# Summary
- This proposal aims to improve the bridge’s and vault’s economic security by:
    - Changing slashing for vaults from premium redeems and unprocessed redeems from 10% to 2%
    - Increasing the minimum collateral for all vaults to `$1,000 * secure_threshold` to ensure premium redeems and liquidations remain profitable
- Use ~ $145 of the DAO treasury to buy iBTC and burn under-collateralized iBTC in the liquidation vault

# Parameter Changes
Recently, a user [reported](https://discord.com/channels/745259537707040778/991617172407337030/1179866092441706626) a vault that got liquidated because it did not process a redeem request and got slashed for 10% of its collateral. The result was that the vault's collateral ratio dropped below 100%. Hence, the vault’s BTC was no longer secured, and liquidators were not incentivized to redeem iBTC to receive collateral because the collateral value would be less than the redeemed iBTC.

The vault was likely abandoned, which only had ~$130 in collateral and backed 0.003515 iBTC, so the damage is limited to a few USD. However, it highlights that we should change a few parameters to prevent such cases from happening again. Therefore, the proposal suggests to apply the following changes:

- **Reduce the slashing** punishment for premium redeems and unprocessed redeems from 10% to 2%
- **Increasing the minimum collateral** for all types to `$1,000 * secure_threshold` or more specifically:
    - USDT: $1,500 (=1,500 USDT)
    - qUSDT: $1,500 (=7,500 USDT)
    - DOT: $1,300 (=236 DOT)
    - vDOT: $1,350 (=200 vDOT)
    - qDOT: $1,300 (=1,000 qDOT)

**Reducing the slashing** amount will have two effects. First, the change will ensure that punishments for vaults will not cause the collateral ratio to decrease below 100%. This is true if a vault is close to the lowest liquidation threshold in the entire system, which is 105%, so the liquidated collateral would still contain a 3% premium for liquidators. Secondly, it drastically reduces the financial risks for vault operators in case their service is unresponsive or temporarily falls below the premium redeem threshold. This should also support the current attempt to onboard new vault operators and increase mint capacity.

**Increasing the minimum collateral** is required to ensure that premium redeems remain profitable. We have recently seen several days where fees for Bitcoin transactions were ~$20, so premium redeems with a 2% premium on amounts of less than $1,000 would have been unprofitable. The same issue, although to a lesser extent, holds for liquidations if we assume that someone has to (re-)mint iBTC before/after burning his iBTC in the liquidation process. In both cases, a Bitcoin transaction will be triggered, so the proceeds from the premium redeem or liquidation should cover at least the costs of such a transaction. The suggested amount should still be small enough to not jeopardize decentralization but also to ensure profitability for the actions mentioned above.

**Numerical example**
If the vault is completely offline and does not respond anymore, it will get slashed until the collateral ratio is below the liquidation threshold. Assuming a newly registered vault would have at least $1,300 collateral at at 130% collateral ratio and is unresponsive, then users would be able to drain the vault down to $1,050 or 105% collateral ratio, by getting reimbursed on their failed redeems. Below that level the vault would get liquidated. At this point, a liquidator would get ~$50 for the liquidation, which should cover the transaction fees on BTC (if we assume he has to (re-)mint iBTC) and some profit.

Currently the smallest vaults only provide ~$5 to liquidators so even a small increase in BTC fees make it unprofitable for liquidators to do this.

# Burn liquidated iBTC
Given that the liquidated collateral of the vault does not fully cover the iBTC value anymore, it is suggested to use treasury funds to buy 0.003515 iBTC with INTR via HydraDX and burn the iBTC to receive 130.08 USDT, which shall reside in the DAO’s treasury. At a Bitcoin price of $41,418.36 (as of 04.12.2023), this would incur a loss for the treasury of about $15.51.

SubSquare has proposed changes to improve the economic security of the bridge and vault. The changes include reducing the slashing punishment for vaults, increasing the minimum collateral for all types, and burning under-collateralized iBTC in the liquidation vault. The proposal aims to prevent cases where the collateral ratio drops below 100% and liquidators are not incentivized to redeem iBTC. The changes will ensure profitability for premium redeems and liquidations and reduce financial risks for vault operators. The proposal also suggests using treasury funds to buy iBTC and burn under-collateralized iBTC in the liquidation vault. This will result in a loss of about $15.51 for the treasury.

