[Report] Table of Contents

[FelixLutsch]

The writing process will take place as follows: we will create Github issues for each section and link to them from here. Felix also walked through the table of contents in the second LSWG call at minute 5

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Abstract

Table of Contents

Introduction to Proof-of-Stake

Liquid Staking

Definition and Motivation

Taxonomy

Examples

Custodial

Non-Custodial

Native

Synthetic

Liquid Staking in the Context of Decentralized Finance

A Building Block for Decentralized Finance

Staked Assets as Collateral

Improving Liquidity of Staked Assets

Improving User Experience and Enabling Advanced Financial Products

Improving Price Discovery for Staking Assets

Liquid Staking as the Foundation for Shared Security

Liquid Staking, Network Security and Governance

Systemic Risk

Stake Centralization

Impact on Validator Incentives

Governance

Fractional Reserve

A Framework to Evaluate Liquid Staking

Desired Characteristics

The Tradeoff Space

The Framework

Evaluation of Different Liquid Staking Approaches

Conclusion

Recommendations for the Cosmos Hub and other Proof-of-Stake Blockchains

Future Work

References

Glossary

[Hyung-bharvest]

I think risk section deserves full one topic in this table of contents. I suggest below subcategories for the risk section. This list is not confirmed but just providing a brainstorming.

1) organization trust risk 2) centralization(cartelization) risk 3) design/codebase/economy complication risk 4) user security risk(hacking, compromisation of keys, web frontend pishing, etc) 5) protocol bug and vulnerability(attack vectors) 6) single point of failure(too dependent structure, prefers distributed risk design) 7) market volatility driven risk 8) bank run liquidity risk 9) fund lost forever risk

We should do following discussions with the categories 1) definition of each category 2) impact of each risk 3) prevention methodology of each risk 4) contingency plans for events of risk realization 5) analyze risk of each proposed solution

Reasoning of risk importance on this WG 1) tragedy of commons

• each project has more incentives on creating solution, but less incentives on risk over entire network or users. so i think this wg should deliverately focus more on risk topic 2) significantly higher systemic risk
• why risk matters more in liquid staking than other defi : because tokens under control in defi is less than 5%, but it can be up to more than 50% for liquid staking defi. therefore its potential impact on overall ecosystem is significantly more than usual defi such as DeX or lending

[FelixLutsch]

Getting back to this @dlguddus, I want to clarify what you mean with some of these risks to see if I already cover them in the current risk draft sections (which I will share shortly):

1 & 2: I think this would be covered in the Stake Centralization section, with organization risk you are referring to that the issuer of a liquid staking token ultimately has control over the tokens staked with it and could thus take control of the network?

3 to 5: these seem to be general risks for blockchain applications (aside from economic complication, which I currently deal with in "Systemic Risk"), is there anything specific about these risks associated to liquid staking protocols?

6 is this the risk that through competing protocols a more resilient solution might be created? I.e. a counter argument for a native solution?

7 can you expand shortly what you refer to with that?

8 Would this refer to a scenario where e.g. an exchange cannot reimburse tokens to withdrawing customers? I think here normal unbonding periods would apply. Or are you talking about a fractional reserve scenario (this is a risk I cover in my drafts). Possibly a good point to write some paragraphs to explain liquidity management in liquid staking solutions.

9 again, this seems to be a general blockchain risk to me, unless I am misunderstanding.

Thank you already for this great contribution and generally for participating in this effort!

[Hyung-bharvest]

1&2 : it is about ratio of asset in control vs collaterlized market cap. Liquid staking has a good chance to have the highest ratio among other defi networks. And it amplifies the concerns of centralization of the network.

3-5 is connected to 6. It means that if majority of staking becomes liquid staking, the risk exposure is not related to the market cap of the liquid staking network, but related to entire underlying network. Therefore those risks in 3~5 have much more size than other normal networks. Just imagine banking sector. It is less than 5% of total economy but its impact is very huge. It is the very reason why the sector need to follow such complex regulations. Backbone of the economy it is.

To achieve 6, I don't necessarily promote native solution. Instead, i hope to discuss some natural structure so that such liquid staking demand is not concentrated too much on one or two solution. Free competition mostly leads to monopoly structure without regulation, law of capitalism.

If a solution is dependent upon price Oracle of atom, I think the product is exposed to price volatility driven systemic risk. Because tokens have extremely high volatility(+100%) which is not seen in traditional financial market, the volatility driven risk is an unknown place even for financial experts. So I think it is a good space to discuss about.

For 7, all above risks are about decentralized liquid staking solutions. So no. It is not about centralized services. I think we aware good enough about it so there is no much need for us to discuss about it. Bank run implies general mass behavior towards same direction. If a liquid staking solution possess majority of underlying token distribution, such mass impact might cause unexpected outcome on underlying ecosystem.

9. Yes. It is general but again, if a solution possess majority of assets from underlying token, it exposes entire underlying network at risk. So it is especially important for this kind of "layer solutions"