How Bifrost is building a cross-chain StakeFi ecosystem

Bifrost is a Web3 infrastructure that provides cross-chain liquidity for Staking. It provides a decentralized, cross-chain Liquid staking service for multiple chains via the Cross-Chain Message (XCM). Since Bifrost went live on the Kusama parachain on October 21, 2021, it has minted a total of $137M in derivatives, provided $11.04M in liquidity, held 81,297 addresses on the chain, and completed 333,921 signed transactions.

Looking at Bifrost’s 2022 Roadmap, this is only a small step in the less than six months since Bifrost’s parachain went live. The bigger challenge for Bifrost is to create and capture value from a cross-chain StakeFi ecosystem. The value capture of this cross-chain StakeFi can be seen in the Staking Liquidity Protocol (SLP) and the Slot Auction Liquidity Protocol (SALP), two Staking derivative liquidity protocols launched by Bifrost. to start with.

Staking Liquidity Protocol

Reward Competition under PoS Consensus

SLP is Bifrost’s Staking derivative protocol for Proof of stake consensus chains such as Polkadot ecosystem, Cosmos ecosystem and other Proof of stake consensus chains that bridge heterogeneous chains. The protocol will make cross-chain Stake interoperability calls through XCM broadcast across the consensus message communication format to mint fully decentralized Staking derivatives.

Since PoS consensus Token can generate rewards through Staking, it will inevitably lead to the situation that the reward of DeFi, GameFi, LearnFi and other applications deployed in the ecology will compete with the reward of Staking at the bottom of the chain, which will bring great challenges to the ecological application development of PoS consensus chain. With the emergence of high market cap PoS consensus chains such as Ethereum 2.0, Polkadot and Cosmos, the ecological development problems caused by this conflict will become increasingly serious.

Indispensable middle layer

Bifrost SLP solves the problem of the conflict between the underlying consensus and the income of ecological applications by providing an intermediate layer of derivatives with interest. Eco-applications that support the SLP protocol can provide users with their own business rewards while providing them with Staking reward protection, enhancing the overall reward base. Users can indirectly participate in Staking by minting derivatives, lowering the threshold of user Staking participation, while the PoS consensus chain will get a higher staking ratio and improve the consensus security of the network.

Bifrost SLP is built on the XCM Cross-Chain Message format and has the ability to communicate with various parachains, contracts and public chains across chains, enabling decentralized minting of derivatives while making it easier to build the derivatives application scenario. The minting process of derivatives will be aggregated in Bifrost parachains through cross-chain interoperability instead of scattered across different contracts in multiple chains, aggregating their liquidity and providing more competitive depth and slippage.

The validator set election process is completed by a standardized automatic strategy and the governance council, providing efficient, decentralized and governable validator set election standards for various PoS consensus chains. Compared with Lido, which is currently the largest derivative of ETH 2.0, Bifrost’s advantages are mainly reflected in three aspects: cross-chain interoperability, liquidity aggregation, and governance standardization. As an indispensable intermediate layer for PoS consensus and its ecological application, Bifrost will capture value in terms of staking reward generation, validator set voting rights, and derivative liquidity fees.

Slot Auction Liquidity Protocol

Slot auction decisions and opportunity costs

SALP is Bifrost’s protocol for providing derivatives for Polkadot and Kusama slot bidding. A total of 9 Polkadot parachains and 11 Kusama parachains have been successfully bid on, with a total of 1,774,509 vsDOT and 174,667 vsKSM minted.

Polkadot leases security and cheapness to other parachain projects through slot auctions. It provides secure sharing and provides a set of cross-consensus message protocols for parachains to facilitate arbitrary message communication between parachains, relay chains and external chains.

In order to enjoy this service, parachains need to provide a two-year DOT liquidity lock as a leasing fee. For reasons of liquidity and the scale of cold-start funds, parachains often pay community users the interest for this part of the locked DOT by distributing tokens.

Therefore, the slot auction forms a StakeFi economic model with a three-way game among Polkadot, parachains and community users. Whether the tokens paid by parachain projects bidding for slots can outweigh the opportunity cost (price fluctuation, Staking revenue) lost from locked DOT becomes the key to whether community users can profit from slot bidding.

Therefore, the two-year opportunity cost brought by locked DOT needs to be decided at the moment of slot bidding, which brings a huge difficulty challenge to the decision, and the excessive decision threshold also prevents a large number of new users from continuously participating in slot bidding, at this time, how to reduce the difficulty of user decision and reduce the opportunity cost of locked DOT has created a huge demand and value.

The new game of liquidity bonds

Community users can participate in the auction of slots for specified parachain projects through SALP, while DOTs that originally need to be locked for two years can be mint into vsDOT and vsBond with liquidity through SALP, where vsDOT is the redemption certificate for locked DOTs and vsBond represents the time when the redemption certificate is opened for redemption.

By combining vsDOT with vsBond at maturity, the DOT can be redeemed 1:1, while vsBond has a different discount due to its different maturity, which represents the discounted gain paid for the liquidity provider. This creates a vsDOT bond market that satisfies both the arbitrage needs of the liquidity provider and the liquidity needs of the community users.

Based on current observations of the SALP protocol operation, the vsDOT two-year bonds mint through slot bidding, of which the discounted annualized rate can reach up to 40%. At the same time, because the bond is fully reserved, there is no acceptance risk, which is a reliable low-risk, sustainable, long-cycle return that is very impressive compared to other DeFi projects of the same risk level. The source of reward comes from the Polkadot slot auction, through SALP, which indirectly allows more funds to participate in this ecosystem of Polkadot slot auction. Bifrost, as a bond market aggregation platform, will capture value from discounting, liquidity, and acceptance cycles.

Summary

According to the 2022 Roadmap, Bifrost will use SLP and SALP protocols as the starting point to provide standardized cross-chain interest-bearing derivatives (vDOT, vETH, vFIL, vGLMR, vSOL, etc.) for Polkadot relay chains, parachains, and heterogeneous public chains bridged to Polkadot, lowering the threshold of Staking for users, increasing the ratio of multi-chain staking, and improving the reward base of ecological applications, and create a positive cycle of StakeFi ecology with the empowerment of users, multiple chains and ecological applications.

What is Bifrost

Bifrost is a Web 3.0 infrastructure that provides cross-chain liquid staking, providing decentralized, cross-chain liquid staking services for multiple chains through the Cross-Chain Communication Protocol (XCMP).

Bifrost’s mission is to provide standardized cross-chain interest-bearing derivatives for Polkadot relay chains, parachains, and heterogeneous public chains bridged with Polkadot by aggregating over 80% of PoS consensus chains’ staking liquidity through cross-chain derivatives, lowering users’ staking threshold, increasing multi-chain staking ratio, and improving ecological application revenue base, creating a positive cycle of StakeFi ecosystem with three-way empowerment of users, multi-chains, and ecological applications.

Bifrost has received millions of dollars of funding from NGC, SNZ, DFG, CMS and other institutions and Web3 Foundation Grant, and is also a member of Substrate Builder’s Program and Web3.0 Bootcamp.

Learn more about Bifrost or join our incredible community of over 100,000 members strong!