Introduction

Points. We all have a love-hate relationship with them. And with so many options available to increase your points earnings, it’s hard to choose the best option. Ion Protocol simplifies this decision by providing a platform where users can increase their restaking exposure with minimal liquidation risk, the lowest borrow rates for LRTs, and hyper-efficient deleveraging.

Ion Protocol enables borrowers to earn up to 14x the rewards on their LRT holdings and lenders to earn some of the highest and most sustainable ETH-on-ETH yield in DeFi while qualifying for additional bonus rewards.

Opening a Position On Ion Protocol

To open a position on Ion Protocol, you must gain access via a referral code. Then you can follow these simple steps:

1. Choose your strategy: Decide whether you want supply LSTs like wstETH or if you want to borrow and multiply your exposure to assets like EtherFi’s weETH, Kelp DAO’s rsETH, Swell’s rswETH, or Renzo’s ezETH (coming very soon).

2. Assess the market: Review the current borrow rates, available liquidity, and potential earnings.

3. Create the position: Use Ion Protocol’s interface to multiply your LRT rewards by moving the slider to your desired multiple, selecting the max slippage, and clicking the deposit button!

We’ve kept you waiting long enough, now it’s time to open the floodgates.

After completing our mainnet closed beta, access to Ion Protocol begins today!

During the closed beta, Ion Protocol reached over $10 million in total deposits from our early community members, testnet contributors and ecosystem partners, bootstrapping the first cohort of markets including weETH, rsETH, and rswETH. This marks a significant milestone for Ion, and we’re excited to begin our first referral and points program. Users will be able to immediately begin accruing rewards across multiple markets on both the lending and borrowing side by:

1. Accessing Ion via referral link
2. Depositing in the different vault integrations that are already public

Restaking is rapidly evolving to become one of the leading sources of ETH denominated yield. Within this innovative landscape, liquid restaking has emerged as a pivotal new primitive, offering a pathway to better access, fungibility, composability, and enhanced returns for restakers—much like LSTs did for staking. Despite lending and borrowing being the largest DeFi use case for LSTs we still don’t have ubiquitous for support them. LRTs will only exacerbate this issue due to the differing complexity of AVSs and their portfolio permutations unless an underwriting solution can accurately assess validator backed assets. This is why we built Ion Protocol – to change to future of how staked and re-staked assets are valued and used in DeFi. Now it’s time to finally reveal how to use Ion and what it means to unlock real, ETH denominated yield in DeFi.

A New Era of Lending: Earn More With Ion

Ion Protocol isolates each markets risks and focuses on compensating lenders while giving them exposure to numerous staked assets, removing centralized lending risk to one asset. We’re able to redefine how much lenders can earn by supporting the demand for EigenLayer and LRT points. In our first market, lenders will supply stETH to borrowers who collateralize eETH. Given the lender payoff we described, we anticipate lender yields being able to reach double digits. For the first time, lenders can unlock sustainable and rewarding ETH on ETH yields in addition to points and other rewards in one easy click.

The Power of Isolated Markets

Ion introduces the concept of isolated markets, a feature that allows users to tailor their DeFi strategy to their preferred risk exposure. Traditionally, in pooled lending protocols, the yield distributed to lenders is generated by all the collaterals supported instead of just one. This also exposes lenders to the insolvency risks of each market for which their supplied assets are being borrowed in. By having isolated markets be the standard in Ion, we enable lenders to create their own journey and define the risk profile they’d like exposure to according to the collateral assets we support. Additionally, each market will have collateral specific interest rates that react to yield so that lenders can benefit from increases in staking and restaking yields.

Boosted Restaking: Amplifying Your Yield

One of the most compelling features of Ion Protocol is capital efficient leveraged staking and restaking. We want to deconstruct the negative connotation that comes with the term leverage. At the end of the day, leverage just means using borrowed capital to increase the borrowers return on some asset or strategy. Typically, we think of things like volatility and price de-couplings which cause financial infrastructure to collapse under high leverage, especially via cascading liquidations. If we remove price volatility and price de-couplings, then we minimize the major risks associated with leverage, making it safer AND cheaper for borrowers to increase their leverage exposure. A couple core concepts that make this possible include:

• Flash Leverage: Instantly multiply your exposure to restaking yield, points, and additional rewards without the usual constraints of traditional lending. Flash leverage allows you to define the amount you’d like to multiply your collateral exposure by and execute the leverage restaking strategy by simply dragging the slider and clicking earn.
• Solvency Based Underwriting: Ion introduces a novel approach to underwriting validator backed assets. By quantifying the solvency of a liquid restaking token based on the ETH in its provider’s validator reserves instead of depending on price oracles or AMM counterparty liquidity, we remove volatility and price depegging from being a risk that borrowers are exposed to. In Ion Protocol, borrowers only get liquidated after serious slashing events, which rarely ever occur and will most likely decrease in frequency and impact over time due to the emergence of new technologies such as DVT and TEE.
• Collateral Specific Interest Rates That React to Yield: With collateral specific interest rates that react to yield, borrowers can lock in an estimated APY without worrying about fluctuations in the staking yield.

