How Neutron is Patching Fragmented Liquidity in Cosmos with wstETH
Neutron is onboarding Lido’s liquid staking token wstETH to Cosmos with a decentralized yet user centric design.
Status Quo of the Outer Cosmos Liquidity
Decentralization vs User Experience
Decentralization often does not go hand in hand with good user experience. It is meant to mitigate the risk of the total collapse of a system from a single point of failure. And it often entails some sacrifices in user experience. As interoperable as it can be with IBC(Inter Blockchain Communication) among the Cosmos-SDK based blockchains, Cosmos still has to rely on the bridges when it comes to dealing with Ethereum native assets. Relying on a single bridge protocol can be dangerous (centralization), but having multiple bridge protocols minting distinct tokens for the same underlying asset can be a real bummer for the user experience.
Bridge Providers
There has been multiple bridge protocols that brought the non-Cosmos liquidity into the Cosmos ecosystem, namely Axelar, Gravity Bridge, Wormhole(Gateway), Nomad, and Multichain. At first, each protocol brought in its own version of various outer Cosmos tokens into the Cosmos ecosystem, resulting in multiple non-interoperable tokens with the same underlying assets circulating in the ecosystem. For example, USDC bridged by Axelar, Gravity Bridge, and Multichain were all treated as different tokens. So there had to be many AMM pairs on the exchanges to let users swap an USDC token for another USDC token. The picture above shows axlUSDC & multiUSDC pair on Kava, axlUSDC & grvUSDC pair on Crescent, and 4 different types of USDC on Osmosis.
And to make the situation even worse, Multichain bridge and Nomad bridge got hacked, leaving the users concerned about bringing their assets into the Cosmos ecosystem.
Transition to the Native Asset Issuance
It all comes down to the demand for the top 4 traded assets in crypto — USDT, USDC, BTC, and ETH. In order to support the defi activities, Cosmos still needed to have stablecoins in the ecosystem despite all the bad UX and bridge risks. So Noble brought native USDC by Circle into the ecosystem. Kava started issuing native USDT by Tether.
These were remarkable accomplishments, but there’s no need to stop there. Osmosis had just announced that they are bringing native WBTC to Osmosis. And Lido’s wstETH is brought to Cosmos via Neutron. Both WBTC and wstETH are not exactly the original forms of Bitcoin and Ethereum. However, they become as relevant as BTC and ETH when it comes to defi activities.
WBTC is a tokenized version of of BTC minted by trusted custodians like BitGo in order to facilitate defi activities on decentralized networks. It can always be redeemed for BTC at 1:1 ratio.
wstETH (wrapped stETH) is a non-rebasing version of stETH, which is a transferable rebasing utility token representing a share of the total ETH staked through Lido. stETH holders receive a share of ETH staking rewards generated by the protocol on a daily basis. Because rebasing can be complicated while the token is deployed outside of the Ethereum network, wstETH is the more efficient form of LST to bring to the Cosmos ecosystem.
Why wstETH?
‘AAVE’ and ‘Maker DAO’ are the top money markets on Ethereum. And Lido is the protocol with the biggest TVL. With that said, you can see that wstETH is the most popular asset to be supplied in the money market. It is even more popular than ETH and WBTC when it comes to lending. This is no surprise since the interest rate for supplying ETH is generally lower than the APR for liquid staking ETH on Lido.
When sufficient amount of wstETH flows into the Cosmos ecosystem via Neutron, it’s naturally going to invigorate defi activities in Neutron as the users borrow USDT and USDC against their wstETH supply collateral. In fact, the proposal to list wstETH on the Red Bank’s Neutron Outpost had passed already on Mars Protocol.
The marketcap of stETH is more than 6 times bigger than the marketcap of ATOM. Just a portion of stETH liquidity flowing into the Cosmos ecosystem can make a huge difference in terms of defi TVL and volume.
Can We Call It ‘Native wstETH’?
USDC on Noble, USDT on Kava, and WBTC on Osmosis are referred to as ‘native’ because they are issued straight on these chains by the original asset creators, meaning Circle, Tether, and BTC Custodians acknowledge these tokens as their products. They will let the holders redeem USDC and USDT on Noble and Kava for fiat USD, but they won’t accept axlUSDC or wormhole USDT.
