Alliance: Harnessing the Power of Incentive Alignment
Following an overwhelming vote of approval on proposal 4717, the LUNAtic community has successfully integrated the Alliance module into Terra mainnet, opening up a range of possibilities for growth and cross-chain collaboration.
Alliance represents a paradigm shift in scaling decentralized economies. Let’s dive into how it works, why chains like Migaloo and Kujira have decided to integrate it, and what makes it the ideal tool for Terra.
How Alliance Works
An exciting feature that’s emerged from the Internet’s transition from Web2 to Web3 is the ability to enable large-scale coordination among disparate participants by utilizing economic incentives. As an open-source Cosmos SDK module, Alliance builds on this concept, empowering blockchains to align incentives with adjacent chains, developers, and users to strengthen and expand their ecosystem.
At its core, Alliance aims to serve as an economic instrument that steers a decentralized economy’s monetary policy (i.e., staking rewards) toward achieving desired objectives. Functionally, this is accomplished by allowing users to stake multiple tokens on a single chain to earn a portion of native staking rewards — a feature never before possible in Web3.
The module was designed with flexibility in mind, accommodating staking for any token, including IBC assets, stablecoins, LP tokens, and liquid staking derivatives (LSDs). Alliance was also carefully crafted to be non-invasive, meaning it can be added seamlessly to any compatible Cosmos chain without requiring any changes to the consensus mechanism or significant alterations to common core modules. Here’s how it works:
Creating an Alliance Between Two Chains
- Both chains integrate the Alliance module and determine, through governance, which tokens users can stake on their chain. These are known as Alliance assets.
- Each Alliance asset is assigned a Take Rate (i.e., the percentage of staked Alliance assets the chain redistributes to native chain stakers) and a Reward Weight (i.e., the portion of native staking rewards the chain distributes to Alliance asset stakers).
- Users of each chain can then bridge their assets via the Inter-Blockchain Communication protocol (IBC) to the other chain and stake them to earn the Reward Weight.
While the name Alliance implies its aptness to form mutually beneficial economic relationships between chains, communities can also leverage it within a single chain. This means chains can add tokens from other networks or from native applications as Alliance assets in a permissionless manner. Here’s one example of how a network may use Alliance to increase liquidity for essential token pairs:
Leveraging Alliance to Extend Liquidity for Essential Token Pairs
- A blockchain integrates the Alliance module and decides, via governance, which LP tokens users can stake as Alliance assets.
- Each LP token is assigned a Take Rate (set to 0% in this example) and a Reward Weight.
- Users can provide liquidity for those pairs on a native DEX, subsequently staking those LP tokens into the Alliance module to earn their Reward Weights.
In essence, Alliance functions as a mechanism to align incentives to encourage any desired user behavior.
To learn more about the inner workings of Alliance, visit the How Alliance Works Docs guide.
Use Cases
The Alliance module’s versatility presents several use cases, catering to the ever-evolving needs of the Cosmos landscape. With the ability to transform any token into an Alliance asset and adjust its Reward Weight and Take Rate via chain governance, Alliance acts as a dynamic, adaptive tool that can scale as an ecosystem’s needs change. Users and decentralized economies alike can use Alliance to:
- Diversify and augment staking yield — Newer, lower liquidity chains can augment their native staking yield with uncorrelated, less volatile, and more liquid Alliance assets by setting the Take Rate above 0%. Larger, more established chains can diversify their native staking yield by incorporating foreign tokens as Alliance assets and designating a Take Rate above 0%. Users can diversify and boost their rewards by staking on one chain, bridging their LSD to an allied chain, and staking it — thereby earning a second yield in the form of that chain’s native token.
- Attract users, liquidity, and developers — By assigning a low Take Rate to an Alliance asset, a chain of any size can attract new users and liquidity from allied chain participants who bridge and stake their holdings within their ecosystem. Alliance staking translates to positive reflexivity: Higher usage -> higher liquidity -> more developers building dApps -> higher usage -> higher liquidity, and so on.
- Incentivize application developers — Alliance can offer L1 staking yield to app token stakers in the ecosystem — thereby allowing users of the most promising apps to be rewarded directly from fees and inflation of the underlying L1. Communities may also use Alliance to fund the development of essential ecosystem applications (e.g., DEXs, money markets, NFT marketplaces, etc.) or novel DeFi primitives.
