stELA — Liquid Staking for Elastos

Elastos Staking Overview

Elastos has a mainchain-sidechain architecture that is somewhat unique to the space. Similar to ecosystems like Cosmos or Polkadot, the Elastos mainchain could be considered as a ‘layer 0’ protocol. In other words, the mainchain serves as the primary hub from which the security of the sidechains is derived. The mainchain is relatively ‘dumb’, as it does not have smart contract capability and only includes simple functions such as transfer of value, delegated-proof-of-stake (DPoS) voting, and governance. However, unlike other layer 0 protocols in which each project built on top uses its own token as the native currency (a ‘layer 1’), Elastos sidechains use the same currency (ELA) as the central hub.

This architecture comes with its own set of advantages and disadvantages. The main advantage is that growth of the ecosystem is directly tied to ELA, owing to the fact that it is required for all operations on all chains. This should create significant value capture for ELA and prevent diluting the utility value across a multitude of tokens. However, it also comes with some drawbacks. One of the recurring discussions within the community over the past year has been how to maintain a healthy voting participation on the mainchain as (a) deflation mechanisms reduce the annual rate of return, and (b) decentralized applications on the Elastos side chains become the primary destination for ELA utility and yield.

Decentralized exchanges, money markets, NFTs, games, and more will force users to decide between contributing to the security of the network, or putting their assets to work on the sidechains. And as we all know, money is going to win this battle 99.9% of the time. So in a sense, the success of Elastos’ sidechains are an existential threat to the protocol as a whole. The more active the sidechains become, the less ELA gets delegated to validators and the more exposed to vote manipulation the network becomes.

This phenomenon is not completely unique to Elastos. Other protocols suffer from a similar trade-off. The more useful a native asset becomes, the less willing users are to participate in proof-of-stake. The situation is only exacerbated for Elastos due to the exceedingly low staking APR (~1%) and the friction associated with moving ELA back and forth between the mainchain and sidechains. We believe this is a problem sorely in need of a solution.

What’s liquid staking?

In recent months, liquid staking solutions have grown in popularity for protocols such as Ethereum, Solana, Terra Luna, and more. Liquid staking refers to the process of exchanging the native token for a derivative token representative of your staked position. The derivative token remains liquid and can be used in various DeFi applications while the native token is contributed to the protocols’ consensus mechanism to strengthen security and earn a staking yield. The derivative token captures a portion of the staking yield through adjustment of the exchange rate between the two assets. As a result, users are able to avoid the lengthy lockups commonly associated with proof of stake protocols while simultaneously earning a staking yield and deploying their asset in various DeFi offerings.

It can also be asserted that liquid staking can be a positive force for decentralization by shifting the responsibility of selecting validators from individual users to a decentralized autonomous organization (DAO). Many users do not have the time to research individual validators and are likely to simply choose the most popular ones or whichever promises the highest rewards. This can have a negative impact on the validator community, as we have observed with Elastos’ DPoS and vote buying. In addition, a DAO can elect to distribute its voting weight across an unlimited number of validators to help improve decentralization.

Implementation

stELA (‘staked ELA’) will be the ticker for the liquid staking derivative made available on the Elastos Smart Chain (ESC). Users will be able to commit their ELA to a smart contract in exchange for stELA. DeFi use-cases for stELA may include:

• Providing liquidity for a stELA-ELA LP on Glide, earning LP fees as well as incentives without much risk of impermanent loss
• Depositing it as collateral on a lending protocol to borrow other assets
• Swapping stELA for ELA using the LP to skip unlocking periods (post-DPoS 2.0) if funds are needed urgently

Elastos is currently in the process of developing a new staking system that will improve upon some of the flaws associated with the current model. The noteworthy changes include reducing the voting power of each ELA from 36 validators to 1, introducing time-lock based rewards for stakers, normalizing payout percentages, and offering equal opportunity to all active validators to allow for a more fluid ranking system. However, given that the upgrade is not expected to occur until Q4 of 2022, we plan to release a soft version of liquid staking that will be available sometime in Q2 this year. The basic flow of the proposed system is detailed below:

Staking: Users stake their ELA token with the LiquidStaking smart contract and receive stELA tokens as receipt, representing their staking deposit. The trusted relay node listens to these events, converts sidechain ELA to mainchain ELA, and delegates the deposited ELA tokens to a whitelisted validator.

