Building a Cosmos “ETF” market on Solana
This post was created for Picasso Network bounty from the Solana Scribes event https://earn.superteam.fun/listings/hackathon/picasso-paradise/
Bitcoin EFTs have validated retail demand but are lacking as true investment ‘products’
The recently launched Bitcoin ETFs have seen a heap of interest from retail investors. And rightly so, Bitcoin is very well known but is still relatively difficult to access for most people even though CEXs (centralised exchanges) are fairly established entities now.
There’s two longer term problems with these products (if we ignore the fact the Bitcoin ETFs cannot be rebalanced at all, as they are only one asset..):
- Bitcoin has no yield: Even though dividends are not as common from publicly listed shares as they once were, most ETFs will carry some sort of yield in the form of dividends. None of the Bitcoin ETFs are able to offer a yield.
- Bitcoin EFTs are (mostly) traded off-chain: One of the huge advantages to an EFT is you take most of the trading off the Bitcoin L1 (which is expensive and slow) and place it on centralised stock exchanges (which are much faster and cheaper). However that also means you’ve completely centralised and permissioned a once decentralised and permissionless asset.
The opportunity for LSTs as a new, blockchain based, ETF market on Solana
I think there exists an opportunity to bring new and interesting LSTs to Solana from the Cosmos ecosystem via IBC (Inter-Blockchain Communication protocol https://cosmos.network/ibc/).
The Cosmos ecosystem has a plethora of L1 chains, with a wide range of use cases. All these chains require a set of validators and their protocol token staked with those validators (or they use the Cosmos Hub validators, called Interchain Security https://cosmos.network/interchain-security, and stake ATOM).
Solana is: user friendly, very cheap, very fast, and has large amounts of trading happening on chain.
A long stated goal of Solana is to ‘bring the NASDAQ on chain’. Enabling a central marketplace, on chain, for these LSTs would be in line with that aim.
What Solana doesn’t have is a large liquid staking defi ecosystem like you’d expect from a chain with its current metrics. Whilst a very large percentage of all SOL is staked a very low percentage of that is in the form of LSTs (liquid staking tokens). LSTs are vital to fostering the growth of defi on blockchains as they offer a way to leverage the base liquidity and offer an investment product that is widely appealing: Relatively low risk, easy to access yield.
It’s a very easy sell to new users to defi: Buy this token. Get staking rewards for holding it. That’s it.
This is why LSTs are such an easy onboard for people into defi.
But whilst we’ve seen an explosion in LST innovation on Ethereum, we’ve not seen the same level of innovation from Solana despite Solana, on balance, launching the most innovative products in crypto.
Even if we do see more innovation in LST in the future there’s not a lot more you can do with a SOL LSTs as they are all based on the same core mechanic i.e., staking SOL.
Cosmos still suffers from liquidity issues
Via the excellent work of Stride https://app.stride.zone/ in Cosmos (who are also one of the chains now using Interchain Security) we now have a wide range of LSTs from different Cosmos chains. All of these are able to be used on the Osmosis chain, the main DEX in Cosmos, so have base liquidity there (e.g., LPs).
The problem with Cosmos is although there are many different chains and many different use cases, the liquidity is very low on most and even with the excellent work Stride and Osmosis have done to make the ecosystem as a whole more user friendly it still can be very complicated for even experienced defi users to navigate the different chains.
As LSTs are key to building a defi ecosystem on a blockchain and a defi ecosystem (aka token liquidity) normally underpins every other use case, raising base liquidity in LSTs on all chains would be very beneficial to Cosmos as a whole.
I would love for someone (e.g., Picasso Network https://picasso.xyz/) to facilitate a Stride LST market (expanding to other Cosmos LST providers later) on Solana which would function a bit like the Bitcoin ETFs do now. That is the market on Solana would have wrapped versions of these LSTs which would maintain their yield on Solana (assuming this can be done via oracles like Pyth).
I believe there would be a significant amount of interest in the range of different LSTs from Cosmos from Solana natives and bringing the excellent trading experience (fast and cheap) to all these tokens in one place would be a huge draw card for new and experienced Solana users.
Not to mention the staking yields are mostly significantly higher than SOL LSTs.
In time I would hope that this interest would translate into more activity and users for the respective Cosmos chains themselves (tokens are still the best marketing tool we have in crypto to drive adoption).
The LST offering on Stride currently
Currently here are the LSTs available on Stride (APYs are at time of writing and subject to change, head on over to https://app.stride.zone/ to see the latest rates)
The use cases are quite varied between the different chains so offer different value propositions to users.