Think about borrowing against ETH denominated assets like LSTs and LRTs like taking a loan to purchase a house. If your house is in good standing you wouldn’t want a loan that liquidates you when the market changes your house’s value. The bank would take your home! The same goes for validator backed assets like LSTs and LRTs. As long as validators are in good standing, and the borrower can pay off their loan, the loan should be in good standing. We baked this into the design of Ion protocol to internalize the true value of LRTs — the ETH deposited in them, not only their market price. By utilizing these features, borrowers can optimize their leveraged restaking yield to match their preferences for earning with their restaked assets.

Why Ion Stands Out

ETH on ETH yield represents the purest form of real crypto native yield, being generated via compensation for economically securing the network. Within this context, Ion Protocol aims to be the most capital efficient platform for lending and borrowing with staked and restaked assets.

Keep your eyes out for the first market deployment coming soon, with more to follow thereafter! In the meantime, join the Discord and stay tuned for the LRTs that we’ll support as we roll out to mainnet.

Introduction: A Revolution in the Making

We’re thrilled to report that over the past week, our testnet has seen a surge in activity, with a remarkable number of unique users joining us. Your enthusiastic participation and insightful feedback are shaping the future of Ion Protocol. Now, we’re excited to introduce a pivotal step in our journey: the Mainnet Whitelist.

The whitelist is a carefully curated access list, allowing users to participate in Ion Protocol’s markets on mainnet. This is a temporary but essential measure to ensure the utmost security and stability of our newly launched markets.

Why a Whitelist?

In DeFi, security is paramount, and we believe in minimizing the risk to user funds as much as we can. Our decision to implement a whitelist comes from a deep understanding of the potential risks present in lending platforms—sudden defaults, leverage pitfalls, and external systemic risks. By controlling the initial influx of users, we aim to create a robust and resilient environment for all as we safely scale the protocol.

Your Path to the Whitelist

Earning your spot on the whitelist is straightforward:

1. Testnet Feedback: Dive into our testnet, engage actively, and give us valuable feedback. Exceptional contributions will be recognized.
2. Testnet Participation: Your wallet address could be entered in raffles based on smart contract interactions.
3. Audit Competition: Show off your skills by participating in our audit competition. All accepted submissions stand a chance to be whitelisted.
4. Be a Lender (to access certain borrow markets): Once we launch to mainnet, deposit as a lender. This allows you to strengthen your alignment with the protocol while strengthening Ion’s potential to scale.

Benefits for All

Qualifying for the whitelist brings exclusive early access to our mainnet markets, giving you a head start at compounding your staking yield or multiplying your points from restaking providers such as EigenLayer. As we release more markets in the future, whitelist users will also gain first access to these opportunities. With all of the excitement around the staking and restaking ecosystem, we can assure you that this is not an opportunity you should sleep on.

We can’t wait to have you.

Introduction

Starting Monday January 22nd, $40,000 has been allocated to the reward pool for our Audit Competition with Hats Finance. Security researchers and auditors of all experience levels are invited to participate in this competition. Let this be an opportunity for you to dive into Ion’s architecture before we go live and learn about the mechanisms we’ve designed! Join the Discord channel the Hats team has made for us to discuss any findings or questions with members from both teams and other security researchers and auditors.

Rules

The competition will begin on Monday, January 22nd, 2024 11:59 AM EST and run until February 5th, 2024 11:59 EST.

This competition will contain a variety of ways for you to participate. Security researchers can submit any issues, bugs, or code flaws they identify in our code on the Hat’s Finance dapp. You can submit one on-chain submission mentioning all issues found on the repo — a forked repo which will be provided by Hats Finance on behalf of Ion Protocol [https://github.com/hats-finance]. In addition, we’re also opening submissions for formal verification.

Here’s a brief tutorial!

We will not be distributing rewards for the following:

• Any known issues. This includes any issues mentioned in our audit docs or vulnerabilities that were already made public (either by Hats or by a third party).
• “Centralization risks” that are known and/or explicitly coded into the protocol.
• Attacks that require access to leaked private keys or trusted addresses.
• Issues that are not correctly submitted (via the Hats Finance dapp).

What we will be distributing rewards for:

• Low-severity issues (must be approved)
• Medium-severity issues (must be approved)
• High-severity issues (must be approved)

Vulnerability Issue Submission

The vulnerabilities found can generally be classified into three severity levels.

Low-Severity Issue Submission

Low-severity issues are those where the behavior of the contracts differs from the intended behavior (as described in the docs and by common sense) but don’t put funds at risk.

Medium-Severity Issue Submission

Medium-severity issues lead to an economic loss but do not lead to a direct loss of on-chain assets. These include gas griefing attacks, any attacks that make essential functionality of the contracts temporarily unusable or inaccessible, and anything that resorts in the short-term freezing of user funds.

