Requested Amount: 50,000 KSM

Date: 26.11.2024

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Proposal Context

Proposal Discussion: https://kusama.subsquare.io/posts/30

Previous Proposal (Rejected): https://kusama.subsquare.io/referenda/465

Updates:

• Proposal to return back 50,000 KSM (principal) with 4,625.0495 KSM (interest) to Kusama Treasury has been completed (Executed)
• More exposure to attract more community members to vote, preventing proposals from being sniped in the final stage.

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Product Link: https://app.bifrost.io/

About vKSM: https://docs.bifrost.io/quick-start-and-tutorials/liquid-staking-slp/vdot-and-vksm

Summary

Bifrost is a Liquid Staking app-chain tailored for all blockchains, utilizing decentralized cross-chain interoperability to empower users to earn staking rewards and DeFi yields with flexibility, liquidity, and high security across multiple chains. Built on the Polkadot SDK, Bifrost uses Polkadot’s cross-consensus message format (XCM) and other decentralised cross-chain communication protocols such as Layerzero, and Hyperbridge, providing standardised cross-chain liquid staking solutions for multiple chains. Bifrost is currently one of the largest Polkadot parachains in terms of Total Value Locked (TVL) with over $77M. It also has the largest TVL for liquid staked DOT (vDOT) with over 7.5M DOT ($45M). Bifrost has liquid staking solutions for other networks such as Kusama (vKSM), Astar (vASTR), Ethereum (vETH), Manta (vMANTA), and Moonbeam (vGLMR).

This proposal would request the Kusama treasury to lend a total of 50,000 KSM (repaid with interest) for 18 months as base liquidity for the KSM and vKSM (liquid staking token for KSM) pair in Bifrost Stable Swap.

This proposal is identical to our last two successful proposals in 2022 and 2023- for reference below:

• 2022: https://kusama.polkassembly.io/post/1606
  • The execution timeline of the proposal: https://kusama.subscan.io/treasury/177
• 2023: https://kusama.subsquare.io/referenda/236
  • The execution timeline of the proposal: https://kusama.subsquare.io/referenda/236?tab=timeline
• Bifrost has brought a total income of 8,370.5523 KSM to the Kusama Treasury. (check more details at the next section “Bringing Substantial Income to the Kusama Treasury”)

The repayment of last year's liquidity loan will occur in Nov 2024 (15 months after receiving the loan in 2023).

In terms of Repayment details:

9/27 | Withdraw vKSM/KSM liquidity from Bifrost Stablepool. (Executed)

10/25 | Initiate Bifrost referendum proposal to redeem borrowed vKSM + 15 months interest. (Executed)

11/19 | Transfer total 54,625.0495 of KSM ( 50,000 KSM from initial principal + 4,625.0495 KSM from staking rewards of 25,000 KSM in 15 months) back to Kusama Treasury. (Executed)

Why Bifrost?

This Initial liquidity subsidy is fundamental in keeping sufficient liquidity for vKSM and enabling more support for broader use-cases across the ecosystem particularly Polkadot (DOT <> KSM bridge will be supported soon).

The renewal of this liquidity loan would ensure the continuity of benefits achieved from our previous proposals for the broader Kusama ecosystem and community (below are comparisons between last few years’ proposal and presents in terms of achievements and present developments):

Bringing Substantial Income to the Kusama Treasury

During Bifrost's use of the KSM subsidy, we continuously channeled additional income to the Kusama Treasury:

• 2023: Repayment 53,745.5028 KSM,
  • with 3,745.5028 KSM Interest.
• 2024: Repayment 54,625.0495 KSM,
  • with 4,625.0495 KSM Interest.

Bifrost has brought a total income of 8,370.5523 KSM to the Kusama Treasury.

Unique Use cases for liquid staking

In 2024, we added the following important features to vKSM to help KSM users retain governance power while maximizing the benefits of liquid staking:

LST Governance Capacity Inheritance (GCI)

vKSM Voting is one of the unique features of Bifrost LST, which reserves the right for Bifrost LST holders to participate in its original on-chain governance.

Read more details at here.

Leveraged Staking (LoopStake)

Loopstake refers to the strategy of amplifying yield earned from staking by leveraging vKSM against KSM, it can also be called Leveraged Staking. This approach allows KSM users to potentially earn higher staking rewards than they would with just their own funds.

Read more details at here.

Chain Abstraction for KSM liquid staking

Bifrost SLPx streamlined the complex process of bridging funds to destination chain, allowing users to liquid stake on any chain without leaving UI to interact with bridges. The ultimate goal of SLPx is to allow users and developers to effortlessly use or integrate Bifrost LSTs on any chain.

Read more details at here.

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 53% 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 its liquidity staking solution with XCM V5 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.

• Empowering KSM staking across Kusama and Polkadot

In the fourth quarter of 2024, Bifrost is expected to support bi-directional cross-chain between Kusama and Polkadot. Bifrost SLPx—a Bifrost chain abstraction protocol—will connect to Bridge Hub and package XCM cross-chain messages, ultimately enabling one-click minting of vKSM on Bifrost-Polkadot.

This development brings two major advantages: firstly, it provides Polkadot users with more LST options; secondly, not only vKSM, but more Parachain Staking assets can be transferred to Bifrost-Polkadot via SLPx.

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

Bifrost achieves decentralization and an alpha user experience for vKSM through the following aspects:

Decentralized staking process:

Bifrost uses keyless sovereign-derived addresses to execute remote staking via XCM, ensuring the staking process is completely decentralized. For details on how this works, check here.

