoS tokens and, in exchange, receive rTokens. These rTokens can be traded freely, all the while ensuring that users continue to earn staking rewards.
With the latest integration of Cosmos’ LSM on the testnet, StaFi eliminates the step of unstaking. LSM employs a mechanism known as “representative tokens” to enact liquid staking. Whenever a user stakes their assets, they are issued a representative token, which functions just like any other tradable token and can be freely transferred and traded. Should users wish to redeem their assets, they can do so at any moment and receive the corresponding value of these representative tokens.
The LSM is set to impose a restriction on the proportion of liquid staked ATOM tokens allocated by all liquid staking providers. This limit is fixed at 25% of the total supply of staked ATOM. The primary objective behind this constraint is to prevent a scenario where liquid staking providers collectively gain control of more than 1/3 of the entire staked ATOM supply, a threshold at which a coalition of malicious actors could potentially disrupt block production.
From a technical perspective, this restriction on liquid staked ATOM is upheld by placing a cap on the overall quantity of tokens that can be staked via interchain accounts and tokenized using the liquid staking module operating on the Cosmos Hub. Once this defined limit is reached, the LSM initiates measures to prohibit further staking of ATOM through interchain accounts and also halts the tokenization of additional delegations using the LSM.
StaFi Strengthens Security In Liquid Staking Delegations
Validators seeking delegations from liquid staking providers will be required to self-bond a specific quantity of ATOM tokens, adding an extra layer of security to the process. This self-bond, often referred to as the “validator-bond,” ensures that validators have a tangible stake in the game, enhancing trust among liquid staking providers. This mechanism serves to discourage malicious behavior by validators while also granting them negotiation leverage with liquid staking providers.
The validator-bond is technically monitored by the Liquid Staking Module (LSM). The maximum number of tokens that a liquid staking provider can delegate to a validator is determined by multiplying the validator-bond by a factor known as the “validator-bond factor.” Initially set at 250, the validator-bond factor can be adjusted through Cosmos Hub governance. Further details about this governance parameter and its starting value of 250 can be found in the appendix.
To put it simply, with a validator-bond factor of 250, for each ATOM token a validator self-bonds, they become eligible to receive up to 250 ATOM tokens in delegations from liquid staking providers. Importantly, the validator-bond exclusively impacts eligibility for delegations from liquid staking providers and nothing else.
The LSM allows users to instantly convert their staked ATOM to liquid staked ATOM without the usual three-week waiting period, eliminating the loss of staking rewards. Users can easily do this at any integrated liquid staking provider, just like converting unstaked ATOM to liquid staking. This is made possible through “LSM shares,” which enable users to tokenize their staked ATOM for quick exchange into liquid staking tokens.