Liquid staking has proven to be a pivotal, even a necessary component of Proof-of-Stake (PoS) economies. The model of liquid staking adopted by a chain significantly influences various facets like stake distribution, decentralization, governance control and security.
Given that the model of liquid staking has a profound impact on the dynamics on the chain, it is useful to define what the optimal liquid staking solution for Celestia looks like. A solution that takes a measured approach to achieving capital efficiency with staked TIA.
Ironically, Centralized Exchanges (CEXs) were the initial enablers of liquid staking. Opting to stake assets with a CEX afforded users the luxury of earning staking rewards without the customary token lockup, courtesy of the non-custodial nature of CEXs. This posed a serious risk as users might move capital to non-custodial solutions over self custody; which hurt the fundamental ethos of blockchains.
Liquid staking was largely a countermeasure to this problem. By letting users mint a derivative token off their staked assets; they could achieve similar amounts of capital efficiency without losing custody over their assets.
The advent of Cosmos SDK chains and Inter-Blockchain Communication (IBC) surfaced new design considerations. How does a single liquid staking protocol serve numerous sovereign chains? Interchain Accounts (ICA) was the pioneering solution. For the first time, it enabled one chain to tether to another, presenting a liquid staking product through this linkage.
However, this model of liquid staking is not without issues. The chain actually executing the liquid staking logic is not beholden to the validator set of the chain it onboards. This creates notable external risk, especially if a large percentage of stake was liquid staked. (This is the direction PoS chains seem to be heading in). This makes the liquid staking centralization problem a lot more pronounced as the centralizing protocol now lays completely beyond the control of the chain’s validators.
A further challenge emerges in the realm of control over stake allocation and the economic dynamics of validators. The external liquid staking protocol assumes a commanding role, possessing the authority to determine which validators remain active within the set and the extent of their voting power. This situation economically binds the loyalties of validators to liquid staking protocols, as opposed to TIA delegators, who serve as representatives of the wider community. Consequently, this could pave the way for a divergence of incentives, wherein the objectives of validators and community representatives potentially misalign.
Within the Cosmos Hub community, several solutions, notably the Liquid Staking Module (LSM) and Interchain Security (ICS), have emerged to navigate these issues.
The LSM is a module that lets users mint non-fungible tokenized delegation shares. These delegation shares are then consumed by a liquid staking protocol to issue a Liquid Staking Token (LST). Although LSM’s primary allure is enabling users to seamlessly transition their stake between staking and liquid staking positions, from a security perspective, its potential to deploy logic that regulates liquid staking is equally noteworthy. Presently, the LSM does this by instituting a global liquid staking cap and validator bond requirements for validators to be eligible for ICA delegations. These measures are meant to slow the pace of liquid staking.
While this method curbs liquid staking in the short term, it doesn’t offer a viable long-term solution to align liquid staking markets to the chain community that it serves. It restricts the capital efficiency benefits provided by liquid staking and places centralized financial requirements on validators participating in liquid staking.
Interchain Security, a feature intrinsic to the Cosmos Hub, allows it to lend its validator set to a consumer chain. Thus, the consumer chain inherits security from the Cosmos Hub ensuring that liquid staking remains fundamentally governed by Hub validators. This validator overlap provides greater control and creates value alignment between the liquid staking protocol and the Cosmos Hub.
Though the Cosmos Hub lets governance be done by consumer chain governance tokens; in theory a consumer chain with no governance token would be the better solution as it prevents the problem of stake distribution mentioned above.
With the Celestia chain launching soon, it is important to think about some of these security and alignment trade offs that come with unbridled liquid staking. The imperative for a Celestia-aligned liquid staking protocol becomes more pronounced and complex because Celestia does not have an execution layer. Most liquid staking implementations remain beyond the control of Celestia validators. It is our opinion that liquid staking on Celestia should be within a shared security framework wherein the Celestia validators and TIA stakers completely control the liquid staking protocol.
In addition, this protocol should also economically align itself with Celestia to create maximum utility for liquid staked TIA in the roll up ecosystem and beyond.
There are a few options on how this can be done:
- Developing a Custom Native Staking Module: Implementing a custom native staking module on Celestia, which mints a liquid staking derivative: This option would provide the highest security guarantees as the protocol is completely within the security apparatus of Celestia. However, the Celestia chain was meant to be minimal; so introducing app logic on the chain might deviate from the vision of the chain.
- Implementing a Liquid Staking Roll-Up: A liquid staking roll-up, especially one that shares security with Celestia and aligns at the sequencer level with the main Celestia chain, emerges as a plausible solution. It would be ideal if the governance token for this liquid staking protocol was liquid staked TIA. This ensures that liquid stakers themselves have say over the operations of the protocol.
In conclusion, the outlined discussions and design alternatives should be pivotal in deciding the activation of ICA on the Celestia chain. It might be prudent to have permissioned ICA, wherein only governance (or any other social consensus) can agree upon individual ICA connections based on their purpose and the product that ICA brings to the Celestia chain. A more robust mechanism for selective ICA deployment can be figured out in the future that does not rely on social consensus for every ICA connection.
This permissioned approach to enabling ICA can lead to a dialogue within the Celestia community about TIA’s liquid staking future and help keep track of risks as we launch and move forward.