Treasury proposal: KSM liquidity subsidy for KSM liquid staking token - vKSM

TyronePan
1yr ago
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Proponent Address: F7fq1jMmNj5j2jAHcBxgM26JzUn2N4duXu1U4UZNdkfZEPV (parachain 2001)
Requested Amount: 50,000 KSM
Date: 19.06.2023

Product Link: https://bifrost.app/vstaking/vKSM
vKSM mechanism: https://wiki.bifrost.finance/staking-liquidity-protocol-slp/vksm

Summary

Bifrost is a substrate based Kusama and Polkadot parachain that provides non custodial decentralized cross-chain liquid tokens for staked assets. By leveraging on Polkadots cross-consensus message format (XCM) it provides standardized cross-chain liquid staking services for various networks notably Polkadot (vDOT), Kusama (vKSM) and the first LST solutions on both Moonbeam (vGLMR), Moonriver (vMOVR) as well as other multiple chains (currently 6+ chains).

This proposal would request the Kusama treasury to lend a total of 50,000 KSM (repaid with interest) as base liquidity for the KSM and vKSM (liquid staking token for KSM) pair.

This proposal is identical to our successful proposal of last year- for reference https://kusama.polkassembly.io/post/1606
The execution timeline of the proposal: https://kusama.subscan.io/treasury/177
The repayment of last years liquidity loan will happen on the 20th of July, 2023 (1 year following the loan receipt in 2022).

In terms of Repayment details, before the 20th of July, Bifrost will post under this proposal comment. The general steps will be the following:
6/20 | Withdraw vKSM/KSM liquidity from Zenlink and Mangata DEX.
6/25 | Initiate Bifrost referendum proposal to redeem borrowed vKSM + one year interest.
7/3 | Start KSM unstaking process on Kusama relay chain.
7/10 | Gather borrowed KSM + interest in Bifrost Kusama sovereign account.
7/11 - 7/20 | Initiate Kusama referendum proposal to repay KSM from Bifrost paraid2001 to Kusama treasury.

Bifrost had done the repayment of the last liquidity subsidy proposal, at July 11th, 2023. Check our latest comment under the last proposal: https://kusama.polkassembly.io/post/1606#uyr5UGFRsOIFcPN2olpP

Why Bifrost?

This Initial liquidity subsidy is fundamental in keeping the liquidity backing and support for broader utilities and use-cases across various DeFi applications and scenarios within the Kusama and Polkadot ecosystem and driving KSM related economic growth and adoption on both Substrate and EVM parachains.

This liquidity loan will keep driving the benefits achieved from our previous Kusama treasury liquidity proposal of last year for the broad Kusama ecosystem and for the community (below are comparisons between last year's proposal and presents in terms of achievements and present developments):

(Past) Provide liquidity for staked KSM and promote the capital utilization of KSM in various DeFi scenarios and applications. This initial liquidity subsidy provides backing to vKSM being a catalyst in driving the expansion of KSM’s multichain economy.

(Present) Liquidity subsidy helped us to growth KSM-vKSM capitalizations across:

On-going developments and collaborations (check more details in Section #Motivation - application scenarios)

  • vKSM vault collateral for Kintsugi kBTC
  • vKSM on Kintsugi DEX for KSM LST Pool (to launch this quarter)
  • vKSM deployment on HydraDX OmniPool (upon Bridge Hub DOT <> KSM completion).
  • vKSM on Pablo AMM on Picasso Kusama (potentially first vKSM/vDOT pair via Composable Polkadot - Picasso Kusama IBC).
  • vKSM as xcvKSM on Moonriver EVM Parachain for native utility:
  • xcvKSM-xcKSM on Solarbeam DEX
  • xcvKSM as collateral for lending-borrowing on potential protocols such as Moonwell Apollo, Orbiter Finance.

(Past) Bifrost will develop the SLP pallet (vKSM minted pallet) SDK and Stable Asset Pool SDK for cross-chain vKSM mint/redeem calling convenience. The remote SDK call will facilitate cross-chain liquidation for vKSM/KSM.

(Present) The vKSM minted pallet has been developed and it is called the “XCM-Action Pallet” in Bifrost Runtime - XcmAction, it currently works for EVM-compatible chains (Astar and Moonbeam have tested) contract (https://github.com/bifrost-finance/xcm-action-contracts) calling vToken minting/redemption/swap to Bifrost via XCM. It wlll be launched expected at the end of July of 2023.

(Past) Further improve the incentives for users to nominate and pledge tokens;

(Present) Bifrost has incentivized vKSM, vDOT single-token farming for over a year to drive users to use Bifrost and to deploy vKSM on other parachains and protocols.

