Cosmos Hub Fireside Chat #17: Co-Founder Vish Modali talks about the Implications of Risk and Reward Socialization

Last week, Quicksilver co-founder Vish Modali went live on a Cosmos Hub fireside chat with Billy Rennekamp, Cosmos hub lead at Interchain GmbH.

Among the subjects discussed were Quicksilver’s risk and reward socialization mechanisms. “Quicksilver will mint a token representative of a user’s staked position, a qAsset, which will accrue value that will be reflected in the redemption rate,” Vish explained. The redemption rate is the rate at which native tokens can be exchanged for their qAsset counterpart, which will shift positively as rewards accrue. Slashing events will also be reflected in the redemption rate.

A topic that has been discussed more widely in the Cosmos, Billy asked for more detail around the protocol’s risk and reward socialization. “Can you go into more detail on what that means? Why is it necessary?”

“By nature, staked positions across validators are fundamentally different. They’re not fungible: Each of these validators has a different risk profile. We need to socialize both rewards and risk to maintain fungibility because you can’t have a fungible token that can be used in DeFi without pooling all validators,” Vish explained. Billy inquired about the nature of this combined model, to which Vish responded, ”Combining socialization of risk and reward will make it easy to accrue value, as well as simplify the user experience.”

Addressing concerns around socializing risk, Vish shared the team’s thought process with regards to handling security implications. “Keeping this Cosmos focused, an argument can be made that it isn’t actually the amount of stake locked up, but rather how distributed it is, that matters regarding slashing.” He continued, “The slashing rate on Cosmos is 0.01% for downtime and 5% for double signing. If you think about it, this is not a huge disincentive to misbehave. What prevents validator misbehavior is decentralization — When you have staked assets spread across multiple validators, it becomes harder and more costly to attack.”

Segueing into the future of disincentivizing misbehavior, Vish dug into what he believes will be a far larger reason not to misbehave. ”I believe the effects of slashing are relatively low. As validator competition improves, chains will be safer.”

Billy noted, “We’ve seen proof-of-stake networks out there that got rid of slashing completely, because it’s not about the punishment for bad behavior. It’s a reward for good behavior. If eventually we get to a point in which instead of slashing, a validator gets removed from the validator set, they wouldn’t be able to earn rewards. That’s a similar punishment to reducing the rewards a validator receives.”

Vish added onto Billy’s point, stating, “I think that it has panned out to have behavior incentives be about rewards. I don’t think slashing is a disincentive for validator misbehavior, and I think it has hurt more validators that have made mistakes than validators that have acted maliciously.” Thinking toward the future, Vish continued, “This will then evolve into liquid staking protocols deciding how to punish validators for misbehavior, as more and more stakers move to this type of solution. I think it’ll also open the door for an interesting conversation around how security is addressed in the Cosmos.” As more users transfer their delegations into liquid staking protocols, which will be made easier through the Liquidity Staking Module, Liquid Staking protocols will need to take a more active stance on disincentivizing misbehavior.

Even though Quicksilver as a protocol won’t use Whitelisted Validators sets, the community will be able to restrict validators of onboarded chains through a governance proposal if needed. This could evolve into misbehaving validators taking huge hits on how much stake they have delegated to them.

Vish ended the subject by concluding that liquid staking protocols must be aligned with onboarded chains and the Cosmos in order to work toward long-term, net-positive solutions. He stated, “It is important to establish that alignment very early on as liquid staking comes into the ecosystem,” referring to the relationship between other Zones and Quicksilver, ensuring the well being of the Cosmos ecosystem is forefront.

To hear the full Twitter Spaces, visit: https://twitter.com/i/spaces/1YpJkZYgbqMGj

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