Expanding the Stablecoin idea to Stable-pairings to create Canonical versions of external tokens, such as ETH

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Hey all, so this idea came up last night in our twitter space, and Abhishek seemed to love it. So here it is:

One of the issues with bringing non-IBC native assets into the Cosmos is that there are already multiple different ways (bridges) to do it, with only more bound to come in the future. So how do we deal with having both axlETH, gravETH in our ecosystem? What’s more, how do we deal when we also have wormholeETH, multichainETH, crosschainETH, etc?

This will create a serious fragmentation problem across dApps and chains in regards to liquidity. This issue will adversely affect both protocols & projects trying to build robust DeFi solutions, and end-users who will have a subpar DeFi experience, or maybe not even try it out at all, if they notice the liquidity is too thin. Hopefully, we all know how detrimental thin liquidity can be to DeFi apps of all kinds.

What I propose, and have been trying to start the discussion around for a while now, is the idea of a Curve ($CRV on Ethereum) style chain that serves to take the various bridge versions of popular bridges, create stable, 3, 4, 5, etc way pools, and use the LP token generated from depositing as the canonical token in the cosmos. Now, this idea, as is, doesn’t quite fit the Comdex model, but I still want to discuss my original vision, and then open it up to discussion on how it may be adapted for Comdex.

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Let’s walk through an example with $ETH:

So on this Curve-styled chain, there would be ONE liquidity pool for “Ethereum” it would be comprised of bridged ETH tokens from any and all bridges connecting to the cosmos. So at the moment, it would probably be 50/50 gravETH/axlETH, but it could be expanded later to a 3 pool, 4 pool, etc to support more bridges and versions of ETH.

A user that brought 2.4 ETH (random number) over from ETH would use their bridge of choice, and it would deposit it straight into this curve-style chain and into the ETH liquidity pool, in return, it would give the user a sort of LP token, 2.4 of them to be precise. This token would be called cETH (for both Canonical and maybe for Comdex :wink: ) and would be the actual ETH that all DeFi in the cosmos uses.

I see two issues with this, however, though I don’t feel they’re insurmountable.

  1. This would expose all ETH in the cosmos to the risks associated with ALL bridges. If one bridge were to fail or have issues, it could temporarily, or even permanently affect all cETH in the cosmos.
    Again, i truly do think there are ways to account for and protect against this, but that would need to be worked out with the utmost care.

  2. If not wildly successful, it would actually be detrimental to its initial goal, in that I would be yet ANOTHER eth token floating around the cosmos, further fragmenting liquidity.
    To this, I imagine the best way for this to be implemented would be to meet with and get the various bridges on board, so that when users use those bridges to bring assets over, it automatically sends it to the curve chain, deposits the asset into its respect pool, and then credit the user with the LP token, which is used as the actual asset through the interchain.

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I couldn’t help but mention this idea while talking about Comdex’s up and coming stablecoin last night, and since the team seemed to like the idea, well, here I am! This is the very basis for an idea. More importantly, I hope it gets the conversation started on the issue in bold at the top. This may not be the solution, but we need to find one before we run into liquidity issues.

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Not to be a buzzkill, but the general rule of thumb that I follow is that the more complex a financial product is, the riskier it is. That being said, such a liquidity pool would be subject to the risks of each bridge. I feel that only the parties who are well versed in each bridge (i.e. knows the risks with the tokenomics, code, capital behind the wrapped asset, etc.) should be providing liquidity to such a pool. Very few people have such knowledge.

Also, if you’re trying to solve for the problem that there will be different types of bridged assets (i.e. axelarETH, wormholeETH, gravityETH), etc…the simpler and more effective solution seems to be to just limit the number of bridges to have only a single bridge into the ecosystem. If we are going so far as to have a “canonical” bridge or whatever, why not just select one and shut the others out? That way resources can be spent to make sure that bridge is secure, supported, and well capitalized. Doesn’t more weaker bridges just open up the ecosystem to more risks?

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I love the idea that @TendermintTimmy proposed!

With the launch of Harbor, users can currently deposit different types of stablecoins into different vaults to borrow $CMST. This could reduce the stablecoin liquidity fragmentation in the cosmos. Now users can deposit their bridged stablecoins into the CDP and borrow $CMST.

In this manner, $CMST can become the central piece of stablecoin liquidity in the cosmos, solving the problem of liquidity shredding for the same denomination.

Implementing this with stablecoins is easier for us with the current system we are building; The example of ETH is a bit difficult to implement, and a curve like solution is best to do something like that.

Currently we are also working on enabling LPs on our Dex as collateral to Borrow $CMST, this would be pushed in future updates, what this does is gives users the benefits of liquidity mining and also deploy capital efficiently by reducing liquidity fragmentation.

Curves stable swap formula is a sophisticated combination of the constant sum formula of x+y=k and constant product formula x*y=k, where the sum transitions into the product once the pool is heavily imbalanced. This works really well for low slippage and low fee swaps.

We can implement what you suggest, wherein a curve like Dex can be built, and all the bridged versions can be deposited in an LP and take out a Canonical ETH that can be used across COSMOS.

There’s one more way which is a grassroots level idea but can be implemented with the current resources we have rather than building something new here’s how it will work:

Just like users mint $CMST by depositing various stable-coins 1:1 into a vault and all the different stablecoin liquidity can be aggregated into one token, we can build adaptable and modifiable vaults and use the same stablecoin minting mechanism to mint $ETH or any other asset for that matter.

A synthetic $ETH that can be minted by depositing bridged $ETH can also be minted using collateralizing $ATOM with a higher CR ratio. This can be imposed across various assets, and Comdex can become an internal IBC bridge/funnel to improve user experience and reduce liquidity friction.

Once the infrastructure around the core DeFi products like stablecoin, AMM, and lending borrowing is built, we plan to make specific exotic products like stable swap, options, yield aggregators, and much more.

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Yeah so i definitely agree, hence that being my first issue i listed. In fact, Ismail, before we even discuss too much further i think we do need to think through the drawbacks, as RedRabbit reiterated. What are your thoughts here? There’s no need to build something just to give Comdex another product offering if there arent real benefits to it that outweigh the drawbacks.

One thing I’d say for sure, is i don’t think you’d want to allow ATOM to be used to mint ETH, or any other asset. Then we start getting deeper into synthetics territory, and while that may be something to explore in its own right, it’s def not the issue i was thinking of tackling here initially.

Lastly, one thing I’ll add is that i think everyone would like to see your synthetics lending platform launch before anything. Esp before any stable coin modules. That’s what has been teased the longest, and something like a stablecoin system requires a lot of faith and trust that I think you’ll need to first earn with your other product offerings.

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