(Past) Improve the enthusiasm of KSM holders to participate in staking;

(Present) The growth of KSM staked with Bifrost in the past year:
from 70’108.1841 KSM to 347'823.6972 KSM with a growth rate of 396.12%.

(Past) Borrow 50’000 KSM from the Treasury and pay back with interest, increasing treasury funds utilization.

(Present) Bifrost will repay 54,750 KSM with interest on the 20th of July, 2023. In using this liquidity loan, Bifrost has driven KSM liquidity use cases and continues to do so as mentioned in the section “Application scenarios”.

The significant improvements of Bifrost in the past year

  • Bifrost Substrate vToken growth in the past year:
    Stimulate vKSM market share and use cases, launch 5 more vTokens: vDOT, vMOVR, vGLMR and vFIL.

Motivation

As our original intention stated in our first proposal remains unchanged, Bifrosts long-term goal is underpinned by the following objectives:

  • Facilitate Capital Flow of KSM staking

KSM, as the governance token of Kusama, about 50% of the total amount of KSM is currently in staking. Bifrost hopes to activate the capital utilization of staked KSM while empowering the security of the Relay-chain consensus, and promote the activity of Kusama Staking. Thus, Bifrost has enhanced liquidity derivative protocol with XCM V3 for Staking KSM: vKSM, a liquid staking token that is anchored 1:1 with staked KSM and comes with KSM staking income. Bifrost hopes to borrow 50,000 KSM from the Kusama Treasury as the base liquidity.

  • Enhance the consensus security of Kusama network and reduce the threshold for users to participate in staking

Bifrost's KSM liquidity pledge agreement (staking liquidity protocol-SLP) completes the cross chain nominating of KSM by calling XCM at the runtime level, and SLP pallet completely controls and casts vKSM. In the whole process, the SLP protocol selects the validator with no security risk and reasonable rate of return through the governance on the chain to help users complete the one-stop nominate, and complete the final voting through the “Sequential Phragménd Method“ on the Kusama chain.

vKSM validators (108 validators now): https://bifrost.app/vstaking/vKSM?tab=validators

Bifrost uses a hybrid mechanism of community governance + automatic scoring to select Validators behind vKSM, 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.

VBL Discussions at Bifrost Forum: https://bifrost.subsquare.io/discussions

More details at:
https://bifrost.finance/news/vet-validator-election-track-based-on-bifrost-open-gov-for-the-multichain

In Q3 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.

Therefore, vKSM can help any user willing to stake, complete the pledge without knowledge threshold, and use governance screening to improve the overall staking quality. Staking with mobility will be integrated with rich DeFi scenes to stimulate more users to participate in the nominated proof of stake.

vKSM utility “implementation plan”

Application scenarios

XCM-action: take KSM staking to Multichain

The function of XCM-Action is to deploy the vToken's mint, redeem, and Swap entry on Multi-chain, making it easier for users from different ecosystems to participate in "Stake KSM with Bifrost" or "Stake DOT with Bifrost".
At the current stage, XCM-Action has completed several stages of development work:

  1. Bifrost XCM-Action Pallet Development;
  2. XCM-Action Contract and SDK deploy on EVM-compatible chains: Astar and Moonbeam;
  3. Testing XCM-Action runtime logics with Astar Alpha and Moonbase testnets;

Next Steps:

  • May 2023 | Register xc-vKSM and xc-vDOT on Moonriver and Moonbeam, launch XCM-Action runtime on Moonriver and Moonbeam production.

  • May 2023 | List vKSM on Pablo DEX on Picasso and create the first vKSM/vDOT pair using Composables’ Centauri IBC bridge (Polkadot ⇔ Kusama).

  • May-June 2023 | Test the cross-chain settlement function of vKSM and vDOT for XCM-Action using DIA vKSM PoR + Market price feed and Astar lending protocol.

  • June 2023 | List vKSM on Kintsugi DEX for KSM LST Stablepool and enable vKSM as a new vault type collateral for kBTC.

  • June 2023 | Launch the Bifrost xc-vKSM Mint & Redeem page on Moonriver ecosystem, guiding Moonriver ecosystem users to stake KSM directly in the EVM environment without manually cross-chain to Bifrost.

  • June 2023 | List xcvKSM on Solarbeam DEX on Moonriver and launch the xcvKSM-xcKSM pool.

  • June 2023 | Upon the successful completion of the native Polkadot ⇔ Kusama bridge via Bridge Hub, list vKSM on HydraDX Omnipool.

  • June-Aug 2023 | Use price feeds such as DIA + Chainlink price feed to promote xcvKSM as a lending and borrowing collateral on protocols such as Orbiter Finance, Moonwell Apollo (TBC).

  • Aug-Dec 2023 | Enable xcm-action contract and SDK on Ethereum mainnet and L2s (rely on Polkadot ⇔ Ethereum bridge), promote vKSM utilities and Bifrost LSTs Hackathon in Ethereum.

