[Proposal] stkATOM Instant Redemption adjustment proposal

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%.

  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
  2. 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.
  3. 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.

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Dear pStake team.

Thank you for inviting us community members to share our thoughts! :slightly_smiling_face:

Regarding 1.: You know better if there is an imbalance from time to time than I do.

Regarding 2.: In my understanding, an attacker who tries to keep the pStake TVL low shouldn’t be a problem, because the attacker would have to buy large sums of stkAtom on a DEX, hence driving the price of stkAtom on that DEX up (=buying more expensive stkAtom) and he would then redeem it on the pStake smart contract and get less Atom than he sold at the DEX. Please correct me, if I’m wrong. Game theory indicates a loss for the attacker in my view.

Regarding 3.: Arbitrage in most cases is a blessing, not a problem, isn’t it? Because of its effect of equalising the price and making the price fair/equal over all exchanges and apps. Please correct me, if I’m wrong.

  1. If another reason could be, that the pStake team earns more, that would be totally okay for me, because I as a believer in the project want the team to be health, happy and accordingly paid. I just would prefer transparent communication about it, if this is one of the reasons.

  2. Maybe I have a reason FOR your proposal: If you increase the fee to 1%, more people would go to DEX’s to swap, hence increasing the trading fee APR’s for liquidity providers, which would incentivize more people to provide (more) liquidity.

Best wishes and thank you for your great work,
Felix (1Spirit)

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@1Spirit thanks for your reply.

Regarding 2.: In my understanding, an attacker who tries to keep the pStake TVL low shouldn’t be a problem, because the attacker would have to buy large sums of stkAtom on a DEX, hence driving the price of stkAtom on that DEX up (=buying more expensive stkAtom) and he would then redeem it on the pStake smart contract and get less Atom than he sold at the DEX. Please correct me, if I’m wrong. Game theory indicates a loss for the attacker in my view.

Yes, this is in general true, however an attacker of the protocol in this case is not seeking a profit, they are just seeking to suppress pSTAKE TVL. In that case, even if they lose a bit of money, it’s currently a very cheap way for a competitor to suppress pSTAKE TVL and because the fees are currently so low the protocol does not benefit in any way from the activity on the platform, so the protocol just suffers from the lack of growth in TVL. We want to make it more expensive for an attacker to do this. We could scale instant redemption fees based on how much is redeemed at once, but that creates additional problems/side effects that affect regular users such as incentivizing users to split their transactions, leading to a worse UX for users if they want to maximize value.

Regarding 3.: Arbitrage in most cases is a blessing, not a problem, isn’t it? Because of its effect of equalising the price and making the price fair/equal over all exchanges and apps. Please correct me, if I’m wrong.

Agreed, we expect there to be arbitrage when there are price inefficiencies. However, given the value of the feature we don’t believe the current price point is the right one. Arbitrage existing is not any issue from our perspective, but the price is too low currently, incentivizing people to drain the pool to turn a profit. The intention of instant redemptions is for users to easily be able to exit staked positions natively through the platform. The intention of instant redemptions is not to create large profits for arbitrage traders. If there is an arbitrage opportunity, we would love it for traders to take advantage of that. If instant redemption is almost always cheaper than swapping on a DEX then we have valued the platform-native feature too low compared to its actual utility and thus we are creating arbitrage opportunities too often, to the point where the feature loses utility for the average user because they can actually never use it. Recently we have seen that regular users can never use instant redemptions because they are always being front-run by arbitrage bots to the point when an opportunity exists the whole pool gets drained right after a staking action. If we price correctly these opportunities for profit should still exist but much more rarely, and when they do exist they shouldn’t result in the entire pool getting drained.

  1. If another reason could be, that the pStake team earns more, that would be totally okay for me, because I as a believer in the project want the team to be health, happy and accordingly paid. I just would prefer transparent communication about it, if this is one of the reasons.

At this point we don’t believe that the protocol will earn more from increasing the instant redemption fee, and it’s not intended to be a significant source of revenue for the protocol. We expect that the pool will be drained less often, which will likely actually lead to significantly lower volumes of instant redemption transactions (and thus lower revenues for the protocol). We expect the number of users who are able to trigger instant redemption transactions to go up over time, however, because there should now more consistently be liquid funds in the deposit pool.

Hopefully this addresses your points, please do keep it coming with your feedback & concerns as the team does look at and consider everything written here!

2 Likes

Dear Maajid,

thank you for your reply!
I understand your position better now. I agree with you in every point and will vote for your proposal, if it will be brought forward.

Best wishes,
Felix (1Spirit)