Avalanche is a proof-of-stake blockchain aiming to be the fastest smart contract platform in the industry, touting a capability of thousands of transactions per second, low costs, and the ability to scale horizontally through the creation of independent blockchains running on dedicated subnets.
Since announcing their Avalanche Rush program on August 18, which aims to bring more dapps and assets to its growing DeFi ecosystem, Avalanche’s TVL has grown from $312M to an extraordinary $11.63B (as of December 29). This puts it firmly in the top 4 chains for DeFi—with an incredible rise from sub-top 10 before the Avalanche Rush—along with Ethereum, Terra, and Solana, with Avalanche’s growth in TVL outperforming any of the other chains over the same period.
It’s clear that Avalanche is poised to be a DeFi juggernaut, presenting excellent opportunities for users and Wonderland alike should Wonderland decide to get involved.
Avalanche’s staking parameters require a minimum staking period of two weeks and a minimum staked amount of 2,000 AVAX for a validator (at current prices around $200k USD) or 25 AVAX if delegating (source). Staked AVAX is illiquid until unstaked.
These factors make Avalanche an ideal candidate for liquid staking: users gain liquidity to take advantage of the booming DeFi opportunities on the chain, and are no longer beholden to minimum amounts or staking periods, making Avalanche staking more accessible for everyone.
Additionally, capturing the liquid staking market on Avalanche has the potential to bring millions of dollars of revenue annually to the Wonderland DAO, a value that will only grow as Avalanche gains traction as a blockchain and their DeFi sector continues to boom. As of December 29, $25B of value is staked on the network, making it the fourth most staked asset by USD value.
The annual staking reward on Avalanche currently stands at 9.82% (source). Based on Avalanche’s current market cap of $25.7B, the total addressable market for staking is roughly $2.5B per year.
In practice, 235B of the 378B AVAX supply is currently staked (source, source), for a staking ratio of 62% – a very large market ripe for capture. For comparison, Terra’s staking ratio stands at 37% (source) and Ethereum’s at 7% (source).
Lido, one of the largest liquid staking solutions, presently offers liquid staking on both the Terra and Ethereum chains. Adoption currently stands at 17.6% and 13.4% of staking users respectively (source).
If we assume that we can capture 5% of the total addressable AVAX staking market (approximately 8% of existing staked supply), this means gross staking rewards of $125M per year. If Wonderland were to split this reward 90:10 with staking users (i.e. Wonderland keeps 10% of reward and the user earns 90%), Wonderland’s gross revenue would be $12.5M per year.
At a more aggressive market share, 20% of the addressable market, Wonderland’s corresponding gross revenue would stand at $50M per year.
Avalanche’s multi-chain architecture presents interesting challenges to any team wishing to bring Lido-style liquid staking to the Avalanche platform. It is made up of three distinct blockchains: the Exchange Chain (X-Chain), the Platform Chain (P-Chain), and the Contract Chain (C-Chain).
Smart contracts are executed on the C-Chain, however staking is performed on the P-Chain, which cannot run custom smart contract code.
Because Avalanche does not yet enable smart contracts to transfer AVAX between chains or to perform staking on the P-Chain, it is not currently possible for a smart contract to move tokens between these chains, meaning that some amount of the process must be custodial to begin with.
We propose a two-stage roadmap, combining the best of what is possible today, with a path to improvements in automation and trust minimisation as Avalanche grows. Both stages assume the creation of an Avalanche C-Chain token (stAVAX), representing staked versions of AVAX.
As with Wonderland’s MEMO (or, indeed, existing liquid staking solutions such as Lido’s stETH), tokens will accrue rewards as a function of time, removing the need for users to sacrifice liquidity or meet minimum staking value requirements to be able to participate in Avalanche’s growing DeFi ecosystem. Additionally, governance over selected validators, fees, other parameters, and matters such as upgrades to the protocol will be carried out by DAO token holders.
In the initial version, the subset of operations which cannot yet be managed by smart contracts (such as cross-chain transfers and staking) will be carried out via operations requiring multi-party approval using MPC to ensure security of staked funds. These approaches will then be phased out as the Avalanche blockchain matures.
The next update to Avalanche (Blueberry) intends to improve cross-chain transfer functionality, with work commencing in Q4 2021. We are currently working with Ava Labs to build on this and help add functionality to enable automated cross-chain staking with minimized trust. This will require a number of improvements to Avalanche to better support cross chain messaging and querying, interchain accounts, remote transfers, and ultimately staking from contracts on the C-Chain.
Work on our liquid staking solution began in earnest in Q4 2021, with the aim to finish in Q1 2022 (both testnet and mainnet). We accept the risk of some delay in estimation, as we anticipate both structural changes to Avalanche, as well as work being naturally subject to audit and the implied resulting changes.
The Avalanche blockchain is still in active and rapid development. It will be a challenge to develop liquid staking for Avalanche, and we anticipate a deep level of involvement with new changes and features as they are discussed and released.
We will work closely with the Ava Labs team, not only to help implement functionality to enable us to achieve what we need for our project, but to evolve and improve Avalanche for the developer community as a whole. We believe in the long term success and value proposition of liquid staking on Avalanche, and are therefore eager to propose an incentive structure that shows our commitment both to this project and to the alignment of our respective interests.
From our discussions with the core team it’s clear that community preference is to prioritise alignment of incentives, and therefore a higher % of revenue share in exchange for a smaller up-front grant. This both reduces risk to Wonderland, and aligns both teams’ long-term incentives.
We propose a 25% revenue share for the first 4 years of operation (i.e. 75% of revenue to Wonderland, 25% to the team), falling to a 15% revenue share thereafter. To further protect Wonderland DAO, we propose a break clause (if voted by the DAO), of whichever is larger of 10M USD, or the last 12 months’ revenue multiplied by 3.
We believe this work can (and should) expand to other EVM-compatible chains, and in particular we are keen to target Fantom as a fast-follow to the project. To build both the Avalanche project and subsequent Fantom project, we propose a one-off grant in order to retain the team, structured either as $6M MIM (granted half at agreement and half upon delivery), OR $9M (staked) TIME (vested linearly over 24 months), as the Wonderland DAO prefers.
The “Opportunity” calculation assumes a 90:10 split of staking rewards between users and Wonderland DAO. As the bulk of the team’s revenue now arises from revenue share, we propose that it not fall below 2.5% of total staking reward, to protect the team’s downside risk if the DAO chooses to reduce its reward share below this 90:10 split.
Our team comes from a mix of crypto and fintech backgrounds, and includes experts in distributed systems architecture, blockchain development, and financial security. We are in close contact with the core Avalanche development team and will be collaborating with them to deliver this solution.
Our existing financial products have grown from early stage startups to be trusted by millions of users every day, and our team has extensive experience building high availability distributed consensus and data storage systems in Go (our backend lead has >8 years production Go experience) which is a perfect fit for Avalanche.
In addition, we have a wide range of infrastructure and payments experience, having designed, built, and operated secure core banking and cryptocurrency exchange systems – along with integrations with a wide range of traditional payment networks and other exchanges, across AWS, GCP, Digital Ocean, and multiple physical data centres.
This experience includes secure application design, cryptographic key management, smart contracts and backend integrations to facilitate high volume transaction signing, and working with auditors to attest the security of these systems.
We believe our collective experience is uniquely suited to bringing liquid staking to the Avalanche ecosystem for Wonderland, and presents an exciting opportunity to work together