Improving Vault and Bridge Security Parameters

# About us

[Bifrost](https://bifrost.finance/) is a dedicated liquid staking Layer 1 built on Substrate powered by Polkadot providing non custodial decentralized cross-chain liquid tokens for staked assets. By leveraging off Polkadots cross-consensus message format (XCM) it can provide standardized cross-chain liquid staking solutions for multiple chains notably Polkadot (vDOT), Kusama (vKSM) and the first LST solutions on both Moonbeam (vGLMR), Moonriver (vMOVR) as well as other multiple chains (currently 6+ chains). Bifrost facilitates the issuance and deployment of liquid staked assets (“vTokens' '), allowing users to earn staking rewards while participating in DeFi, such as liquidity provisioning on DEXs, and lending/borrowing. Bifrost aims to offer a seamless staking and DeFi experience for PoS users and enable developers to build innovative applications around Bifrosts’ liquid staking derivatives (vTokens).

# Summary

This proposal aims to add vDOT (Bifrost DOT LST) to the Interlay lend market, preparing for the following use cases:

- Increase base income for lenders who deposit IBTC, DOT, or any other asset as collateral in the lend market.
- Activate leveraging staking by rotating borrowed DOT stake to vDOT and depositing it as collateral.

Therefore, this proposal will perform the following functions (Check details at the "Technical Details" section below):

- Enable vDOT as collateral in the lending market.
- Add vDOT lending market.
- Activate vDOT lending market.

## Why vDOT

vDOT is a liquid staking token issued by the Bifrost SLP pallet. It represents staked DOT on the Polkadot Relay, but it is also a fungible and tradable asset. vDOT has unique features such as Fast-Unstake, Stable Swap, Automatic validator selection, Cross-chain voting, and deposit for harvest in DeFi. Additionally, vDOT naturally earns yield through staking rewards as its value appreciates. For more details about vDOT, please refer to the links below:

vDOT Application: https://bifrost.app/vstaking/vDOT

![Untitled](https://i.ibb.co/b5Pkfgq/Untitled-18.png)

vDOT logic behind: https://docs.bifrost.finance/builders/liquid-staking-slp/vdot

OpenGov+Automatic Validator Selection: [https://docs.bifrost.finance/builders/liquid-staking-slp/vdot#vdot-validator-se](https://docs.bifrost.finance/builders/liquid-staking-slp/vdot#vdot-validator-set)

### Recent Developments and Collaborations

- **The growth of vDOT in last month**: The total vDOT volume staking has exceeded **1,450,000**, with a monthly growth rate of 11.23%.
- **Utilities of vDOT in cross-chain scenarios**: Bifrost has completed the asset registration of all vToken on the Moonbeam and Moonriver network. Users can use the Moonbeam App to interact with xcvDOT and transfer assets between Bifrost and Moonbeam. Moonbeam App bridge: https://apps.moonbeam.network/moonbeam/xcm
- **vToken voting in relay-chain**: This feature allows users to participate in Kusama’s OpenGov governance (vDOT will be the next) on Bifrost parachain. It is currently in the final testing phase and is expected to be launched on the Bifrost Dapp next month. For more details, please refer to: https://x.com/0xLurpis/status/1706326874421661763?s=20
- **vToken Stable Swap**: It utilizes the LST Stable Pool to achieve low slippage swaps between LST and its original token. All vTokens on Bifrost Kusama have been adapted for Stable Swap. https://bifrost.app/swap?tab=pool
- **vDOT Vault on Interlay**: Interlay has proposed vDOT as collateral for Vault creation, allowing anyone to choose vDOT as collateral when establishing an IBTC Vault on Interlay. The staking reward feature of vDOT will enhance the collateral income for Vault creators, enriching the revenue attributes of Interlay Vault collateral.
- **vDOT minted by HydraDX Treasury, via XCM**: HydraDX used the treasury address to cross-chain invoke Bifrost SLPx and minted 81,800 vDOT, which was automatically transferred back to HydraDX to enrich the treasury revenue. This transaction was completed in one step with the help of SLPx. https://twitter.com/TheDolpha/status/1706358817225646177

### What benefits for Interlay lend market?

- **Increase passive income for lenders and expand the TVL of the lend market.**

vDOT naturally earns rewards from DOT staking, therefore vDOT lenders can earn DOT staking APY + Lend APY + INTR APR.

- **Introduce Leveraging Staking, combining staking rewards.**

Loop lending is the underlying logic for leveraging staking. This means that it requires repeated operations of collateral depositing, borrowing, and deposit again to increase leverage while increasing your LTV. By stacking the leverage of vDOT, higher DOT staking returns can be obtained. For example, if the leverage of vDOT is expanded to 1.5 times, the APY of vDOT staking will also expand 1.5 times for your principal (actual situation may involve factors such as interest rates).