- Deepen liquidity for essential token pairs — As mentioned above, chains can increase liquidity for desired pairs by adding LP tokens as Alliance assets and specifying a Reward Weight above 0%.
Things are Going WHALE for Migaloo 🤝
One of the first chains to embrace Alliance thus far has been WhiteWhale’s Migaloo.
Access Alliance on Migaloo Using Eris Protocol
By adding ampLUNA and bLUNA as Alliance assets and offering WHALE rewards to stakers of each, Migaloo has begun using Alliance to attract users and liquidity (~100K combined bLUNA and ampLUNA staked in less than a week), utilizing LUNA Take Rates to diversify and boost WHALE staking yield. In addition to forging an Alliance with Terra, Migaloo is also exploring collaborations with other Cosmos chains and investigating project ideas built on top of Alliance, such as an auto-compounder for Alliance rewards.
Not to mention, using Terra’s Alliance module, Migaloo enabled a Cosmos First!
On April 5th, 2023, at block height 766297 of the Migaloo chain, an anonymous user performed the first delegation on a mainnet Cosmos blockchain using a non-native token: staking bLUNA on Migaloo. This achievement once again highlights Terra’s capacity to deliver inventive solutions, showcasing our commitment to building the picks and shovels that enable a freer financial system.
Growing Interest Across the Cosmos
Several other Cosmos chains want in on the Alliance action, including Kujira, which has already integrated on mainnet and is exploring incorporating native application tokens as Alliance assets to align incentives. According to their announcement article,
“By adding app tokens to Alliance, we foster a tight, integrated ecosystem between the protocols within the Kujira chain, where revenue is pooled together to create a rising tide that lifts all boats.”
Kujira’s sentiment underscores the potential impact of Alliance in fostering a thriving, interconnected blockchain ecosystem. It’s no wonder why numerous other chains have expressed interest in integrating…
Alliance and the 🌕
With Alliance now live on Terra, LUNAtics can unleash their creativity. Anyone from within the community is now free to propose the addition of new Alliance assets and their associated Reward Weights and Take Rates via governance. This makes possible an array of exciting use cases that can propel our ecosystem forward. In addition to those mentioned above, Terra may also consider:
- Developing a protocol that wraps Alliance staking assets to be used in Terra DeFi while earning a Reward Weight
- Extending LUNA utility by forming Alliances with other chains that incorporate LUNA LSDs as Alliance assets
The dynamic nature of Alliance enables the Terra ecosystem to flourish both now and into the future. By giving rise to a more robust ecosystem of applications, deeper liquidity for essential token pairs, a more diverse community of users, and higher TVL, Alliance sets Terra on a trajectory for one thing: growth. One can foresee a future where LUNA stakers earn native staking rewards from ten or even twenty different Alliance assets. This exemplifies the tremendous potential of Alliance in shaping the evolution of the Terra ecosystem.
Unlocking Capabilities for Decentralized Economies
From its inception, Terra has championed the importance of freedom. Our community has embodied fervent resiliency at every turn, and we continue to envision and fight for an open, more decentralized financial system. By offering use cases that strengthen decentralized economies, Alliance takes us one step closer in our journey toward building that system.
Alliance stands as a testament to the transformative power of incentive alignment in the world of decentralized finance. We’re only beginning to witness the potential of this technology, but with a range of chains, including collaborations like Migaloo and Terra, embracing the capabilities of Alliance, the future looks brighter than ever for interconnected, collaborative blockchain ecosystems. Embracing Alliance signifies a new chapter in decentralized economies, where collaboration, innovation, and growth know no bounds.
Getting Started with Alliance
- For chains interested in incorporating or learning more about the Alliance module, check out this quick integration guide on the Alliance Docs, or have a look at the open-source codebase (audited by FYEO)
- For those of you looking to try out Alliance, check out this step-by-step guide and visit the Alliance UI on Eris Protocol to stake bLUNA or ampLUNA on Migaloo
Bonus(!): Maybe this is just my conditioning from waiting for Marvel end-credit scenes coming out, but for those of you who have read this far, here’s a sneak peek of what the Alliance UI may look like on Station 👀 👇
