In February of this year, it was announced that Stader Labs, a company focused on facilitating staking for Proof-of-Stake (PoS) chains, was coming to Fantom. At the most basic level, PoS protocols are a class of consensus mechanisms for blockchains that select validators in proportion to their quantity of holdings in the associated cryptocurrency.
Maintaining a secure consensus in a PoS system while unlocking value (yield) for native coin holders has been a major challenge for scaling layer 1 chains.
For DeFi-focused layer 1’s such as Fantom, the need for secure, distributed computing, along with a mature, liquid base currency is imperative for its scalability and longevity.
In this article, we will break down the challenges of securing, decentralizing, and scaling Fantom. We will also explore what Stader is looking to bring to this asynchronous byzantine general’s corner of the world.
About Stader Labs
Stader started working on their staking infrastructure in March of 2021.
By June 2021, they began development on Terra. Since then, Stader has accrued $730 million (at the time of writing) of TVL across the Tendermint chain and launched its own token (SD) in January.
They succeeded in raising ~$20 million from the community via a Coinlist sale and $12 million in a recent private sale to Three Arrows Capital. This is in addition to last year’s $4 million seed investment from Pantera and Coinbase Ventures.
Stader is building the key staking middleware infrastructure layer for multiple PoS networks. This infrastructure will tackle the key issues PoS blockchains face. Before we dive deeper into the nitty-gritty of the processes Stader streamlines and facilitates with their services, let’s first have a look at PoS mechanisms and the challenges they entail for Fantom.
PoS on Fantom
Without going too deep into the nuts and bolts of PoS on Fantom (we’ll cover its unique consensus mechanism: Lachesis in a dedicated article very soon), Fantom’s consensus is an asynchronous byzantine fault tolerant (aBFT) mechanism that allows for trademark fast transactions, great scalability and robust security.
Byzantine Fault Tolerance means that only (2/3 + 1) of the validation stake needs to be “good” and allows for up to (1/3) of the validation stake to be “malicious” to secure transaction blocks.
At the time of writing, Fantom has 66 validator nodes with over 1.389 billion FTM staked into the network. This means that for an attack to occur on the network, more than 463 million FTM of value (Total Amount Staked x ⅓ + 1) would have to conspire together to perform an attack.
To stake on Fantom, there are 2 main options available to users: run a validator node or delegate your FTM to a validator.
The current cost to run a validator node requires one to self-stake a minimum of 500 000 FTM. Delegators can provide as low as 1 FTM to a validator node.
To prevent a single node from garnering majority staking share, Fantom has set a cap on the total amount of staked FTM one node can accrue. Each node can have a maximum of 15x their self-staked amount.
A little more on network security
The importance of decentralizing validators and the total amount of staked FTM within them begins to unravel before us when we are confronted with the problem of malicious actors.
Don\\\’t be alarmed just yet. Along with Byzantine Fault Tolerance, Lachesis employs automated slashing to handle nodes who behave maliciously or conspire to do so. If a node or several nodes decide to sign transactions within a block, against the health of the network, 100% of the stake on said node(s) would be slashed off and the node(s) would be pruned from the network, incapable of validating ever again.
Moreover, validators are required to register their node’s identity on-chain before ever running it.
By combining the minimum self-stake requirement, the slashing measures and the requiring registered node identity on-chain, bad actors have little incentive to commit any type of attack on the network as the penalty would outweigh the possible reward.
In terms of staking however, Fantom still has two central problems: stake-centralization and opportunity cost.
The problem of stake centralization
The current distribution of the validation stake on Fantom is heavily centralized within the top 5 to 10 nodes, ranked in terms of validation stake. Currently, 56.8% of the total amount of FTM staked is held on the top 5 nodes, which is a far cry above ⅓ of total stake.
An important thing to note however is that the Fantom Foundation does hold a number of highly delegated nodes. This, in unison with the other aforementioned preventative measures helps offset the current skewed validation stake distribution.
