Universal-Tokenization-Model(Fungible YToken).MD

Delegation-Tokenization-Module

Delegation tokenization module, a native Cosmos-SDK module which allows delegations to be tokenized to fungible tokens

1. Problem

• Each delegation has different
  • Validator to stake on
  • Accumulated rewards
  • Risk of double signing
• How we can standardize staked atom into universal one token?
  
  

2. Solution

Utility

• Delegators can tokenize their delegation into NToken and YToken
• Tokenized delegations either can be
  • redeemed by submitting both NToken and YToken
  • or auctioned to any NToken holder after maturity

Basic Analogy of each token

• NToken
  • It has ultimate rights to redeem "any" tokenized delegation whose maturity is passed
• YToken(V,M)
  • It is fungible over same validator V and same maturity M
  • YToken holders get accrued rewards until redemption, but are exposed to slashing risk
  • YToken holders will
    • redeem delegation with NToken and YToken submitted to the module before maturity
    • or get auctioned by NToken holders after maturity
      
      

3. Parameters, States and Messages

Parameters

• DefaultTokenizationRatio

  • The starting value of TokenizationRatio
  • This value decides how much of slashing loss can be covered by YToken
  • Lower DefaultTokenizationRatio results in less slashing risk for NToken holders

• MaturityLength

  • The length of tokenization period until maturity
  • Longer MaturityLength results in
    • Less auction amount for each maturity
    • Less opportunity for NToken holders to redeem TokenizedDelegation

• TokenizationFrequency

  • The frequency of delegation tokenization execution
  • Shorter TokenizationFrequency results in
    • Too many kinds of YToken(V,M) floating around
    • Too frequent auction held
      • But more diversified auction amount for each period

• AuctionPeriod

  • The length of auction before entering into SuddenDeath mode
  • Shorter AuctionPeriod results in
    • Higher risk of significantly discounted auction winning price

States

• TokenizedDelegation

  • DelegationIndex
    • pointing the delegation object which is tokenized
  • TokenizationDateTime
    • datetime of tokenization
  • Maturity
    • the maturity datetime of this TokenizedDelegation
  • Status
    • Tokenized / AuctionPeriod / SuddenDeath

• DelegationAuction

  • DelegationIndex
    • pointing the tokenized delegation object to be auctioned
  • AuctionMaturity
    • block height when the auction finalized
    • when 0, the auction entered SuddenDeath status
  • HighestBid
    • the bidder and bid price with highest bid price

Messages

• MsgDelegationTokenization

  • TokenizationRequestor
    • the account address of tokenization requestor
  • DelegationIndex
    • pointing the delegation object to be tokenized

• MsgRedeemDelegation

  • RedeemRequestor
    • the account address of redeem requestor
  • RedeemToken
    • sending NToken and YToken for redemption
  • DelegationIndex
    • pointing the delegation object to be redeemed

• MsgDelegationAuctionBid

  • Bidder
    • the account address of the bidder
  • DelegationIndex
    • pointing the tokenized delegation object which is under auction to be participated
  • BidToken
    • the bid price in NToken
    • the tokens are escrowed in the module until
      • higher bid is coming in
      • or auction is finalized
        
        

4. Process

Delegation Tokenization

• Description : a delegation with OriginalBondedAmount of StakingToken splitted into two kinds of tokens

  • NToken : Fungible delegation notional token
  • YToken(V,M) : Fungible delegation yield token for validator V and maturity M
  • Tokenization of OriginalBondedAmount of delegation → (TokenizationRatio * OriginalBondedAmount) of NToken + OriginalBondedAmount of YToken(V,M)

• Delegation Tokenization Schedule and Maturity

  • Delegation Tokenizations are executed TokenizationFrequency
    • TokenizationFrequency is a governance parameter
    • Users can reserve delegation tokenization for next available execution datetime
  • MaturityLength : A governance parameter which decides the length of the maturity for every delegation tokenization

