Miners Staking Derivatives ETF
The cosmos network will be the network of blockchain’s. The cosmos hub is the first blockchain of the cosmos network and will connect to other blockchain’s in future. These blockchain’s will be formed mostly on PoS model.
PoS’s model allow the usage of capital to act as a security of Blockchain consensus protocol. However, validators in this PoS model and there subsequent delegators are rational profit seeking agents. With the rise of lending protocols in DeFi, there could occur a scenario where yields from lending could exceed PoS returns.
The staked capital is an inflationary instrument as it is inherently a cryptocurrency with inflation as part of the protocol to incentivize miners or validators/ delegators to stake there capital so as to accumulate more of the new crytptocurrency.
The time value of capital that is lost from locking up an inflationary monetary instrument in a smart contract can be significant, which disincentivizes staking when there exist an alternative yield-generating opportunities. In order to incentivize validator participation, staking protocols have proposed staking derivatives, which allow validators to borrow against their staked assets. This borrowing, which resembles secured lending from fiat finance such as home equity loans, provides a mechanism for validators to gain partial liquidity on their staked capital. By having the protocol provide lending services (in the form of staking derivatives), one can potentially mitigate the capital flight issues.
However, I believe all these staking derivatives created from different validators/miners does resembles to shares of metal mining companies in real world. We can combine all the staking derivatives tokens of top 100 validators to form a validator index quite similar to NYSE Arca’s miners index.
Since these staked derivatives of different validators is an accumulation of individual borrowing’s done by delegators which makes it very much important for on chain consensus to know about defaults of these individual delegators so that accordingly monetary policy can be adjusted to decide on the exchange prices of staked assets w.r.t to there staking derivatives.
Above thing has been accurately highlighted and explained by Tarun Chitra of Gauntlet where he proposed a machinery in the form of Constant Function Market maker (CFMM) that would allow consensus to keep track of debt prices and positions. CFMMs are market makers that acts as an exchange for the staked coin and derivative asset. Uniswap is the most popular CFMM.
I believe that above risk can be shared with the formation of validator index ETF which can be 2x or 3x leveraged and tracking a benchmark validator index.
The benchmark validator index which will be the combination of different validators staking derivatives tokens. The staking derivatives tokens will be pooled in a liquidity pool with characteristics similar to liquidity pools of CFMMs. The market makers will provide liquidity to these pools by acquiring staking derivative tokens in exchange for other native cryptocurrencies and then pooling the same in the liquidity pool
Market makers will get newly minted tokens Xn which is an ETF cryptocurrency.
However they have to pay the following amount
Price_floor + Spread*M*Xn/ (Summation of all the individual Xi )
Thus, the proponent is paying more amount initially to get proportionately less tokens. So, if an attacker keeps on calling the smart contract then the proponent will deplete its own money so we can save the smart contract from DoS attacks also.
These minted Xn can then be sold in decentralized exchanges like Uniswap of Centralized exchanges like Coinbase and thus the market for Xn will be formed where arbitrageurs will help in aligning the market price of Xn with underlying staking derivatives tokens.