Treasury proposal: DOT liquidity loan for Bifrost DOT liquid staking token (vDOT) to be returned + DOT Staking rewards to Polkadot Treasury

TyronePan
11mos ago
31 Comments

Please Note:

The subsidy application goal for this proposal has been revised to Bifrost solely requesting 500,000 DOT . Since the close of the Poll, and in order to preserve the integrity of the original proposal, we have changed the following contents, please see Comments for detailed reasons for the change in the application goal.

Previous title of this proposal: Treasury proposal: DOT liquidity loan for Bifrost DOT liquid staking token (vDOT), subsidising Interlay iBTC vaults with DOT staking rewards

Proponent Address: 13YMK2eeopZtUNpeHnJ1Ws2HqMQG6Ts9PGCZYGyFbSYoZfcm(parachain 2030)

Requested Amount: 500,000 DOT

Date: 13.12.2023

Liquidity loan proposal summary

Key highlights

  • This liquidity loan proposal would request the Polkadot treasury to loan a total of 500,000 DOT(approximately $3,375,000) which would be repaid in full with roughly 5% interest (roughly 54,000 DOT in staking rewards) at maturity back to the treasury.

  • The liquidity loan is crucial in building deeper liquidity for vDOT-DOT, supporting vDOT growth and penetration and broader utilities and use-cases across various DeFi applications and scenarios within the Polkadot ecosystem, both on Substrate and EVM parachains.

  • Furthermore, the minting of vDOT for the Polkadot treasury is a compelling diversification strategy which puts its DOT capital to work for a 1 year duration and receives its 500,000 DOT principal back with staking rewards on its loan.

Bifrost has a strong treasury loan track record:

Bifrost has previously successfully repaid its 2022 50,000KSM (over $2.5M) Treasury liquidity loan with interest (4,750 KSM - over $100k) to the Kusama Treasury on the 20th of July 2023 execution timeline and renewed this 50,000 KSM loan for another year for maturity 2024 (details) for its liquid staked KSM (vKSM) solution. - As a result, Bifrost wishes to initiate a similar loan initiative with the Polkadot Treasury with vDOT.

Bifrost and its vision

Bifrost is a dedicated liquid staking middle layer serving the omnichain ecosystem. Built on Substrate, powered by Polkadot and Kusama. By leveraging Polkadot’s cross-consensus message format (XCM) Bifrost provides standardised and secure cross-chain liquid staking solutions for multiple chains : Polkadot (vDOT), Kusama (vKSM), Moonbeam (vGLMR), Moonriver (vMOVR) , Astar (vASTR) and other chains notably Ethereum (vETH) and Filecoin (vFIL). For more details on our vision and our “headquarters + branch” model, refer to our recent polkadot forum post here.

As a DeFi protocol, Bifrost aims to solve the following issues in Proof of Stake ecosystems:

  • The paradox between Staking rewards and DeFi yields
  • The balance between Token Staking/Circulating and security of PoS chains
  • Maintaining governance rights whilst holding a liquid staking token
  • Staking rewards in cross-chain scenarios

Bifrost's main objective has always been to integrate Bifrost’s Staking Liquidity Protocol (SLP) with Polkadot XCM to create a product with XCM features. Based on the feature of cross-chain invocation, developers can remotely interact with Bifrost SLP pallet in parachains that support any environment, truly achieving the multi-chain expansion of DeFi protocols. Bifrost aims to offer a seamless staking and DeFi experience for PoS users and enable developers to build innovative applications around Bifrosts’ liquid staking tokens. For more information around building initiatives on Bifrost, check here.

vDOT

vDOT is a reward bearing liquid staking token for staked DOT issued by the Bifrost SLP pallet. vDOT represents staked DOT on the Polkadot Relay chain and rewards from staking. As staking rewards are received, vDOT increases in value, without any change to the quantity of tokens. Additionally, vDOT allows users to earn staking rewards whilst retaining their governance rights and participating in DeFi, such as liquidity provisioning on DEXs, providing collateral on lending/borrowing protocols and for stablecoin issuance as well as restaking for securing decentralised solutions. Finally, as well as being fungible and tradable, vDOT has unique features such as Fast-Unstake vs. 28 un-bonding, efficient swap exchange via Bifrost dedicated liquid staking Stable Swap, high optimal staking yield via its dynamic validator selection mechanism, and finally Polkadot OpenGov support. These features and developments are covered in the section “Key product and protocol developments”. For more details about the underlying technological logic of vDOT please check here.

Key product and protocol developments

XCM V3 improvements

The implementation of XCM V3 on Bifrost replaced many off-chain services for SLP and our Slot Auction Liquidity Protocol (SALP) pallets, which simplified Bifrost’s ability to verify the message status sent to the other chain, streamlining the communication process. Learn more details here.

