Recently, we have found that some users have doubts about the dividend distribution method of LSD, why some LSD assets will increase with the passage of time, while others will not. This is actually because different LSD assets have different dividend distribution methods. Generally speaking, there are three types, namely Claim, Rebase and Reward Bearing. Bifrost uses Reward Bearing. This article will make an overall review of this.
claim
As an interest-bearing asset, LSD will continue to generate income. The most direct way is to allow users to manually collect benefits. The staking income generated each time is placed in a pool, and users can manually claim it with LSD. If the user does not operate, the income will always be in a state of waiting to be claimed.
In this case, LSD only represents the principal, and the price of LSD assets and original assets remains 1:1, and LSD assets can always be redeemed for original assets at 1:1, unless a Slash occurs, which may lead to unanchoring.
If the user needs to compound the income, it needs to manually operate, pledge again and mint LSD. This method requires the user to frequently operate and collect, and each time the user receives or operates compound interest, it will cause the user to generate Gas fees. Now the mainstream LSD protocol has abandoned this method.
Rebase
The exploration of Rebase's mechanism source Algorithmic Stablecoin has now been widely used in the field of dividend distribution of interest-earning assets.
Under the Rebase mechanism, the system will dynamically adjust the overall supply of tokens based on the generated pledge rewards or Slash, and the amount of LSD held by users will be adjusted in proportion to the adjustment of the overall supply.
From the perspective of user experience, users will not need to frequently manually claim or operate compound interest, and users will observe that the LSD Token in their hands will continue to increase (if there is no Slash event), just like they will multiply.
In this case, LSD maintains a 1:1 relationship with the original asset, even if a Slash occurs, it still maintains a 1:1 relationship, because the system can reduce the number of LSD Tokens in the hands of users through Rebase.
Although rebase will change the balance of LSD Token in all addresses, the process of rebase does not need to spend a lot of gas, and the logic implementation of rebase is carried out at the system contract layer.
Compared with manual claim, the rebase mechanism improves user experience and reduces the overall Gas consumption during the dividend distribution process. At present, Lido's stETH dividend distribution adopts the method of rebase.
However, Rebase still has some shortcomings. When Rebase-type Token is used as the basic asset in DeFi, its quantity change will complicate the calculation of DeFi yield rate. If the DeFi protocol wants to integrate Rebase-type Token, it often needs to do Special logic to provide users with a real-time update display of the number of tokens. This has brought huge obstacles to the widespread integration of Rebase Tokens. In addition, the rebase mechanism is not conducive to the listing and integration of centralized exchanges. In order to solve this problem, Lido issued the wrapping asset wstETH wrapping stETH and converted it into Reward Bearing Token.
Reward Bearing
Reward Bearing refers to the inclusion of income in interest-earning assets. This method of dividend distribution breaks the 1:1 exchange rate between interest-earning assets and their underlying assets, allowing the exchange rate to change in real time as income continues to increase.
Reward Bearing's dividend distribution method was first seen in Compound's cToken in the DeFi field, and has now been adopted by most LSD protocols, including Rocket Pool, Stafi, and Biforst.
Let's use an example to illustrate that at the beginning of the period, user A pledged 1 ETH and obtained 1 vETH. After a period of time, due to the income generated by Staking, 1 ETH has become 1.05 ETH . At this time, 1 vETH can be redeemed for 1.05 ETH. ETH. With the accumulation of Staking income, the number of ETH that can be redeemed by one vETH continues to increase, and the exchange rate of vETH to ETH increases. In the event of a Slash, the exchange rate decreases.
Changes in the exchange rate mean that both the redemption rate and the minting rate are changing. When the current redemption rate of the agreement is that 1 vETH can be redeemed for 1.05 ETH , only 1 vETH can be obtained by pledging 1.05 ETH through the agreement.
The Reward Bearing model converts the changes in pledged assets caused by Staking dividends and Slash into changes in exchange rates. Under this mechanism, LSD represents the sum of principal and income accumulated from the beginning of staking to the current point in time.
For DeFi, such LSD is no different from other tokens and can be easily integrated, while Claim-type Token and Rebase-type Token will be regarded as heterogeneous Tokens for DeFi protocols, and the integration is more troublesome.
Let’s make a comparison of these three dividend distribution methods
Dividend payment method | income collection | compound interest | DEFI integration friendliness | LF |
claim | manual | manual | Low | high |
Rebase | automatic | automatic | Low | lower |
Reward Bearing | automatic | automatic | high | Low |
In addition to the above three typical dividend distribution methods, there are also some interest-bearing agreements that separate the principal and income. LSD represents the principal, and the income generated is expressed by another derivative asset (the derivative asset uses Reward Bearing's dividends), such as StakeWise and Frax.
In fact, the separation of principal and income can also be achieved through third-party agreements. For example, Pendle can cast interest-earning assets into PT (Principle Token) and YT (Yield Token).
summary
Bifrost, as a veteran LSD protocol launched in 2019, is one of the first LSD protocols to adopt the method of Reward Bearing to distribute dividends. Bifrost pays special attention to the ease of integration of vToken. The LSD assets (vToken) of 9 chains currently supported all adopt the Reward Bearing method. Due to contract restrictions, vETH adopted the Claim mode in the early days, but after the upgrade in Shanghai, it has been updated to the Reward Bearing mode.
In order to improve the ease of integration of vToken, Bifrost also uses parachains to carry all LSD assets, so as to realize the unified integration interface of all LSD assets and realize the friendliness of Cross-chain integration.
With the help of Polkadot's XCM, Bifrost can realize Onmi-LSD. At the same time, Bifrost also brings LSD to the Polkadot ecosystem to promote the development of the Polkadot ecosystem LSDFi.
What is Bifrost?
Bifrost is a scalable, Non-custodial decentralized full-chain liquid staking dedicated parachain based on Polkadot Layer-1. It has provided standardized Liquidity staking Derivatives for 9 or more blockchain networks (Ominichan LSD).
Bifrost's mission is to aggregate more than 80% of the staking Liquidity of the PoS consensus chain through Cross-chain Derivatives , and provide standardized Cross-chaininterest for Polkadot relay chains, parachains, and heterogeneous public chains bridged with Polkadot Derivatives , lowering the threshold for user staking, increasing the ratio of Multichain pledges, improving the revenue base of ecological applications, and creating a StakeFi ecosystem that empowers users, Multichain, and ecological applications and positively circulates.
At present, Bifrost has received millions of dollars in financing from NGC, SNZ, DFG, CMS and other institutions and the Grant of the Web3 Foundation. It is also a member of the Substrate Builders Program and Web3 Bootcamp .