Proposal

Amount:
We apply to borrow 50,000 KSM liquidity subsidy from the Kusama Treasury.

Liquidity subsidy:
For a detailed description, please see the section “Liquidity Loan and Repayment Process” below.

On-chain instruments used to provide liquidity to this proposal

  1. Zenlink DEX
    Zenlink is an underlying cross-chain DEX protocol based on Polkadot, deployed on Bifrost parachain and Moonbeam EVM.

Why Zenlink?

  • Bifrost native DEX, provides basic AMM exchange functionality for vKSM native users of Bifrost.

Additional Information
Website: https://zenlink.pro/
Github: https://github.com/zenlinkpro

  1. Mangata DEX
    Mangata is a next-generation DEX that makes tokens from all ecosystems tradable on a single exchange. It features gasless swaps, prevents front-running and MEV without additional fees, and secures the network with the revolutionary proof-of-liquidity consensus.

Why Mangata?

  • No Front-running/MEV
  • Gasless swaps
  • Proof of Liquidity staking, stake is used as liquidity in Mangata DEX.
  • Liquidity bootstrapping

Additional Information
Website: https://www.mangata.finance/
Github: https://github.com/mangata-finance

  1. Kintsugi
    Kintsugi is a blockchain network that allows bitcoin holders to utilize their assets within the Kusama network. Kintsugi’s kBTC aims to open the value of bitcoin to Kusama by enabling bitcoin based transactions across other Kusama parachains such as Bifrost, Karura, Shiden and Moonriver.

Why Kintsugi?

  • Use BTC across Kusama ecosystem
  • vKSM as kBTC valut collateral
  • vKSM as part of the KSM LST pool
  • KSM stakers can utilize kBTC in border DeFi use cases

Additional Information
Website: https://www.interlay.io/kintsugi
Github: https://github.com/interlay

Managing the funds and Repayment process

Tracking Borrowing and Repayment Process

Bifrost will complete the borrowing/repayment process of the 50,000 KSM subsidy through a fully open and transparent process on Kusama and Bifrost governance.

Borrowing Process

  • Kusama side
  1. Apply to Kusama treasury to borrow 50,000 KSM to the ParaId2001 (F7fq1jMmNj5j2jAHcBxgM26JzUn2N4duXu1U4UZNdkfZEPV) beneficiary through the (Treasury::propose_spend) method of the treasury module on Kusama.
  • Bifrost side
  1. Generate Bifrost treasury derived address via Utility::derivative_account_id method;
  2. Through the Tokens::set_balance method, an additional 50,000 KSM will be issued on Bifrost treasury derived address;
  3. Transfer 50,000 KSM from Bifrost treasury derived address to the treasury (eCSrvbA5gGNYdM3UjBNxcBNBqGxtz3SEEfydKragtL4pJ4F) address via the Tokens::force_transfer method;
  4. Mint 25,000 KSM into about 25,000 vKSM via VtokenMinting::mint method;
  5. Add 25,000 KSM and corresponding minted 25,000 vKSM trading pairs to Zenlink and Mangata to provide liquidity.
  • Additional
  1. In the actual transaction, steps 4 and 5 need to be called through the utility.dispatchAs method.
  2. In the actual transaction, steps 1-5 need to be packaged into one transaction through utility.batchAll.

Repayment process

  • Bifrost side
  1. Remove liquidity from DEXs, retrieve the liquidity of the KSM-vKSM trading pair to the treasury account;
  2. With the VtokenMinting::redeem method, almost 25,000 vKSM is converted back to more than 25,000 KSM;
  3. Transfer 50,000 KSM from Bifrost treasury address to treasury derived address via Tokens::force_transfer method and set_balance to 0;
  4. Transfer roughly 4,750 KSM (4,750 KSM staking reward is estimated, the actual return depends on Kusama staking APY and the real-time liquidity position of KSM and vKSM in the AMMs.) from Bifrost Treasury to Bifrost Sovereign account on Kusama via the XCM;
  5. Initiate a proposal on Kusama, repay 54,750 KSM to the Treasury.
  • Kusama side
  1. Return roughly 54,750 KSM from ParaId2001 to Kusama treasury address (F3opxRbN5ZbjJNU511Kj2TLuzFcDq9BGduA9TgiECafpg29).

About redeem LPs on DEXs:

For non-Substrate DEXs:
Since XCM currently does not support remotely calling Solarbeam's contract from Bifrost to complete the provide/redeem LP operations, Bifrost can only use the multisig solution of Bifrost Council members to operate xcKSM and xcvKSM on Solarbeam.

For Substrate DEXs:
We will execute though governance via HRMP transactions, below are past cases:

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