Eris Protocol — More than Liquid Staking
Detailed explanation on how to use Eris Protocol’s Amplifier to score real yields on Cosmos, which sets Amplifier apart from other Liquid Staking providers.
Vision of Eris Protocol
The vision of Eris Protocol is to automate the processes of collecting income/ rewards in the Cosmos Ecosystem of parallel chains communicating through IBC. Eris Protocol is currently active on: Terra2, Terra-Classic, Juno, Kujira, Migaloo, Osmosis, Chihuahua, Injective, Archway and Sei.
Primer on use of the Eris Amplifier.
On proof of stake chains, users “stake” their chain-tokens as a security for the chain and in return earn: (i) staking yield from token inflation of the chain plus (ii) a portion of fees earned by the chain by performing transactions; and (iii) airdrops. Airdrops are new tokens launching on the chain that may “airdrop” their tokens to stakers, thereby launching their token on the chain. Users may have to claim their airdrop (e.g., Atom) or the airdropped tokens are deposited into their wallet (e.g., Kujira). The staking yield is paid out in the chain’s token and may be staked again to compound the investment.
Claiming and reinvesting the staking rewards (i.e., amplify) may be performed automatically by using the Eris Amplifier. This is a tax-efficient method to grow the token bag. By claiming routinely and often, the Amplifier compounds the returns more rapidly than a user self claiming the rewards. Tracking the transactions is simplier because the claiming transactions are done internally and not visible to the user of Amplifier. The process of using the Amplifier is described below.
To auto-compound or “amplify” the staking rewards, the user either clicks on the amplify tab (which starts the app) or launches the Eris app by clicking on the “Launch Eris” button. The latter provides a summary menu and the user selects “Stake” button in the Amplifier box. The following Amplifier screen appears.
The Amplifier app defaults to LUNA, but other tokens can be selected by clicking on LUNA and selecting the desired token in the dropdown list (options are: ampWhale, boneWhale, CAPA, ROAR, WHALE, USDC, mUSDC, ASH, KUJI, MNTA, OSMO, INJ, SEI, ARCH, JUNO, LUNC).
LUNA, CAPA, WHALE, KUJI, OSMO, SEI, JUNO, and LUNC are tokens that represent the Cosmos chain with defined staking rewards. These L1 chain tokens may be amplified by selecting stake, which results in the pop-up window below.
The user enters the # of L1 tokens (e.g., WHALE) to Amplify in the “Deposit amount” box. The Amplifier calculates the number of ampTOKEN the user will receive based on the accrued value to date. The user then hits “Stake” and authorizes the transaction in their wallet. The L1 tokens are staked, so there is an unbonding period (e.g., 21 days for WHALE) that the user must wait for the tokens to be unbonded. The user must return to collect the unbonded tokens because they are not automatically deposited back into the wallet.
The ampToken is a multiple of underlying token and this multiple depends on the staking rewards of the token chain. The Amplifier trades the user provided Tokens for the ampToken at the rate calculated by the Amplifier (see Figure). The Amplifier deposits the user-provided tokens into the staking contract and routinely collects the staking rewards, which comprises the $Token, dust tokens, and airdropped tokens. The dust and airdropped tokens are traded to the $Token. If, for example, 1% of the current supply of the $Token was obtained from staking rewards, then each ampToken now provides 1% more token. Currently, 1 ampWhale = 1.0697 WHALE. The Amplifier is therefore compounding the staking rewards much more rapidly than a human could or would want to claim. The Amplifier pays lower fees because the claim is bundled into a single transaction for multiple users. This is offset to some degree by the fees charged by Eris for the Amplifier service.
The unbonding period can be a major inconvenience if the funds are needed in an emergency. The unbonding time also adds risk for the lending protocol if users are borrowing against ampToken. The solution has been the implementation of deep liquidity in $Token: amp$Token pools. A user can therefore exit the position with minimal loss and the lending protocol can sell the collateral rapidly if needed. Arbitrage bots (including Eris’) maintain the balance in these $Token: amp$Token pools.
Which tokens offer juicy yields on the Eris Amplifier?
