Introduction

Unlike most blockchain projects, Cosmos offers developers a consensus mechanism and application development tools (SDK) rather than a traditional virtual machine for execution. This unique approach grants developers more freedom to customize their application chains. However, the Tendermint consensus mechanism has limitations, particularly in achieving a decentralized network of validator nodes, resulting in a restricted number of validators.

Liquid staking in the Cosmos ecosystem differs significantly from Ethereum’s approach. Due to the constraints of the Tendermint consensus, Cosmos projects can only support a limited number of validator nodes. As a result, many liquid staking projects in Cosmos cannot operate their own validators and instead act as intermediaries, delegating users’ native tokens to validators on the target chain. Users pay a fee (typically between 3.5% and 10%) to receive liquidity certificates, which provide additional liquidity for their staked tokens. In contrast, Ethereum’s validator nodes are permissionless, encouraging node operators to attract more capital to create additional validators. ETH holders are motivated to delegate tokens to liquid staking projects for better returns.

Currently, the major liquid staking projects in Cosmos include Stride, Pstake, StaFi, and Quicksilver. Stride stands out with significantly higher trading volumes and broader network applicability. This article will explore its product logic, economic model, and current development status.

What is Stride?

Stride is a liquid staking protocol within the Cosmos ecosystem, built on the Tendermint consensus mechanism. It was launched in June 2022, and the STRD token’s mainnet went live in September 2022.

The project was developed by Stride Labs, which has a team of over ten members. The three co-founders share similar backgrounds in computer development. Since its inception, Stride has completed three funding rounds, attracting investment from firms like Pantera Capital, 1Confirmation, North Island, and various other participants in the Cosmos ecosystem. The seed round in June 2022 raised $6.7 million and included a one-year lock-up and a two-year linear release period. The $1.5 million round in March 2023 also had similar terms. The latest strategic round raised $4 million in early February this year, with a one-year lock-up and complete release within a year.

Source: stride

User Experience

Stride offers a user experience similar to Ethereum’s liquid staking projects. Users stake their tokens to receive liquid staking certificates and earn rewards. For example, when users stake ATOM on Stride, they receive stATOM tokens as proof of their liquid stake. Unlike stETH, which is a rebase token, stATOM behaves like wstETH, increasing in value as staking rewards accumulate. The staking interface displays the annual percentage yield (APY); for instance, currently, staking 1 ATOM yields 0.681 stATOM, with an APY of 13.89%. If users want to unstake, they must wait 21 to 24 days for the process to complete.

Source: stride

Stride charges a 10% fee on the rewards generated from user staking. Of this fee, 80.75% goes to STRD token stakers, 15% is paid to ATOM stakers on the Cosmos Hub as a service fee, and the remaining 4.25% is allocated to the community fund. Stride currently supports a variety of projects in the Cosmos ecosystem, including Celestia, dYdX, Osmosis, Injective, SAGA, and Stargaze.

Technical Implementation

Stride’s user experience is similar to that of Ethereum staking projects, but significant differences exist in technical implementation due to the performance of the underlying public chains. Here’s how the technical process works:

When a user engages in liquid staking: (1) The user deposits tokens into their Stride account. Stride creates a deposit record, calls the LiquidStake module to mint the corresponding st tokens, and sends these st tokens to the user. (2) Stride uses the IBC (Inter-Blockchain Communication) protocol to transfer all tokens from the deposit record to the Delegation Inter-Chain Account (ICA). (3) Stride then delegates the tokens in the Delegation inter-chain account to validator nodes on other chains for staking. Currently, Stride allocates tokens to 30 trusted validator nodes based on a limited custody principle. However, after the upcoming v2 technical upgrade, Stride plans to change this delegation method. Future distributions of staked tokens will follow a principle of replicated staking, meaning that tokens staked by users will be allocated to validator nodes on the target chain according to their staking weight. This approach aims to minimize Stride’s impact on community governance on the target chain by simulating the delegation preferences of stakers.