Validator White List (VWL) and Validator Boost List (VBL)

Bifrost has implemented its hybrid mechanism of community governance + automatic scoring to select Validators behind vDOT, making the validator election process diversified, more efficient and transparent. Bifrost divides the seats of entrusted validators into two parts, the Validator White List (VWL) and Validator Boost List (VBL). A set of clear validator rating selection rules will generate the former, while the active application of nodes will render the latter and the Bifrost community votes on their application submission for approval. The SLP protocol will only entrust the assets staked by the user to the validators in these two Lists. More details regarding the automatic validator selection mechanism can be found here, to check our current active validator set for vDOT check here.

In Q4 of 2023, Bifrost will launch a governance voting track dedicated to validator elections: Validator Election Track (VET) in conjunction with OpenGov. The VWL and VBL need to pass the VET voting process before officially taking effect (more details)

SLPx pallet, SDK & OMNI LS DApp

To achieve interoperability and cross-chain DeFi interactions, Bifrost recently launched the SLPx. The SLPx is an extension pallet to Bifrost SLP that allow users to invoke SLP's functionality on a remote chain without crossing assets into the Bifrost chain, allowing users to mint, redeem, swap vTokens remotely on the target chain. More information on SLPx technical integration

For users, the minting, redemption, and swapping of vTokens have been simplified, as they can now be directly performed on EVM chains such as Ethereum and parachains such as Moonbeam, Moonriver and Astar without cumbersome cross-chain operations all through one single interface, the recently launched Omni LS DApp powered by SLPx. Omni LS is a front-end application that supports remote minting and redemption of Bifrost vTokens, as well as remote exchange, and swapping of vTokens from any chain. The DApp aims to simplify the cross chain experience by providing a seamless interface for users to natively interact with vTokens across different chains.

vToken voting functions

This feature allows users to participate in governance on the original chain with their vToken. More specifically, users holding vDOT are able to use their DOT to participate in Polkadot OpenGov. Users can automatically capture DOT staking rewards and by using the Bifrost DApp, can also view proposals in Polkadot OpenGov and lock vDOT for voting participation. More details here and its demo.

vToken dedicated Stable Swap

To ensure that the deepest liquidity is on Bifrost, Bifrost developed a dedicated Liquid staking Stable Pool which achieves more efficiency and lower slippage swaps between LST and its original token. All vTokens on Bifrost Kusama and Polkadot have been adapted for the Stable Swap. For more information regarding the mechanism please check here and on our DApp.

vToken dedicated Leverage Staking

Introducing a forthcoming LSD-specific lending marketplace that supports correlated price tokens between DOT and vDOT, as well as KSM and vKSM, will enable the borrowing of corresponding vTokens without liquidatioin risk, which will maximize liquidity utilization. Bifrost Treasury will act as a liquidity provider to mitigate the risk of a run in extreme situations.

Key milestones

vDOT Growth

The organic growth of DOT staked with Bifrost from its inception in late September of 2022: has been substantial from 100,000 DOT to over 3,700,000 DOT with a recent growth rate of over 100% since the recent DOT Unlock of October. This also coincided with Bifrost seeing its best month (October 2023) in terms of monthly active users (MAU) with 1,321 unique active addresses. Bifrost’s current TVL is over $65M. Bifrost Substrate vToken growth and TVL metrics can be monitored here.

vDOT Cross-chain scenarios

The completion of asset registration of all vTokens on EVM parachains such as Astar, Moonbeam, and Moonriver networks and the recent development of SLPx and the launch of the Omni LS DApp has allowed for more use-cases across parachains which has also supported the growth of vDOT. The data below presents the volume of vDOT that have crossed-out to target chains from Bifrost by end users.

Target Chain Volume (vDOT)
Astar 70,067
Moonbeam 573,137
Hydradx 54,207
Interlay 88,660
Equilibrium 1,826

The total volume of vDOT above equals to roughly 968,190 DOT that has been used in cross-chain scenarios such as the deployment of the xcvDOT and xcDOT liquidity pools on native DEXs, Beamswap and Stellaswap on the Moonbeam network supported by a GLMR incentives grant of 250,000 GLMR ($50,000). These pools have gained significant traction on these respective DEXs, over $4M in liquidity on Stellaswap and over $600k on Beamswap. In addition, a vDOT-ASTR pool was launched on Astar networks largest DEX, Arthswap supported by an ASTR incentive grant of 625,000 ASTR ($25,000) which has surpassed over $600k in TVL.

The objective of these native pool deployments have been to facilitate native use cases for vDOT on respective networks and to drive further use cases such as enabling vDOT as collateral on lending and borrowing protocols on Moonbeam with Moonwell, Prime protocol, Orbiter One as well as on Astar with Starlay Finance. Bifrost recently proposed vDOT and vGLMR markets on the Moonwell community forum here and is working on a mint/redeem price contract on Moonbeam to later push for these price oracle initiatives to enable these lending/borrowing markets for vDOT and other vTokens.