TIA / stTIA - Celestia
https://celestia.org/
Celestia is a modular data availability (DA) network that securely scales with the number of users, making it easy for anyone to launch their own blockchain. It provides a dedicated data availability layer for rollups and layer-2 solutions.
DYDX / stDYDX
https://dydx.trade/#/markets
dYdX is a decentralized exchange (DEX) platform that offers perpetual trading options for over 35 popular cryptocurrencies. It stands as one of the biggest decentralized exchanges in the world in terms of trading volume and market share. dYdX has transitioned to its own Cosmos-based blockchain (from StarkWare, an Ethereum L2) for improved user experience through customizable fee structures and transaction fees. The dYdX chain features a decentralized off-chain order book capable of scaling alongside the platform's growth.
ATOM / stATOM - Cosmos Hub
https://cosmos.network/
The Cosmos Hub serves as the central hub of the Cosmos network, enabling the interoperability of different blockchain networks. It uses the Inter-Blockchain Communication (IBC) protocol, which allows for exchanging tokens and data between different blockchains within the network. It also now offers the Interchain Security model where Cosmos chains can get Cosmos Hub validators to validate their chain thus increasing their security budget. We’ve seen a few chains already transition to this model. Stride transitioned to this model mid 2023 (though you can still stake STRD to participate in governance) and Noble launched their chain with Interchain Security straight out of the gate.
OSMO / stOSMO - Osmosis
https://osmosis.zone/
Osmosis is a decentralized exchange specifically built for Cosmos. The Osmosis DEX can facilitate swaps for most Cosmos chain tokens on Osmosis. This has meant Osmosis has become the default liquidity hub for a lot of the ecosystem.
STARS / stSTARS - Stargaze
https://www.stargaze.zone/
The Stargaze blockchain application-specific Layer 1 (L1) designed for minting and trading NFTs (non-fungible tokens).
JUNO / stJUNO - Juno
https://junonetwork.io/
Juno is a community owned and operated L1 that is meant to act as a launchpad for new projects coming into the Cosmos ecosystem by offering tooling that can get them started quickly. Juno style themselves as an incubator for the Cosmos ecosystem.
LUNA / stLUNA - Terra
https://www.terra.money/
The chain that the original Terra Luna, now Terra Luna Classic (LUNC), transitioned to after the UST depeg which heralded the overall crypto market downturn in mid 2022.
EVMOS / stEVMOS - Evmos
https://evmos.org/
Evmos aims to bring Ethereum apps and assets to the Cosmos ecosystem while providing a familiar experience for developers using Ethereum tools within a Tendermint environment. Its compatibility with Ethereum's EVM allows for cross-chain dApps development.
INJ / stINJ - Injective
https://injective.com/
Injective is a blockchain built for finance. Injective provides out-of-the-box financial primitives such as a fully decentralized order book to allow developers to create mainstream dApps. For instance, applications can leverage the order book to launch exchanges, prediction markets, and various other on-chain strategies.
UMEE / stUMEE - Umee
https://www.ux.xyz/
Umee (recently rebranded as UX Chain) is a cross-chain DeFi hub focused on lending. Umee provides users with the ability to easily lend and borrow across different blockchains.
CMDX / stCMDX - Comdex
https://comdex.one/home
The Comdex blockchain enables solutions that bridge the gap between decentralized traditional finance. It is dedicated to developing synthetic asset protocols. The goal is to make finance more accessible to the general public by creating digital versions of various assets that can be traded, thus granting access to global financial markets.
SOMM / stSOMM - Sommelier
https://www.sommelier.finance/
Sommelier is a platform for executing intelligent DeFi vaults (Cellars). Cellars are powered by Strategy Providers (SPs) who develop trading strategies and send the recommended actions to the Sommelier Validators to be executed on the Cellar with the intention of gaining yield.
Support for innovation via increased liquidity
Not listed on the Stride main site anymore, but still available as a Stride LST, is IBCX / stIBCX https://index.ion.wtf/stake (NOTE: IBCX exists on the Osmosis chain).
IBCX is an index token for Cosmos composed of multiple Stride LSTs and core Cosmos ecosystem tokens.
Whilst it’s struggled for uptake since it’s launch mid 2023 this kind of token could potentially see a much higher uptake as a bridged LST on Solana as it would offer a simple way for curious Solana users to get exposure to a broad range of staking yield in Cosmos via one token.
