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Universal-Tokenization-Model(Original).MD

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Delegation-Tokenization-Module

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

  • Module Name : DelegationTokenization Module
  • Utility
    • Delegators can tokenize their delegation into FToken and YToken
    • Tokenized delegations either can be redeemed or auctioned to any FToken holder after maturity
  • Basic Analogy of each token
    • FToken
      • It has potential rights to redeem tokenized delegation whose maturity is passed
      • The time schedule of redeem right
        • If you are holding FToken, someone is definitely holding YToken without FToken
        • This YToken related delegation will be auctionized after its maturity
        • Therefore, "EVERY" FToken will get its redeem right no longer than the maturity length
        • So, FToken can be viewed as a kind of "FORWARD CONTRACT" on delegation
    • YToken
      • YToken holders can enjoy very high yield rate with high slashing risk
      • But YToken holder should redeem delegation or get auctioned by FToken holders after maturity

3. Process

Delegation Tokenization

  • Description : a delegation with 100 bonded Atoms splitted into two kinds of tokens
    • FToken : Fungible delegation token
    • YToken : Non-fungible delegation yield token uniquely mapped to this delegation
    • 100 Atom delegation = 90 FToken + the YToken NFT
  • Delegation ownership transfered to module account

Transferable YToken NFT

  • Ytom holder can transfer the YToken NFT to other addresses
  • Ownership of YToken is stored in TokenizedDelegation object
  • YToken is not transferable when tokenization status is not in Tokenized

Delegation Redeem Process

  • Before maturity
    • redeem requestor sends 90 FToken and the YToken NFT to the module account
      • sent FToken and YToken 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
      • payment token : FToken
      • starting price : 90 FToken and goes up
      • auction period : 20,000 blocks (about 33 hours)
    • hook execution after auction completion
      • final auction winning price = 90 + X FToken
      • X FToken sent to YToken holder
      • 90 FToken burnt
      • the YToken burnt (whoever is holding)
      • delegation ownership transfered to auction winner
        • including all accumulated and automatically withdrawed rewards
    • if auction has no winner after auction period?
      • sudden death auction started
        • anyone paying 90 or more FToken will immediately get delegation ownership

4. Price Discovery Mechanism

Price Balancing from the Market

  • If FToken price is much cheaper than Atom price
    • Traders buy FToken and participate on TokenizedDelegation auctions
  • If FToken price is much more expensive than Atom price
    • Traders tokenize delegations and sell created FToken in the market
  • If YToken price is much cheaper than its intrinsic value
    • Traders buy YToken and appropriate FToken to redeem the delegation
  • If YToken price is much more expensive than its intrinsic value
    • Traders tokenize delegations and sell created YToken in the market

Intrinsic Value of FToken and YToken

  • assumptions

    • OriginalBondedTokenAmount = 100 Atom
    • accrued rewards at maturity = R Atom

  • variables

    • X(0) : FToken price in Atom at tokenization
    • X(m) : FToken price in Atom at maturity
    • Y(0) : YToken price in Atom at tokenization
    • Y(m) : YToken price in Atom at maturity

  • equations

    ① at tokenization : 90*X(0) + Y(0) = 100

    ② redeem just before maturity : 90*X(m) + Y(m) = 100+R

    ③ expected auction winning price = (100+R) Atom = (100+R)/X(m) FToken

    ④ amount receivable by YToken holder after auction = Y(m) = (100+R)/X(m) - 90 FToken

    ⑤ combining ② and ④ gives

    • 90*X(m)^2 - (190+R)*X(m) + (100+R) = 0
    • solving above quadratic equation yields : X(m) is always equal to 1 for any R
    • X(0) = X(m) because they are fungible
    • Y(0) = 10 from ①
    • Y(m) = 10+R → only YToken gets all the rewards

5. Draft Technical Spec

States

  • TokenizedDelegation
    • DelegationIndex
      • pointing the delegation object which is tokenized
    • OriginalBondedTokenAmount
      • the amount of token bonded at the time of tokenization
    • NFTOwner
      • the account address of YToken owner
    • Maturity
      • the maturity of this TokenizedDelegation
    • Status
      • Tokenized / AuctionPeriod / SuddenDeath / Redeemed
  • DelegationAuction
    • DelegationIndex
      • pointing the tokenized delegation object to be auctioned
    • Maturity
      • block height when the auction finalized
      • when 0, the auction entered SuddenDeath status
    • MinBidPrice
      • the minimum bid price = OriginalBondedTokenAmount * 0.9
    • HighestBidPrice
      • the latest highest bid price

Messages

  • MsgDelegationTokenization
    • TokenizationRequestor
      • the account address of tokenization requestor
    • DelegationIndex
      • pointing the delegation object to be tokenized
  • MsgSendYToken
    • Sender
      • the account address of YToken sender
    • Receiver
      • the account address of YToken receiver
    • DelegationIndex
      • pointing the delegation object which YToken ownership is being transfered
  • MsgRedeemDelegation
    • RedeemRequestor
      • the account address of redeem requestor
    • RedeemFToken
      • sending FToken for redemption
    • DelegationIndex
      • pointing the delegation object which YToken ownership is being transfered
  • MsgDelegationAuctionBid
    • Bidder
      • the account address of the bidder
    • DelegationIndex
      • pointing the tokenized delegation object which is under auction to be participated
    • BidPrice
      • the bid price in FToken
  • MsgGovVoteFromYTokenOwner
    • DelegationIndex
      • pointing the tokenized delegation object which represents the governance voting power of the YToken holder
    • ProposalID
      • ID of target proposal to be voted for
    • Vote
      • vote decision option chosen by YToken owner

6. Issues

Governance Voting Rights

  • Problem
    • Because the ownership of delegation is transfered to a module account, it is undecided who has the governance voting right
  • Proposed Solution
    • As unstake Atom does not have any governance right, it is natural that FToken holders also do not possess any governance voting rights
    • Instead, because the YToken holders have full benefit of rewards and full responsibility of slashing, YToken owner should have the governance voting right
    • If the ownership of YToken is changed during voting period, the new owner can overwrite the governance voting
  • Process
    • MsgGovVoteFromYTokenOwner is sent to the DelTokenization module
    • The module account votes on the given governance proposal on the behalf of YToken owner

Validator Power Centralization

  • Problem
    • YToken APR is 10 times amplified, resulting in more sensitive market response for different commission rates on each validator
    • This can cause a strong tendency of
      • over-pricing of YToken with lower commission rate validator
      • under-pricing of YToken with higher commission rate validator
    • These tendency can lead to the validator power centralization, because of pricing imbalance of each YToken
  • Discussion
    • The possible risk of validator power centralization is a result of the nature of selfish incentive motivation of any human being
    • Therefore, it is not caused by tokenization of delegation, but by the human nature
    • Can we prevent validator power centralization somehow?