When a user unstakes: (1) Stride first creates an unbinding record (Epoch Unbonding Record) and calls the unbinding module on the target chain (Host Zone Unbondings). When the user sends the st tokens to the corresponding address on the target chain, the unbinding module updates the status and creates a user redemption record (User Redemption Record). (2) After a set period, Stride sends a message to the target chain to un-delegate, and the tokens delegated to the validator nodes will be sent back to the redemption inter-chain account. Once the unbinding module updates the status, users can claim their tokens on the Stride interface. Due to Cosmos SDK limitations, clients can publish a maximum of 7 un-delegation messages on-chain during the specified unbinding period.

Overall, Stride’s technical implementation is more complex than Ethereum’s liquid staking because it relies on the IBC protocol, inter-chain accounts, and inter-chain querying to handle liquid staking across multiple chains simultaneously. Additionally, because of the Tendermint consensus mechanism’s limitations, blockchains using the Cosmos SDK typically cannot achieve a decentralized network of validator nodes, resulting in a limited number of validators and restricted amounts of staked tokens. Consequently, Stride cannot operate its own validator nodes across various chains and must delegate to existing validators on the target chain for token staking.

Economic Model

STRD is Stride’s native token, launched on the mainnet in December 2022, with a total supply of 100 million tokens.

According to the official token economic model: (1) 31% of the tokens are allocated for liquid staking incentives, which also encourage the use of st tokens in other DeFi protocols; (2) 24.2% are allocated to the development team for future project development; (3) 16.7% are allocated to partners for later financing; (4) 8.9% are reserved for strategic purposes; (5) 6.3% are set aside for airdrops to incentivize new users to stake in the Stride community; (6) 5.2% are allocated as rewards for STRD staking; (7) 3.5% are designated for community growth, covering service fees for ambassadors, content creators, and community managers; (8) 2.2% are allocated for security budgets, including audits and insurance; (9) 2% are reserved for community activities.

Source: stride

The primary function of STRD is to promote the use of liquid staking and governance of the project itself.

To support project growth, STRD incentives target three user groups: (1) For liquid stakers on Stride, STRD allocations can enhance their yields; (2) For STRD holders, the additional rewards from staking STRD will encourage them to continue holding STRD tokens and participate in governance; (3) For the ecosystem, STRD tokens will be used to foster collaborations with Cosmos DeFi projects and promote the development of st token use cases, driving the overall growth of the Cosmos liquid staking sector.

After Stride became a consumer chain of the Cosmos Hub, it adjusted the distribution rate of STRD staking rewards, cutting block rewards by 50% per block. Additionally, 15% of the block rewards will go to validator nodes in the Cosmos Hub as service fees for the consumer chain, and 4.25% of the STRD staking rewards will be deducted as community fees.

Source: stride

Following the adoption of inter-chain security solutions, STRD staking rewards are expected to drop from 16.56% in the first year to 8.49%, which could impact token holders’ willingness to participate.

Source: stride

Current Development Status

As per official statistics, Stride’s total locked value has surpassed $80 million, showing rapid growth since the end of October 2023.

Source: stride

Source: stride

The types of staked tokens include 16 varieties, such as DYDX, ATOM, INJ, SAGA, OSMO, etc. Among these, DYDX has the highest locked value, nearing $30 million.

Source: stride

Conclusion

Stride is a leading liquid staking project in the Cosmos ecosystem. Built on the Cosmos SDK, it provides a foundation for multi-chain liquidity services through features like the IBC communication protocol, inter-chain accounts, and inter-chain querying. However, due to challenges in achieving a decentralized network of validator nodes and the limited number of validators, after becoming a consumer chain, the STRD token lost its role in maintaining the network, leading to a significant drop in staking rewards, which may reduce user participation. The future development of the protocol will depend on the overall growth of the Cosmos ecosystem.