How to establish Leveraging Staking?

1. First, collateralize IBTC, DOT, vDOT or USDT in the Lend Market.
2. Borrow DOT and mint to vDOT.
3. Collateralize the borrowed vDOT in the Lend Market and repeat the above steps.

Below is an example of DOT leveraging staking by using vDOT 

(*The following charts are for the purpose of understanding the principle of leveraging and do not take into account details such as floating lend rates, utilization rate or live exchange rate and etc*.)

![Untitled](https://i.ibb.co/DL2rcg3/image-15.png)

Based on the assumed lending market conditions mentioned above, we can derive the following results under the 65% LTV:

![Untitled](https://i.ibb.co/SrsMzhY/image-14.png)

As described in the chart above, leveraging user can achieve an approximate total APY of 50% with a near "1" health factor by combining vDOT lending positions and leveraging DOT's staking APY multiple times.

# Technical Details
Extrinsic: https://polkadot.js.org/apps/?rpc=wss%3A%2F%2Frpc-interlay.luckyfriday.io%2F#/extrinsics/decode/0x0302086400010300000030390a00d0bf0b00a086010020a107000000ee042cfc430f00000000000000000000000000000000000000000000000000000000000000c52ebca2b10000000000000000000000b2d3595bf006000000000000000000350c00010000c16ff286230000000000000000000000c16ff28623000000000000000000020400000064010103000000

Bifrost is a platform that allows people to earn rewards by staking their cryptocurrency. They have a special type of token called vDOT that represents staked DOT on the Polkadot Relay. vDOT can be used to earn rewards while participating in DeFi. Interlay is a lending market that allows people to earn money by lending their cryptocurrency. They want to add vDOT to their lending market so people can earn even more money. By using vDOT, people can also do something called leveraging staking, which means they can earn even more rewards by borrowing and lending vDOT.

Adding vDOT into Interlay Lend Market

**Introduction**
Polkadex is a fully non-custodial peer-to-peer orderbook-based cryptocurrency exchange for the DeFi ecosystem built on Substrate.

**Goal**
We plan to submit a governance proposal to Interlay this coming Friday (October 6th, 2023), aiming to open an XCM channel between Polkadex and Interlay parachains. The XCM channel will facilitate token transfers and further cross-chain developments and DeFi initiatives between the two parachains.

**Opportunities**
The main use case is that users will be able to transfer their iBTC and other Interlay parachain assets to Polkadex for trading on the Polkadex Exchange. With more parachain listings on the way to the Polkadex Exchange, iBTC and other Interlay assets can be exchanged for other Polkadot parachain tokens and vice-versa, then transferred to subsequent parachain destinations.

This will also create opportunities for traders to borrow and lend via the Interlay platform to trade on Polkadex. Additionally, it can pave the way for the creation of a derivatives platform.

**Discussion Point**

**Any arguments against opening this XCM channel?**
We want to understand if the community has any strong arguments against this action. We are open to answering any questions before submitting the proposal to ensure a favourable outcome.

- Polkadex is a cryptocurrency exchange for DeFi.
- They want to connect with Interlay to make it easier to trade iBTC and other assets.
- This will create more opportunities for trading and borrowing/lending.
- They are asking if anyone has any concerns before they make the connection.
- They want to make sure everyone is happy with the proposal.

Open an XCM channel with Polkadex

Hello, Interlay community!

Today, we'd like to introduce you to Dwellir AB, a trusted partner in the Polkadot ecosystem. We are a world-class Remote Procedure Call (RPC) infrastructure provider. Our journey has been marked by our successful operation of nodes for over 40 networks, processing more than 500 million requests daily.

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We are writing this discussion post as we’d like to become a core provider of RPC services for your community for the following reasons:

- **Decentralised operations**: In alignment with the spirit of DeFi, our services are decentralised. We don't use public clouds, preserving the sanctity of your projects.
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**Based on our comprehensive infrastructure and service offerings, our quarterly costs for operating Interlay/Kintsugi RPC services will be approximately $2284 (reduced from 4000)**. This cost commitment reflects our dedication to supporting your work without compromising financial sustainability, even in challenging market conditions.