If we are keeping ourselves honest, for Fantom to truly scale and decentralize, that means the increase in the amount of total validator nodes cannot be done without a more even distribution of the total stake across validators.
To better illustrate this distribution and how it could potentially be adjusted, let\\\’s look at a tool economists use when measuring wealth inequality in different countries: The Gini Coefficient and The Lorenz Curve.
The diagram above shows that the Gini Coefficient scales from 0 to 1, 0 being perfectly equal and 1 being total inequality.
At 1, it means 1 person has all the money.
At 0, it means everyone makes the same amount of money.
It is calculated by dividing the area between the line of equality and the Lorenz curve with the total area below the line of equality.
Understanding this, we can apply the Gini coefficient to validators and the distribution of the total validation stake and swap out inequality for decentralization.
The points on the Lorenz curve represent each validator and how much FTM is staked onto their nodes. You can clearly see the disparity.
The problem of the opportunity cost of staking
Growing the number of validators and distributing future staked FTM faces another problem: the opportunity cost of staking.
The current APR for stakers is 13.88% if funds are locked for one year. Delegators receive a little less, as Validators get a 15% share of all Delegator rewards.
Stakers can also lock-up for smaller periods of time, but the yield will adjust proportionally. As you can see in the Fluid Rewards graph, staking with no lock-up nets a base APY of 4%.
What’s the issue?
Let’s assume the weighted average cost of capital in DeFi is whatever APY you can net on your Stablecoins in a year, and the yield on Stablecoins hovers between an APY of 10-25%.
Then, let\\\’s think of the numerous liquidity pools and revenue sharing mechanisms offering single-sided yield on FTM with blue-chip dApps like SpookySwap, Beethoven (juicily compounded on reaper.farm of course) with much higher returns and no lock-ups.
Why would smart retail investors expose themselves to additional risk in locking FTM, a more volatile-than-stable asset, if the yield is worse than the readily available, more manageable yield on dApps?
Institutions on the other hand have demonstrated long-term bullishness towards top Layer 1s and have been active participants in the 2021 Layer 1 trade. FTM, Solana, Terra and AVAX went up by tens of thousands of percent and that was mainly due to big bets by even bigger wallets. Some of these institutions can’t always run the risk of impermanent loss or moving size in low liquidity environments.
It could be a fair assumption that VCs for example, with FTM in their portfolio and longer time-horizons, see staking, which could potentially be exempt from capital gains tax, as the safest way to acquire yield on a high-beta play like Fantom.
Thankfully, Stader is here to help align parties.
sFTMx: The 2-in-1 Holy Grail of Defi on Fantom
Stader offers a wide range of staking services, neatly packaged in several products that are currently alive and well on Terra and that they look forward to bring to Fantom.
On April 21st, they will be launching their first product: liquid staked Fantom -> sFTMx.
sFTMx will deliver the maximum staking rewards of 13.5%+, typically reserved for 1 year lock-ups. Additionally, it provides instant liquidity to Major DEXs. sFTMx’s cToken design allows for easy integration with all types of DeFi protocols. This means staking rewards are only the beginning of sFTMx’s potential.
Stader has already concluded partnerships with Beethoven-x, SpiritSwap, Liquid Driver and SpookySwap; where you can expect to find multiple sFTMx <> FTM liquidity pools.
Stader and Reaper farm have also formed a partnership and you can expect auto-compounding pools for most of the aforementioned pools.
Considering more than 85% of staked FTM is Delegated (1.18 billion FTM), institutions could potentially keep their maximum upside exposure to FTM with close to zero impermanent loss as these pools fill with liquidity.
Now yield is great…but how will this help decentralize the network? What’s going on under the hood of sFTMx?
When users enter a liquid staking pool, Stader takes care of the rest.
As outlined in Stader’s litepaper, PoS networks face 3 key challenges when it comes to the staking process: (1) stake-centralization, (2) discovery and stake management for delegators and (3) visibility and delegations for node operators.