• Delegation ownership transfered to module account after tokenization

Delegation Redeem Process

• Before Maturity

  • Redeem requestor sends (TokenizationRatio * OriginalBondedAmount) of NToken and OriginalBondedAmount of YToken(V,M) to the module account
    • Sent NToken and YToken(V,M) are burnt
    • Delegation ownership transfered to redeem requestor
      • Including all accumulated and automatically withdrawed rewards
  • Redeemed TokenizedDelegation is deleted

• After maturity or Automated unbonding triggered

  • Auction held for the delegation ownership for each TokenizedDelegation
    • Bid token : NToken
    • AuctionPeriod : a governance parameter for the auction period length
  • Auction completion before end of AuctionPeriod
    • If AuctionWinningPrice ≥ (TokenizationRatio * OriginalBondedAmount) : winning price is enough to cover originally minted NToken upon tokenization
      • Auction winner payout
        • The delegation ownership transfered to the auction winner including accrued rewards
        • (TokenizationRatio * OriginalBondedAmount) of NToken is burnt
      • YToken(V,M) holders payout
        • (AuctionWinningPrice - TokenizationRatio * OriginalBondedAmount) of NToken sent to YToken(V,M) holders
          • NToken distribution is proportional to YToken(V,M) holding shares
        • OriginalBondedAmount of YToken(V,M) are burnt
          • YToken(V,M) burns proportional to YToken(V,M) holding shares
    • If AuctionWinningPrice < (TokenizationRatio * BondedAmount) : winning price is not enough to cover originally minted NToken upon tokenization
      • Auction winner payout
        • The delegation ownership transfered to the auction winner including accrued rewards
        • Entire AuctionWinningPrice of NToken is burnt
      • YToken(V,M) holders payout
        • Nothing is paid out to YToken(V,M) holders
        • OriginalBondedAmount of YToken(V,M) are burnt
          • YToken(V,M) burns proportional to YToken(V,M) holding shares
      • Update TokenizationRatio as below
        • TokenizationRatio = NTokenSupply / SUM(OriginalBondedAmount in all TokenizedDelegation)
          • Increased TokenizationRatio means the NToken value has been diluted
  • If auction has no winner after auction period?
    • SuddenDeath auction triggered
      • Anyone paying zero or more NToken will immediately win the auction
        
        

5. Advantages and Disadvantages

Advantages

• Fungibility

  • NToken is fungible over all validators and maturities
  • YToken is fungible over same validator and same maturity
  • No NFT is utilized

• No Slashing Rate Assumption

  • YToken is firstly responsible for slashing loss
  • Residual slashing loss is distributed to all NToken by TokenizationRatio increment

• Independent Solution

  • It already provides universally fungible NToken independently
  • It does not need any kind of liquidity pool utility for fungibility

Disadvantages

• Efficient auction participation is assumed

  • If the winning prices of auctions are not competent enough, YToken holders will get much less payout
  • All matured TokenizedDelegation are auctioned at the same time
    • Auction participants cannot utilize their capital into multiple auctions
    • There exists some capital utilization inefficiency for auction participants

• Roll-over inconvenience by YToken holders

  • YToken holders need to buy a lot of NToken from the market to roll over their tokenization
  • To buy enough NToken, they have to bring significant capital
  • If they don't roll over their tokenization until maturity
    • Auction will be automatically triggered
    • There exists some risk that the auction winning price is significantly lower than fair value
    • Lower auction winning price results in less payout to YToken holder
  • There can exist some services provided by large NToken holders
    • To roll-over the tokenization for YToken holders with appropriate fee
    • And send back new YToken with extended maturity to original YToken holder
    • These multiple messages can be atomically transacted in one transaction in a decentralized fashion
      
      

6. Discussions

Governance Voting Rights

• Discussions
  • Because the ownership of delegation is transfered to a module account, it is undecided who has the governance voting right
  • NToken is meant to be used for multiple DeFi purposes including providing liquidity to AMM, collaterized for lending, and trading activities
    • Most NToken will be held by modules, smart contracts or pegged out to different blockchains
    • So, it is difficult to distribute governance power to NToken holders
  • If we only distribute governance power to YToken holders
    • YToken holders locked relatively much less capital than NToken holders
    • So, it is unfair to give the governance right only to YToken holders