stkATOM Exchange Rate Mechanics

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Learn more about the underlying mechanics that drive the stkATOM exchange rate model with ATOM when liquid staking on pSTAKE.

Our upcoming non-custodial ATOM liquid staking solution on the Persistence Core-1 Chain will bring stkATOM directly into the Cosmos ecosystem. Through Interchain Accounts (ICA), pSTAKE will allow users to stake their ATOM and mint stkATOM based on the exchange rate (which follows Compound Finance’s cToken model).

When liquid staking your ATOM on pSTAKE, an exchange rate model drives the relationship between ATOM and stkATOM – the value of stkATOM will increase against ATOM as it accrues staking rewards in the background. pSTAKE automatically compounds ATOM staking rewards after every epoch, resulting in higher yields.

Today, we’ll dive deeper into how this exchange rate model works by answering FAQs and an in-depth case study of on-chain actions, including how they affect the stkATOM/ATOM exchange rate.

FAQs about stkATOM/ATOM Exchange Rate

Below is a list of key questions surrounding the stkATOM exchange rate and its underlying mechanics.

What is the stkATOM exchange rate?

stkATOM’s exchange rate is the rate that defines how much stkATOM is minted when a user stakes ATOM or how much ATOM is claimable when a user unstakes or instantly redeems their stkATOM. It establishes a direct conversion relation between ATOM and stkATOM and is identical to Compound Finance’s cToken model.

How is the exchange rate calculated?

The calculation of the exchange rate between stkATOM to ATOM is a sum and division. The sum of tokens received in deposits for that day’s epoch and the ICA Host chain delegation account balance (all staked ATOM, including auto-compounded staking rewards) divided by the total supply of stkATOM.

What will the stkATOM exchange rate be at launch?

Initially, at launch, the exchange rate will be 1, meaning that 1 deposited ATOM will mint 1 stkATOM.

How is the stkATOM exchange rate calculated?

Below is the exchange rate formula for stkATOM:

Below is a breakdown of the values that make up this formula:

  • ATOMava: ATOM deposited but not yet staked
  • ATOMstkd: ATOM staked on Cosmos (includes earned staking rewards)
  • stkATOM: Total minted stkATOM in circulation

Which on-chain action changes the stkATOM exchange rate?

The stkATOM exchange rate automatically updates whenever any part of the above equation changes:

  1. Depositing ATOM and unstaking stkATOM doesn’t affect the exchange rate value because minting and burning stkATOM is based on the current exchange rate.
  2. Reward auto-compounding increases the exchange rate value because staked ATOM is added to the numerator.

Is the stkATOM exchange rate the same for everyone?

Yes. All users can mint stkATOM when they deposit ATOM or unstake stkATOM to claim ATOM, always at the same ongoing exchange rate.

How does the stkATOM exchange rate change?

The stkATOM exchange rate changes (increases) when the pSTAKE protocol auto-compounds ATOM staking rewards every epoch. stkATOM in the (n+1)’th epoch will be worth more in terms of ATOM than in the n’th epoch.

Why do I receive less stkATOM for my staked ATOM?

As established, the stkATOM exchange rate will keep increasing as staking rewards accrue. Over time, new users who stake ATOM and existing users staking new ATOM will receive fewer minted stkATOM as per the ongoing exchange rate.

Will the amount of stkATOM in my wallet change?

No. The value of stkATOM does not change in any circumstance (unless you unstake). Over time, your same amount of stkATOM will be claimable for more ATOM than you initially deposited.

Case Study

Now that you understand the components and underlying mechanics of stkATOM’s exchange rate, let’s see how this model works in practice through a detailed case study.

Note: All numbers in this case study are arbitrary and only for explanation purposes. Protocol fees are considered 0% for simplicity. pSTAKE will have a 5% fee only on ATOM staking rewards generated.

At launch, the exchange rate of stkATOM to ATOM will be 1 and gradually increase as and when rewards are received every day epoch.

Alice & Bob will receive stkATOM at a 1:1 ratio to the ATOM they’ve staked, as the current exchange rate is 1.

After the first rewards day epoch, rewards received (100 ATOM in this example) are automatically claimed and restaked by pSTAKE for auto-compounding. Next, rewards are distributed to stkATOM holders (in the form of an exchange rate increase).

As the total ATOM has now changed (while the total stkATOM remains the same), the exchange rate will also change according to the formula mentioned above:

  • New exchange rate = 2,100 (Total ATOM) / 2,000 (Total stkATOM) = 1.05

The claimable ATOM by Alice & Bob will increase according to the new exchange rate:

  • Alice ⇒ 1500 (stkATOM) x 1.05 (new exchange rate) = 1,575 ATOM
  • Bob ⇒ 500 (stkATOM) x 1.05 (new exchange rate) = 525 ATOM

When Jake stakes 1,000 new ATOM, the exchange rate for stkATOM/ATOM does not change. Jake receives stkATOM as per the ongoing exchange rate:

  • stkATOM received by Jake = 1,000 (ATOM staked by Jake) / 1.05 (current exchange rate) = 952.38095238 stkATOM

After the second rewards epoch, the exchange rate will change as follows:

  • New exchange rate = 3,255 (Total ATOM) / 2952.38095238 (Total stkATOM) = 1.1025

Consequently, the total ATOM claimable by our stakers will change as follows:

  • Alice ⇒ 1,500 (stkATOM) x 1.1025 (new exchange rate) = 1,653.75 ATOM
  • Bob ⇒ 500 (stkATOM) x 1.1025 (new exchange rate) = 551.25 ATOM
  • Jake ⇒ 952.38095238 (stkATOM) x 1.1025 (new exchange rate) = 1,049.99999999 ATOM

After Bob sends an unstaking request, his stkATOM tokens are blocked from further usage and an unstaking request is made corresponding to his balance. As per the current exchange rate of 1.1025, Bob will be able to claim 551.25 ATOM after a 21-25 day unbonding period against his originally minted 500 stkATOM.

Powering Cosmos DeFi

stkATOM’s exchange rate model enables easy integration with other DeFi protocols and provides a much simpler user experience, given that users don’t need to manually claim their rewards or worry about auto-compounding them for extra yield. 

Because it follows this exchange rate model, stkATOM is a yield-generating asset that will supercharge its composability in Cosmos DeFi, along with numerous other use cases.

About pSTAKE

pSTAKE is a liquid staking protocol that unlocks liquidity for your staked assets. With pSTAKE, you can securely stake your Proof-of-Stake (PoS) assets, participate in protocol improvements and security to earn staking rewards, and receive staked underlying representative tokens (stkASSETs) which can be used to explore additional yield opportunities across DeFi.

At present, pSTAKE supports Binance Chain (BNB), Cosmos (ATOM), Persistence (XPRT), and Ethereum (ETH) networks’ native tokens, with a view to support more chains and assets in the future (SOL, and AVAX).Website | Twitter | Telegram | Blog | YouTube | Forum

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