The redemption of wstETH for ETH can be processed via Lido on the Ethereum network. And Lido is closely involved with Neutron on the wstETH bridging process between Ethereum and Neutron to take responsibilities in making the process as seamless and secure as possible, not to mention that both Neutron and Lido are built by the same team — P2P.org. So we could say that it is comparable with bringing native wstETH to Cosmos.
Mission Control, Satellite, and Bridge Adapters
There are three components in this wstETH bridge design — Mission Control on Ethereum, Satellite on Neutron, and bridge adapters between Ethereum and Neutron. Together, they are consolidated into a decentralized yet coherent bridge system.
Mission Control
Mission control contracts are owned by Lido. It holds locked wstETH on the Ethereum side, allows Lido to manage and upgrade Satellite on the Neutron side, and communicates with bridge adapters to send messages to the Satellite on Neutron. Because it is the one that locks wstETH, the system can simply use a secondary bridge option to redeem wstETH when the primary bridge is compromised.
Satellite
Satellite contracts are currently owned by a multisig of Cosmos contributors on behalf of the Lido DAO, and the ownership is expected to be migrated to the Lido DAO once cross-chain governance is securely implemented. Satellite mints canonical wstETH on Neutron via TokenFactory and receives configured bridged wstETH denom by selected bridge providers. Later as the system matures, it will also handle ETH staking on Cosmos logic and rebasing of stETH on Cosmos. Satellite’s initial version is the Wrapper contract. It’s a wrapper around bridged wstETH that mints the canonical denom of wstETH and vice-versa.
Bridge Adapters
Bridge adapters implement all the bridge-specific behavior. Currently, there are two bridges being discussed — Axelar and Wormhole. Axelar’s satellite is already implemented in the design as the initial bridge mechanism. Wormhole will be implemented later.
The Outcome
This bridge design has two advantages over the simple bridged assets by the bridge providers, creating better user experience.
- Security
- A bridge provider’s failure does affect the users’ assets. - Consolidated Liquidity
- There’s no fragmented liquidity and unnecessary AMM pairs for the same underlying assets.
Decentralization and good user experience have often been inversely proportional. Neutron and Lido are trying to change it with this new bridge design. When it settles securely, Neutron will be the interoperable liquidity hub between Cosmos and Ethereum, bringing a different level of liquidity into the Cosmos ecosystem.
The wstETH Bridge
Users can bridge their wstETH from Ethereum to Neutron at Neutron’s bridge interface. The canonical wstETH minted from this bridge can be used on Astroport as a wstETH/axlETH pair. Soon, it will be listed on Mars Protocol’s Neutron outpost to be supplied as a collateral. Later, it will be ready to outflow to other Cosmos chains like Osmosis and Injective for more defi usage.
FYI, the LP rewards for the wstETH/axlETH pair on Astroport is around 10% at the time of writing! It is one of the highest rate you can get from supplying ETH with a very low IL risk.
About Neutron
Neutron, a leading platform for Interchain Smart-Contract deployment, is built on the Cosmos SDK and supports CosmWasm, enabling smart contracts in languages like Rust and AssemblyScript. It offers ease of deployment, upgradeability, and robust security, underpinned by 175 validators and approximately 186M staked ATOM. Leveraging Interchain Security, it aligns with the security level of the Cosmos Hub. Neutron is integral to the Interchain ecosystem, supporting protocols like the Inter-Blockchain Communication protocol and Interchain Queries, which facilitate complex operations such as interchain liquid staking. As a permissionless platform, it allows open participation, fostering a community-owned environment where any project can contribute to the Interchain economy.
About Cosmostation
Cosmostation is a Cosmos genesis validator and a key player in the Cosmos ecosystem, providing invaluable infrastructure legos essential for scaling and onboarding users onto blockchain networks. Through Mintscan, Cosmostation continues to drive the ethos of transparency and user-centric design, fostering a more insightful interaction with blockchain data across various networks. At Cosmostation, we bootstrap networks and onboard end-users.
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