The pSTAKE protocol currently allows users to instantly redeem stkATOM for ATOM through the same interface used for unstaking. For a nominal fee, this allows users to exit their stkATOM position immediately, with the feature serving as a platform-native alternative to swapping stkATOM for ATOM on a DEX such as Dexter, Crescent, or Osmosis. The core mechanism of Instant Redemptions is fairly simple: incoming deposits are paired with Instant Redemption requests, and if there aren’t sufficient deposits, the feature is disabled when a user attempts to redeem more than is available in the pool. The protocol currently charges 0.5% on the prevailing stkATOM to ATOM exchange rate, which is displayed on the app itself.
While the feature has been widely used and is adding significant utility for pSTAKE users, there are a few problems with Instant Redemptions that this proposal aims to address by raising the protocol fee from 0.5% to 1%.
- Due to the deposit matching mechanism, Instant Redemption liquidity is limited by design, meaning that a single user could drain a significant amount of Instant Redemption liquidity and make the feature unusable for others until more deposits come in
- Instant Redemptions open a vector of attack for malicious actors who seek to reduce the growth of pSTAKE TVL. For a dedicated attacker, the current protocol fee is not a significant deterrent.
- Similar to the first issue, there are occasionally times when the Instant Redemption rate is so favourable that it creates a significant arbitrage opportunity for traders to profit by instantly redeeming stkATOM for ATOM, then swapping ATOM for stkATOM on a DEX and repeating until either the favourable rate is gone or the instant redemption pool is empty.
Currently, the protocol fee is so low that Instant Redemptions almost always provide the best exchange rate for stkATOM while simultaneously being the fastest and most convenient option for users, since everything happens on the same UI and all assets stay on the Persistence chain. Osmosis, for instance, charges a 0.3% swap fee, and with slippage and exchange rate differences included the costs are typically greater than the 0.5% on the protocol native exchange rate that Instant Redemption offers. This does not even take into account the additional hassle the user faces in needing to transfer assets to Osmosis via IBC before any swaps can be performed.
By increasing the current 0.5% fee to a 1% fee, Instant Redemptions should be less attractive for malicious actors and arbitrage bots, while still providing significant value for the average user who is simply looking for an easy-to-use alternative to swapping their stkATOM on a DEX. By increasing the fee, Instant Redemptions should be available more often to a larger proportion of pSTAKE users, and the increased fee should put Instant Redemptions on even footing with other alternatives such as swapping on DEXes and unstaking in offering a distinct tradeoff in terms of time, convenience, and cost.
We would appreciate feedback from the community on the above changes before the proposal goes for a vote.