Unstaking: Users redeem/burn their stELA token and the trusted relay node will undelegate a corresponding amount of ELA from a validator. Due to the variable locking periods being implemented into DPoS 2.0, unstaking may include a delay of up to several days before the user can withdraw the undelegated amount. We may also elect to hold a portion of the received ELA as reserve on ESC in order to enable quicker unstaking.

Rewards: The stELA token represents a share of the total amount of ELAs under control of the protocol. The trusted relay node will collect and compound rewards periodically, which will increase the total ELAs under its control. This will update the exchangeRate, which determines the value of ELA to stELA.

Design Considerations

Non-Rebase Index — To be compatible with DeFi, stELA is a non-rebase token, with collected rewards being reflected in an increasing exchange rate between stELA and ELA. With stELA, you do not manually collect staking rewards. The protocol will automatically collect and compound it. The rewards will be reflected in the stELA exchange rate. Initially the exchange rate will be 1-to-1. As the protocol collects rewards, this exchange rate will gradually increase, so you can redeem stELA for more ELAs than you deposited. However, it is worth noting that due to the low APR currently achievable with DPoS 1.0 (~1%), this exchange rate adjustment will be very gradual. We expect to see a slight uptick in APR following DPoS 2.0 due to profit share being fixed at 75%, but it is unlikely to be an increase significant enough to make stELA competitive with other liquid staking assets. This is to be expected for an asset with such a low annual inflation rate.

Trusted — Unfortunately, there is no way to send a staking transaction from the sidechain to the mainchain in a completely autonomous manner. Therefore, stELA is designed as a trusted solution, requiring relay nodes to listens to onchain messages, move ELA back and forth from the mainchain, and submit staking and unstaking transactions.

Multisig — Another drawback to DPoS 1.0 is staking transactions cannot be executed from a multi-signature account. This makes the custody of assets more risky due to reliance on a sole signatory and creates a single point of failure. Operational security can largely mitigate this risk, but it does not eliminate it completely. Fortunately, multi-signature staking will be one of the new features included in DPoS 2.0. Since our intention is for the system to be fully automated, the DAO will select community representatives to participate in the signature process. Requests will be initiated by the trusted relay node and broadcasted to multisig owners who will then verify the transaction details and sign. However, until this feature is available, the liquid staking contract will include a soft cap on the amount of stELA that can be minted.

Fees — stELA will collect a protocol fee for collected rewards. The exact protocol fee will be determined by governance and a portion will be used to support GLIDE by offsetting the rewards allocated to the stELA-ELA liquidity pool.

How does this relate to Glide?

In general, liquid staking will be beneficial for the Elastos ecosystem as whole, not Glide exclusively. Composability is essential in decentralized finance, so we will actively encourage other protocols building on Elastos to adopt stELA as the standard for their products and services. However, Glide can stand to benefit from spearheading this system in several ways:

• The Glide DAO will be responsible for selecting the list of validators that the pool will delegate to. It may also opt to create basic requirements in order for a validator to be eligible for the whitelist, such as having a website or some active presence within the community. In this manner the active contributors to the ecosystem can be supported and uplifted by the Glide DAO. In addition, this dynamic will strengthen GLIDE’s position as a critical asset to the health of the ecosystem. Depending on the popularity of the stELA token, the Glide DAO may have a significant role in improving Elastos’ Nakamoto coefficient by increasing the quantity of active validators.
• We expect the stELA-ELA liquidity pool to add a considerable amount of total value locked (TVL) to the Glide Finance platform. An LP farm with little to no risk of impermanent loss denominated in a scarce deflationary asset that underpins an entire web3 platform is certainly an attractive proposition. It will also earn rewards in GLIDE.
• The Glide DAO can also vote on the percentage of protocol fees captured from stELA staking it wants to reinvest back into the Glide platform. That being said, the low yield inherent to ELA staking makes this challenging, as you can’t split 1–2% APR too many ways before there’s nothing left.
• Other utility for GLIDE is also possible. Validators could elect to stake and lock up GLIDE in order to receive a boost to their whitelist allocation. An auction system could also be designed for new validators seeking assistance in being elevated to active status (min 80,000 ELA).

Conclusion

Elastos is in the middle of a transition from a consensus model with clear flaws to one that will hopefully result in a more expansive and active validator community. The security of the network depends on the amount of the total ELA staked as well as the degree of validator decentralization (population and vote weight distribution). stELA and the Glide DAO will help strengthen the network’s security as well as provide a viable alternative to both self and exchange staking. stELA will offer a balance of risk, reward, and convenience for users by allowing ELA holders to remain liquid without the negative effects on the network’s decentralized nature.