The Table below summarizes the chain token inflation, current staking apr, and the yield if auto-compounded by using the Amplifier and receiving the amp-$Chain-token.
ampWhale and boneWhale are staked WHALE tokens on Migaloo (with rewards listed in the above Table) that may also be Alliance staked on Terra. BoneWhale is a similar to ampWhale but offered by Backbone Labs (backbone.io). Like staking rewards, these Alliance rewards may be auto-compounded by using the Amplifier app. The user provides ampWhale or boneWhale and is returned ampWhalet or boneWhalet (t=Terra), respectively, similar to what was described above for WHALE. However, the Amplifier is now auto-compounding, auto-compounding derivatives of staked WHALE, so the result is double compound. A double compound is greater that the sum of each APR. For example, 100 WHALE is converted to 99 ampWHALE (1 ampWhale = 1.01 WHALE). The 99 ampWhale is converted into 96 ampWhalet (1 ampWhale = 1.031 ampWhalet). After 1 year, the yield on ampWhale is 10% and the yield on ampWhalet is 20%. Upon exit after 1 year, the 96 ampWhalet yields 118.8 ampWhale (99*1.2). The 118.8 ampWhale yields (after 21 days unbonding) 132.0 WHALE (118.8*1.01*1.1).
The “Alliance” tokens must be on the appropriate chain, or the app will not detect the tokens; specifically, mUSDC and ASH must be on Migaloo chain and ampWhale and boneWhale must be on the Terra chain.
In the near future, ampLuna and boneLuna (LUNA staked on Terra) will be available as Alliance tokens on the Migaloo chain. Currently, there is an 21 day unbonding time for Alliance-staked ampLuna or boneLuna on Migaloo, which is preventing ampLuna and boneLuna from being added to Amplifier. Migaloo is working on removing this unbonding time, but no time-frame is available. The double compounding in Amplifier may then be activated.
Factors on which tokens on the Eris Amplifier will offer the best returns.
Cryptocurrency and $Token outlook: The user’s view on the cryptocurrency outlook may suggest which $Tokens to deposit in the Amplifier.
If the outlook is bullish, then high beta (volatile small caps) $Tokens may outperform and amplifying those returns will increase that performance. In the bullish case, the choice of $Token is the key factor and Amplifying just improves the return. This is highlighted in the ball park example below. Injective (INJ) has increased ~30-fold from the lows, WHALE has increased ~4-fold from the lows, and USDC, a stablecoin is unchanged. The total returns after 1 year at current amplifier rates are shown below:
In a bull-market, the choice of the $Token is key, but the Amplifier provides a great boost to the return.
In a sideways market, the Amp-yield will determine the profit of the position. In a bear market, the Amp-yield will decrease the loss but is unlikely to offset marked losses in the position. In this case, ampUSDC will be the clear winner, appreciating (at current rates) by 43%. The ampUSDC yield in a bear market will likely be much lower than 43% because the appetite to borrow (source of yield) will decline markedly as well. However, the yield reserve built-up during the bull-market may provide an estimated single digit yield.
What are other benefits of the Eris Amplifier?
(NFA: check with IRS.gov; informational only; not CPA or tax professional. Tax treatment of cryptocurrency transactions are complex, not clearly defined, and subject to change. Consult with a tax professional for your circumstances and jurisdiction.)
Tax benefit: Income in the USA and short-term capital gains are generally taxed at the same rate, which is higher than the long-term (held for > 1 year) capital gains rate. The capital gains rate ranges from 0 to 20% depending on income and filing status. Thus, in most cases, holding the token for 1 year (a lifetime in crypto) results in a much lower tax burden.
When the user deposits the $Token in the amplifier, they receive the $amp-Token in return at the current amplifier rate at that time. This may be considered a trade. The rewards are not distributed to the user, so the user technically has no income during the hold period. When the user exits the amplifier, the $ampToken is converted back to $Token; a greater number of $Token are provided because the rewards were compounded by Amplifier. The capital gain (or loss) is the difference in value of the received $Token and deposited $Token.
A user who self stakes deposits the $Token into the staking (or Alliance) contract earns the staked $Token rewards at the staking rate with time. The rewards are generally not distributed to the users. The user claims their rewards when they please and claiming of rewards triggers the income receipt. The price of the $Token * # of tokens = income. Each claim is income that should be reported. When the user removes the $Token from the staking contract, a capital gain (or loss) may occur because the user may have received a derivative of the $Token that they have now traded back to $Token. Some argue that there are no capital gains because the number of $Token deposited into the contract equals the number of $Token withdrawn.
Reduced monitoring and reporting. Another huge benefit of the Amplifier is the reduced monitoring and reporting required compared with user-managed staking. As described above, the Amplifier has 2 transactions: purchase and sale. The user-managed contract has a reportable transactions every time staking rewards are claimed. Because the Amplifier compounds more often with a single fee for a large claim and restake, the value likely increases at a greater rate than user self-staking. The Amplifier fee does reduce this benefit somewhat.
Note: Chris Amani (@fleece_cannon) stated on X that Terra will be releasing station wallet and Pulsar Finance fixes that will make transaction tracking on the Cosmos Ecosystem easy and simple. This should be a great tool!
