HOMA - The Tokenized Staking Liquidity Protocol

Unlike Bitcoin-like Proof-of-Work (PoW) chains, which uses computing power to secure the network while consuming large amounts of energy, Proof-of-Stake networks uses stake aka its network token and variations of the Byzantine Fault Tolerant (BFT) algorithm to secure the network. Polkadot uses NPoS (Nominated Proof-of-Stake) as its mechanism for selecting the validator set. It is designed with the roles of validators and nominators, to maximize chain security.

Polkadot network targets 50% active DOT staking with a 20% annual return. Effectively this creates an opportunity cost for using DOT in other applications versus staking. Ethereum as it currently stands as a PoW network has no such barrier, and in fact, has an incentive for ETH holder to participate in DeFi applications like MakerDAO or Compound. On the other hand, if DeFi lending applications provide a better yield than staking, it could motivate the collective movement of funds from staking to lending, causing a ‘bank run’ and risking the security of the entire network .

1. The Homa Protocol

In any case, the task at hand is to solve the illiquidity challenge of staked assets . We would introduce the Homa Protocol that establishes a staking pool tokenizing users’ staked assets as L-Asset (e.g. L-DOT as locked DOT), which users can invest or use in other applications. For example, lend L-DOT to earn interest or use L-DOT as collateral for stablecoin aUSD. The Homa Protocol tokenizes staked DOT as L-DOT where

  1. L-DOT is tradable and liquid cross all chains on the Polkadot network
  2. L-DOT is redeemable for underlying DOTs at any time, with option to redeem immediately or earlier transferrable unbounded DOTs
  3. decentralized on-chain collective governance by L-DOT and ACA holders
  4. algorithmically adjusted staking strategy to optimize return and ensure liquidity
  5. leverage Polkadot’s shared security mechanism, to have highest security on day one
  6. fee schedule can be customized to boost usability

The Homa Protocol resides on the Acala Network, establishes a decentralized staking pool where users would lock their DOTs to gain staking yield while receiving L-DOTs as a receipt that are liquid and tradable . The protocol manages issuance of L-DOTs and redemption of underlying assets. The protocol would managed the locked assets, participate in staking, execute staking strategies (e.g. validator selection based on uptime etc.), manage rewards and slashed penalties.

2. Staking

Unlike direct validating or nominating, where a user’s asset are bonded directly for staking, the Homa Protocol would aggregate the supply of each user, and participate in staking collectively.

DOTs supplied to the staking pool are represented as L-DOT account balance, which entitles the owner to a likely increasing quantity of underlying assets. The DOTs being used to stake would earn block reward, and incur punishment (DOTs being slashed) in case of validator found to be misbehaving (e.g. not maintaining required uptime).

The balance of the two is the profit/loss that would increase/decrease the amount of the underlying asset of L-DOT. This means earning staking reward is as simple as holding an L-DOT token , while L-DOT is cross-chain capable and can be used to participate in other network activities such as lending or as collaterals in Honzon Stablecoin Protocol.

3. Redeeming

When users redeem L-DOTs for the underlying DOTs, the protocol would unbound staked assets; generally one would have to wait for certain recovery time (28 days as this is written) for the DOTs to be transferrable. The redeem service fee is payable in ACA tokens.

The protocol may reserve a portion of the locked asset, so users can redeem and use the DOTs immediately or in a shorter period of time than normally required. Users would need to pay a premium in DOTs to compensate for the lost yield and time value for immediate or earlier liquidity .

At any point in time, the Homa Protocol

  • may have a certain amount of reserved DOTs available immediately for redemption.
  • may have varied amount of unbounded DOTs available at varying timeframes for redemption.

The amount of premium payable is algorithmically set relative to a number of factors including the amount withdrawn, transferrable timeframe required, potentially lost yield if any, etc. The premium would be retained in the staking pool and shared amongst L-DOT holders.

4. Tokenized Staked DOT: L-DOT

Through the Homa Protocol, staked DOTs become fungible and liquid L-DOTs that exploit the derivative value of the DOTs fueling and powering more applications without sacrificing the security of the whole network.

Users can essentially mint L-DOTs by supplying DOTs to the staking pool managed by the Homa Protocol, and redeem L-DOTs for the underlying DOTs. The exchange rate between L-DOTs and the underlying DOTs are likely to increase over time, as staking rewards are accrued by validating and nominating, and is equal to

The effective profit/loss, however, is determined by various factors including but not limited to

  • inflation rate of DOTs. more details
  • the chosen staking strategy.
  • the performance of chosen validator nodes.

5. Staking Strategy

The Homa Protocol will execute the staking strategy to deploy locked DOTs. The staking strategy and parameters are governed via the Homa council where L-DOT holders can submit change proposals and have voting rights

The staking strategy would be devised with but not limited to the following components

  • voted preferred validators by the Homa Council
  • divest strategy e.g. risk/reward with a number of validators, this may be dynamically adjusted to maximize return, in combination with the built-in optimization mechanism of Polkadot
  • validator selection criteria e.g. security, validator commissions, reputation, uptime, optimization to mitigate slashing risk, reliability e.g. multi-infrastructure for multi-validators
  • reinvest strategy: the protocol will periodically rebalance the reward received, new staking and redemption activities, and algorithmically decide whether to re-invest and earn compounded rewards.

There will be an economic whitepaper detailing further the algorithms, calculations and staking strategies.

6. Governance

The overall Acala network is governed by the General Council and specialized councils. Specialized councils would govern specific domains of the network e.g. the Financial Council would govern the financial and risk management of the network, and the Homa Council would govern the Homa protocol.

In order to make any changes to the Homa Protocol, the idea is to compose active L-DOT and ACA holders, via the General Council and the Homa council together to administrate a Homa protocol-specific upgrade decision. A change proposal can be raised by the council or the public (L-DOT or ACA) holder, but the decision to approve or against it is made collectively. There is a pathway to decentralization from elected council referenda to public referenda.

Any network upgrade would be under the governance of the General Council. L-DOT holders are entitled to govern Homa protocol-specific proposals through the Homa Council. The General Council would have oversight of the Homa Council to ensure the overall welfare of the Acala network.

Special voting rights would be afforded to L-DOT holders to participate in voting for or against Homa protocol related proposals, which include but no limited to these areas

  • update exchange rate model
  • update fee structure
  • update staking pool reserve
  • update redeem premium rate model
  • update and propose new staking strategy

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