We’ve discussed Fantom’s stake-centralization but what does it tell us?
When a user wants to stake without running a validator node, they are required to manually select and manage the validators with which they choose to stake.
This is impractical. The level of trust validators garner involves several factors that aren’t apparent to non-technical people. Regular users will choose validators with the most visible and stark metric they can see -> the amount of staked FTM.
Therefore, how is Stader tackling those 3 challenges?
Validator selection is subject to three main criteria:
1) Safety: Weighted by reputation and time. Which can be measured through:
- Community engagement: The validator should be actively engaged with the community via their website and/or Twitter account.
- Staking start time: The start time of staking for the validator should be before the year 2022.
2) Performance: Validators should have zero downtime
3) Willing to relock frequently for 365 days: Validators should be open to relocking on a frequent basis for 365 day lock-ins to help provide maximum APY to users. This criteria coincidentally also helps to self-select long-term, committed validators.
Their delegation strategy focuses on decentralization. Stader will do an equitable distribution of stakes across all qualifying validators following a round-robin mechanism. This will help spread the stake across all qualifying validators in a much more decentralized fashion than the natural skew that exists today.
To illustrate how Stader will contribute to decentralization, here’s a hypothetical illustration of how stakes will be distributed if all Fantom validators qualified for Stader\\\’s validator pool:
A) Current skew: Top 5 validators account for ~59% of total staked FTM
B) Stader’s round-robin: Top 5 validators will account for only ~7.5% (since 5 validators only account for 7.5% of total 67 validators). However, this can only be possible if delegations don’t exceed the previously defined max stake capacity for validators.
C) Stader’s round-robin, adjusting for current self-stake capacity: Top 5 validators will account for only ~28% of total staked FTM even if current self-stakes of validators do not change and Stader is maximizing staking capacity across all validators (the 58% share of the remaining 75% of staking that happens outside Stader).
A successful sFTMx would naturally, drastically lower the Gini coefficient of 0.751 and help decentralize the total validation stake.
How will this liquidity be readily available for users?
Because the promised staking yield of 13.5+% comes from the maximum, 365-day locked yield, how will the liquidity for this interest-bearing FTM be made available?
- Liquidity pools: FTM <> sFTMx liquidity pools on top DEXs to provide instant liquidity to users who want to exit their sFTMx positions.
- Staders Liquid Staking Pool:
- Stader will be locking-up FTM deposits and maturing flows to 12-month lock-ups to maximize yield for users. For instant liquidity, they designed a pool that allows users to unstake for free -> Free Pool.
- Unstaking from The Free Pool: The Free Pool is a dynamic reserve with the following components: (1) Holds new deposits and maturing funds (after the 12-month lock-up period) for ~5 days before staking and locking them thus creating maturing flows. (2) The staking rewards will accrue from the last staking event. Stader will batch and stake to the contract every 10 days, allowing this reserve to be dynamic. (3) When withdrawal requests are within the limit, users will get FTM as per the current sFTMx <> FTM exchange rate, and the sFTMx will be burned and staking rewards accrued
- Unstaking outside of the Free Pool: FTM is given back to the user and sFTMx gets burned. A small penalty is deducted per the current sFTMx <> FTM exchange rate because we unstaked prematurely and lost accrued rewards. This is in line with Fantom’s native staking.
All unstaking will be followed by a mandatory 7-day unwinding period before being available for withdrawal.
More to come
There are many more possible staking integrations and products Stader will look to roll out in the near future. At the pace they have come in, shipped, and partnered up with Fantom’s DeFi blue-chips, we’re looking forward to the possible synergies to come.
Staking is just one piece of the puzzle that is decentralization. Stay tuned in the coming weeks as we will be breaking down Lachesis, aBFT, and decentralization in a more detailed approach.
For more info on sFTMx: https://medium.com/@staderlabs/introducing-sftmx-ca2bdfd486de
For more info on Stader: https://staderlabs-docs.s3.amazonaws.com/Stader_Litepaper.pdf