The Rollup - Restaking and Liquid Staking in Cosmos with Persistence - Revelo Intel

The Rollup – Restaking and Liquid Staking in Cosmos with Persistence

In this episode of The Rollup, which took place on February 15, 2024, Robbie, Andy, Mikhil, and Tushar discuss liquid staking, Cosmos, Ethereum, and more. Read our notes below to learn more.

Background

Background and Entry into Crypto

  • Tushar says that he was involved in major projects like Kyber Network and Republic Protocol. He transitioned from management consulting to full-time crypto involvement.
  • He established the Decrypt Asia podcast to bridge Asian and Western crypto. He worked at Golden Gate Ventures in Singapore before.

Choosing Cosmos for Real World Assets

  • Tushar says that it is an advantage for Comos to have customization capabilities for real-world asset integration. It is important to consider the validators’ identity for traditional financial institutions’ acceptance.
  • He adds that stakers of $ATOM, $KAVA, and $LUNA received a targeted airdrop of $XPRT. Over a billion dollars worth of stake assets participated in the stake airdrop by Q4 2020.
  • Tushar says that they started building in Cosmos due to a technical evaluation between Tezos and Cosmos in 2019. Despite challenges faced in 2021, Cosmos shows gradual improvement across all metrics aligning with their building philosophy.

Network Effects & Ecosystem Building

  • Andy says that Cosmos took an app chain route initially and is now working on bringing them together for better scalability. 
  • Mikhil says that app chains on Cosmos are evolving and efforts to bring them together for enhanced interoperability. He mentions of convergence between Cosmos and Ethereum over time due to unique features like trustless bridging discussed earlier than other platforms.
  • He highlights struggles faced by multiple chains in building ecosystems within Cosmos.
  • Mikhil says that Cosmos allows for customizability in building on different chains. Each chain builds its ecosystem, unlike Ethereum where successful rollups add value to the ecosystem. Chain abstraction and aggregation are key concepts in Cosmos, enabling interaction between blockchains without user involvement.
  • Mikhil introduces interchain accounts in the Cosmos SDK IBC version 3, allowing control of accounts across different chains. Users can interact seamlessly with applications on various chains without being aware of the underlying complexities.

Convergence and Application Development

  • Tushar says that long-term vision involves Ethereum and Cosmos converging. He emphasizes the significance of application-level advancements over infrastructure enhancements.
  • He predicts a shift towards abstracting complexities for users while complying with local regulations. He foresees dedicated applications tailored to specific geographies to meet regulatory requirements effectively.
  • Tushar anticipates a trend where users focus on seamless interfaces rather than dealing with multi-chain operations’ intricacies.
  • He plans to make end-user applications sourcing the best yields for users. Complexity arises from risk appetites and regulatory aspects, shifting focus from technology battles to UX and regulatory battles. There is an emphasis on abstracting complexities within the Cosmos ecosystem rather than industry-wide. It is important to abstract complexities in Cosmos through an App. Persistence provides staking, LP, collateral, borrowing, lending, etc.

Industry Evolution and Challenges

  • Tushar says that 2021 saw massive adoption; industry maturing with better actors entering. There is a shift from personal network-based team building to professional recruiters and diverse entrants into the industry.
  • He focuses on liquid staking within finance; working on various financial aspects like fixed income and DeFi. Privilege in contributing to asset class development; acknowledging the impact of DeFi breakdown incidents.

Centralization Risks in Staking

  • Robbie highlights significant centralization risk in Ethereum’s liquid staking.
  • Mikhil says that in Cosmos, people learned about staking before liquid staking, unlike Ethereum where it’s the opposite. Cosmos introduced liquid staking in 2021 with $stATOM as the first solution Ethereum mainly focuses on liquid staking due to design choices like not having delegated proof of stake.
  • He adds that native stakers in Cosmos benefit from airdrops; mechanisms like LSM module prevent risks seen in other protocols. LSM allows seamless transition between validators without unstaking assets for 21 days.
  • Mikhil says that liquid staking providers aim to avoid unnecessary risks for the host chain while maintaining transparency in validator selection.
  • He adds that dYdX is as an exciting application with real traction in Cosmos. Decision-making involves assessing chains for support based on factors like liquidity and market fit. Liquid staking protocol supports tokens generating revenue denominated in that token. Importance of choosing chains with product-market fit, like dYdX with 10% token supply staked.

Validator Selection Process

  • Mikhil says that the dYdX chain has the top three validators controlling 45% of voting power, emphasizing the need for decentralization. Persistence aims to distribute stake among various validators to reduce centralization risks.
  • He adds that they avoid conflicts of interest by not centralizing the underlying chain through self-delegation.
  • Mikhil says that liquid staking and validator businesses can be at odds due to differing demands within ecosystems. In Cosmos, native staking currently has more demand than liquid staking, impacting validators’ revenue streams. Transitioning from native to liquid staking affects validators’ income until more users adopt liquid staking.
  • He adds that within Cosmos, businesses may perceive conflicts if a company is both a validator and a liquid staking provider.

Risks of Centralization in $BTC Mining

  • Robbie says that centralization poses a threat to network decentralization. Historical instances of collusion among miners highlight centralization risks. Bitmain and F2Pool colluded, controlling over 50% of the Bitcoin Network. Social consensus plays a role in maintaining network integrity.
  • Tushar says that finding the balance between validators to avoid resource wastage. Power laws apply in crypto, with 80% of the value held by 20% of stakeholders. Accessibility to platforms like radio shows has evolved due to decentralization.
  • Real-world applications can learn from crypto’s social and economic experiments. Crypto serves as a valuable trillion-dollar experiment for understanding incentivization mechanisms.

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Show Information

  • Medium: Youtube
  • Show: The Rollup 
  • Show Title: DeFi By Design EP 126: Restaking and Liquid Staking in the Cosmos Ecosystem Unpacked
  • Show Date: February 15, 2024