Ecosystem use-cases and case-studies

vDOT minted by HydraDX Treasury, via XCM

HydraDX used the treasury address to cross-chain invoke Bifrost SLPx and minted 81,800 vDOT, which was automatically transferred back to HydraDX to enrich the treasury revenue. By leveraging off SLPx, this transaction was completed in one step, more details here.

vDOT Vault on Interlay

vDOT as collateral for Vault creation on Interlay, allowing anyone to choose vDOT as collateral when establishing an iBTC Vault on Interlay. The staking reward feature of vDOT will enhance the collateral income for Vault creators, enriching the revenue attributes of Interlay Vault collateral.

vDOT on Interlay lending and borrowing markets

Bifrost successfully proposed and enabled vDOT as a collateral asset for Interlay lending and borrowing markets to the community, access markets here. vDOT has recently surpassed DOT as a collateral asset on their lending and borrowing markets. The objective being to increase the base income for lenders who deposit iBTC, DOT, or any other asset as collateral in the lending market and increasing their yield through leveraged staking by rotating borrowed DOT stake to vDOT and depositing it as collateral. Furthermore, vDOT can be used to pay for tx fees on Interlay.

KPI

The main purpose of this proposal for Bifrost is to increase the overall TVL for vDOT, deepen the liquidity for DOT-vDOT liquidity on Bifrost Stableswap to ensure a better experience for users swapping between the assets, and to more broadly increase the use cases and growth of vDOT across the Polkadot ecosystem from Substrate to EVM parachains. As a result, Bifrost will track vDOT minting TVL and DOT-vDOT Stableswap liquidity growth, unique address growth rate, and XCM transfers related to vDOT as well as new vDOT ecosystem integrations to assess the success of this treasury liquidity loan proposal.

Liquidity Loan and incentive proposal

Amount:

Bifrost applies to borrow 500,000 DOT (approximately $3,375,000) in liquidity from the Polkadot Treasury as a 1 year loan and would return its principal in full with interest (roughly 54,000 DOT) to the Polkadot Treasury upon loan maturity.

Protocols and instruments used

Bifrost Liquid Staking StableSwap

Bifrost dedicated liquid staking Stable Pool was recently developed to optimise for efficient and low slippage swaps between liquid staking tokens and their original tokens. Current DOT-vDOT liquidity on Bifrost Stable Pool is $1,054,300, DApp here. For more information regarding the mechanism please check here.

Managing funds and repayment

Tracking Borrowing and Repayment Process

Bifrost will complete the borrowing/repayment process of the 500,000 DOT subsidy through a fully open and transparent process on Polkadot and Bifrost governance and leveraging off XCM to ensure the borrowing-repayment process is achieved in a completely trust minimised and trustless way.

Borrowing Process

  • Polkadot side
  1. Apply to Polkadot Treasury to borrow 500,000 DOT to the ParaId2030 (13YMK2eeopZtUNpeHnJ1Ws2HqMQG6Ts9PGCZYGyFbSYoZfcm) beneficiary through the (Treasury::propose_spend) method of the treasury module on Polkadot.

Management Process on Bifrost

  1. Call currencies:set_balance method, an additional 500,000 DOT will be issued on Bifrost treasury address;
  2. Dispatch Bifrost Treasury to call vtoken_minting to mint 300,000 DOT to vDOT ;
  3. Provide 200,000 DOT and 300,000 DOT worth of vDOT to Bifrost DOT-vDOT Stable Pair (Note: the actual liquidity provision proportion is subject to real-time DOT:vDOT ratio.)

Repayment process

  1. Dispatch Bifrost Treasury to remove liquidity from vDOT-DOT Stable pair. - 100% of the 500,000 DOT LP is repaid and does not incur impermanent loss (IL), given the nature of correlated assets in this case staked assets and their respective liquid staked assets and the underlying principle which remains unchanged at LP withdrawal.
  1. Redeem withdrew vDOT to DOT.
  2. Dispatch Bifrost Treasury transfers all 500,000 DOT + Staking Reward (estimated 54,000 DOT) back to Polkadot Treasury via XCM.

Security

At Bifrost we put significant emphasis and attention on security. Details below

All of Bifrost’s code is open source: https://github.com/bifrost-finance

We have our formal documentation describing the mechanism and logic of our protocol, pallets and of the liquid staking tokens, vTokens, that are issued by the protocol.

Bifrost and its features have been audited by various high quality third party blockchain smart contract security auditors (Slowmist, Certik, Common Prefix, Beosin).

Bifrost has an open bug bounty on Immunify.

Resources

Bifrost

App

Code & Documentation

Community & Social Media

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