As we look towards the future, we are eager to engage with you, answering any questions you may have and addressing your unique needs. Our commitment extends beyond providing top-tier RPC infrastructure. We are dedicated to fostering the growth of the Interlay/Kintsugi ecosystem, recognising the transformative potential of decentralised finance. 

Dwellir AB is a company that provides Remote Procedure Call (RPC) infrastructure services for over 40 networks, processing more than 500 million requests daily. They own and operate their bare metal machines across four locations in Europe and Africa, and will soon launch in the US and Asia. 

Dwellir offers decentralised operations, streamlined node management, low latency, high access, and fair pricing. They believe in a fair pricing policy that balances quality and affordability. 

Their quarterly costs for operating Interlay/Kintsugi RPC services will be approximately $2284, which is reduced from $4000. They are committed to ensuring ongoing costs and predictable cost structures. 

Dwellir is dedicated to fostering the growth of the Interlay/Kintsugi ecosystem and supporting their work without compromising financial sustainability.

Dwellir - Your Decentralized RPC Infrastructure Partner

Secret

**INTR to Omnipool**


I have seen that recently various incentives have been made for iBTC pairs in different Dexs paid in INTR

So I would like to propose the following initiative:

**Provide INTR as liquidity in the Omnipool** (by design it allows LPing a single token) in order to access a large number of assets that will expand over time, which by providing liquidity, is as if we were opening a pair with each Omnipool asset, without the need to be incentivizing separate pools,

and in turn the Interlay community, will be able to **manage the fees generated** through governance, opening up different possibilities

It should also be noted that the HydraDX community owns and already provides **10 iBTC as liquidity**, which currently makes Omnipool the best option in terms of slippage, you can review it for yourselves

Also INTR could be used as an incentive in the Omnipool **(this can be separated in another discussion and is not the main point of the proposal)** once Liquidity Mining is active and create a broader liquidity base (with the difference that the LM of the Omnipool rewards long-term LPs, since the more last the position in the Omnipool, more rewards will be generated, these positions can also be transferred)

For now I would like to propose and discuss the above ideas, so as a community we can decide what the terms would be.

1. There are incentives for iBTC pairs in different Dexs paid in INTR.
2. The proposal is to provide INTR as liquidity in the Omnipool to access a large number of assets without the need to incentivize separate pools.
3. The Interlay community can manage the fees generated through governance, opening up different possibilities.
4. The Omnipool currently has 10 iBTC as liquidity, making it the best option in terms of slippage.
5. INTR could be used as an incentive in the Omnipool once Liquidity Mining is active and create a broader liquidity base.

INTR to Omnipool 

Dear Interlay community, 

We've got a slightly awkward situation in our governance with respect to proposals #46 and #47. 

**TLDR**
- Stellaswap made a treasury proposal to help build up the liquidity of iBTC and INTR in their new, more efficient Pulsar AMM (Uniswap v3-style). https://interlay.subsquare.io/democracy/referendum/46
- That proposal passed with 88% "aye" votes and a comparably high turnout. 
- Unfortunately, an XCM bug caused the transfer to fail*
- The TC committee decided to re-execute and fast-track the proposal, considering it had clearly passed the vote. 
https://interlay.subsquare.io/democracy/referendum/47
- Fast-track only gives 3h to vote. Parties opposing the original proposal (a minority of the original vote) voted "No" again - but this time the proposal failed. 

**What now?**
It is important to understand why the re-execution of the proposal was blocked. 

- Did the community change its mind with respect to the Stellaswap proposal? 
- Or was there simply insufficient time for everyone to vote on the re-execution? 

We have 3 options on how to proceed: 

1. Re-vote on the same proposal with a full 7-day vote. 
2. Re-execute via fast-track (if majority of the community is clearly in favor)
3. Change the proposal and put to 7-day vote

Either way, we need to come to an agreement. 
FYI: the Pular pool was set to launch next week, considering the original proposal had passed. 

---
* The runtime upgrade in referendum #45 updated the Interlay XCM weight types. This change was not accounted for when the StellaSwap referendum #46 was made. The referendum passed but due to the change in the XCM weight types, #46 cannot be decoded by the chain and thus not executed. No XCM transfer happened. 

Interlay community had a proposal to build up the liquidity of iBTC and INTR in their new Pulsar AMM. 
The proposal passed with 88% "aye" votes but an XCM bug caused the transfer to fail. 
The TC committee decided to re-execute and fast-track the proposal, but this time the proposal failed. 
Now, the community has three options on how to proceed. 
They need to come to an agreement as the Pular pool was set to launch next week.

Discussions