Validator Diversification:

Currently, vKSM engages 120 validators in the relay chain, with an average of 24 validators for each delegator. All these validators are selected through Bifrost's dual-selection model outlined below.

Dual-model validator selection:

Bifrost employs opengov + automatic scoring for validator selection, enhancing diversity, efficiency, and transparency. Validators are divided into Validator White List (VWL) and Validator Boost List (VBL). VWL is generated by a rating algorithm, while VBL is formed through independent node applications and community voting. SLP only entrusts user assets to these listed validators.

VBL Discussions: https://bifrost-kusama.subsquare.io/discussions

vKSM utility “implementation plan”

Application scenarios

Leverage vKSM use cases on Polkadot.

Once KSM <> DOT bridge is live, Bifrost plans to expand vKSM applications on Polkadot. This initiative will utilize Interlay Value, Hydradex omnipool, and DCA strategies, mirroring the successful approach implemented with vDOT.

• To illustrate, one of Interlay's vDOT vaults has secured 48,801 DOT as collateral. Investors in this vault are currently benefiting from a substantial combined yield of 37.26% APR, comprising 21.12% vault APR and 16.14% vDOT APR. This advantageous model is anticipated to be applicable to vKSM in future implementations.

Abstract away KSM liquid staking to the multichain.

Case Study: omni.ls

• vKSM is currently supported on Kusama and Moonriver. It will be further supported for minting across Ethereum, Base, Astar, Moonbeam, Manta Pacific, and other networks via Bifrost SLPx. In our long-term multichain development roadmap, vKSM will be one of the key assets to build SLPx builder community across different ecosystems.

By leveraging the live DOT <> KSM bridge, we will drive more use cases for vKSM on Polkadot:

• Support vKSM Loopstake on Bifrost-Polkadot.
• Enable vKSM for purchasing Kusama coretime via Hydration Omnipool liquidity.
• Enable vKSM to be used for transaction fee paying on Bifrost.

Next steps:

• Test and live DOT <> KSM Bridge, adapt the staking pallet migration from Relay-chain to AssetHub.
• Register vKSM on Bifrost-Polkadot, enable SLPx supports vKSM minting on Bifrost-Polkadot.
• Adapt vKSM in LoopStake.
• Bridge vKSM-KSM liquidity to Bifrost-Polkadot.
• Establish vKSM-KSM liquidity on Bifrost-Polkadot.
• Register vKSM in Hydration, migrate 50%-80% vKSM-KSM liquidity to Hydration Omnipool and start joint-incetivization campaign.
• Focus on expanding vKSM use cases through the SLPx strategy across more EVM-compatible chains and Layer 2 networks, in line with Bifrost's long-term roadmap: Omni-chain LST Expansion Territory.

Proposal

Amount:

We apply to borrow 50,000 KSM liquidity subsidy from the Kusama Treasury for 18 months.

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. Bifrost Stable Swap This is designed to facilitate related exchanges between Bifrost liquid staking tokens “vTokens” and Token that are expected to have similar values, such as vDOT-DOT, vETH-ETH, vKSM-KSM, etc.

Why Bifrost Stable Swap?

• As Bifrost liquid staking tokens “vToken” is a yield-bearing token, its value will gradually increase over time compared to the corresponding Token value. Therefore, the liquidity supply anchor of vToken and Token in AMM should change with the vToken exchange rate to avoid loss for liquidity providers. The following is a comparison between pegged stable swap and Correlated stable swap

  • Pegged Stable Swap

    Tokens that swap near 1:1, such as two stablecoins of the same currency

  • Correlated stable swap

    Tokens that swap near 1: R with some slowly changing exchange rate R, like vToken (eg: vDOT, DOT)

Additional Information

Docs: https://docs.bifrost.io/quick-start-and-tutorials/lst-stable-swap

Dapp: https://app.bifrost.io/swap?tab=pool

2. Hydration Omnipool The Hydration Omnipool is an innovative type of Automated Market Maker (AMM) that concentrates all liquidity in a single trading pool. This design is intended to unlock new possibilities in the DeFi space.

Why Hydration Omnipool?

• Hydration, the largest DEX across Polkadot with over $4.5M TVL, offers the best trading experience in the Polkadot ecosystem from several angles:
  • Omnipool: It allows users to trade against native asset or non-native asset, under a concentrated liquidity pool.
  • Single Token liquidity Mining: Users no longer need to calculate the required amount of bilateral liquidity in advance as before; they can simply add unilateral liquidity to the Omnipool.
  • Yield DCA: Hydration's Omnipool and DCA Trading are able to fulfill the exchange and automated trading needs between vKSM and any Token with ultra-low slippage.
  • Incoming features around Money Market and Stable Coin base on Omnipool.

Additional Information

Docs: https://docs.hydration.net/

Dapp: https://app.hydration.net/

X: https://twitter.com/hydration_net

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 vKSM liquidity to Bifrost Stable Swap.

• 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. By calling the VtokenMinting::redeem method, vKSM will be converted back to more than 25,000 KSM with 18 months staking rewards;
3. Initiate a proposal on Kusama to repay an estimated 55,437 KSM to the Treasury: Transfer approximately 55,437 KSM (equivalent to one year's staking rewards of 25,000 KSM at an estimated 14.5% APR) from Bifrost Treasury to Kusama Treasury via XCM;