High-Severity Issue Submission

High-severity issues lead to the loss of user funds. These include direct theft of any user funds (whether at rest or in motion), long-term freezing of user funds, theft or long-term freezing of unclaimed yield or other assets, and protocol insolvency.

These submissions are public and not encrypted, making them viewable from github. This is done intentionally since the competition is first come first serve, and we will be disregarding submissions of the same issue twice.

Formal Verification Submissions

Formal verification is a mathematical process used to prove or disprove the correctness of a smart contract’s algorithms, ensuring they behave as intended and are secure against vulnerabilities and errors. We’re giving researchers the opportunity to use the Certora Prover to find bugs and prove properties from a selection of predefined contracts set within the codebase. The best specs written for these contracts will be eligible for this severity prize pool.

The committee judging formal verification submissions will evaluate based on the coverage of the submitted specification. Coverage is determined using private mutations to the code. The private mutations will be made public after the reward calculation.

To access the Prover, sign up Here

Rewards

The reward pool will be split proportionally between:

• 75% of the total pool for vulnerability submissions
• 25% of the total pool for formal verification submissions

For vulnerability submissions, each submission will earn a specific amount of points based on the severity level of the vulnerability found. Points are capped at 1% of the total pool. So if the total number of points is greater than 75, then the dollar per point value gets diluted. If the number of points are less than 75, then the dollar per point value dilutes (75% of total rewards split amongst all accepted submissions according to each submission’s point allocation).

• low-severity: 1 point per submission
• medium-severity: 12 points per submission
• high-severity: 25 points per submission

For formal verification submissions, all the accepted submissions split the 25% based on Certoa’s severity ratings.

Prize Pool

Total Deposit: $50,000

UI Budget: $40,000 (which includes a 20% handling fee from the rewards)

Max Dollars Per Point: $400

Total Formal Verification Budget: $10,000

Conclusion

Join the Hats Finance Discord to stay up to date on the latest information regarding the audit competition.

In the meantime, try our testnet and become a member of our Discord to join the conversation on all things Ion, Staking and Restaking!

Introduction

Over a billion dollars has been lost from protocol hacks in 2023. Not only were recent entrants DeFi some of the most affected, but many of the most prominent protocols in the ecosystem including Curve, Euler, Kyber Network, Multichain, and more have experienced the shortfalls of security exploits. We are no longer in a time where depending on only security audits is sufficient to cover the risks and vulnerabilities that DeFi protocols are exposed to. We at Ion Protocol realize the inherent difficulty in building a protocol that can withstand the test of time, and we are dedicating ourselves to taking as many steps as possible to minimize the presence of contract risk in our architecture.

In anticipation of our Audit Competition with Hats Finance and our mainnet launch, we’re sharing some of our internal practices around smart contract risk mitigation and the public steps we’re taking in our protocol rollout to minimize user risk exposure as much as possible.

Stick to the end to read about how you can enter into our Audit Competition to contribute to the security of Ion Protocol!

Ion’s Internal Testing Suite

Our first line of defense is our internal team’s extensive testing and security reviews. We’ve developed an extensive internal testing suite to help us dial in on any vulnerabilities or attack vectors before initiating external codebase reviews from security researchers and auditors.

Unit Tests

The first step we take is unit testing. This ensures that each small part of the contract behaves as expected. Unit tests are specialized software tests that verify the smallest parts of an application, typically individual functions or methods. By isolating and testing individual functions, we can assert their correctness under various conditions, thereby building a strong foundation for the overall security of the system. The use of unit tests also facilitates easier maintenance and debugging since problems can be quickly identified and resolved at the unit level before they escalate into more complex issues.

Fuzzing

Given the dynamic and unpredictable nature of state variables in our contracts, such as rate accumulators, we employ extensive fuzzing on top of the baseline expectation of comprehensive unit testing. Fuzzing is a software testing technique that involves providing invalid, unexpected, or random data as inputs to a codebase. This is achieved by automatically generating a wide range of inputs to ensure the program can handle unexpected or extreme cases. We use tools like Foundry invariant tests, which stress test contracts in randomized states. This approach is crucial for uncovering bugs that might slip past unit tests.

Additionally, we use Echidna for extended fuzzing campaigns — verifying invariants in a simulated long-term environment with randomized borrower and lender actions, along with fluctuating market conditions. An example of a common invariant in lending markets is ensuring that the total amount of WETH claimable by all lenders never exceeds the sum of idle lender liquidity plus the total amount of debt owed by borrowers at any given time.

wETHClaimable ≤ idleLenderLiquidity + totalDebtOwed

This method is particularly effective in complex systems like financial contracts, where the number of possible states can be vast, and traditional testing methods might not uncover every potential issue.

Fork Tests

Despite extensive unit and fuzz testing, it is not sufficient to test protocols like Ion in a vacuum. Fork tests play a critical role to provide more realistic simulations of market conditions. A fork test involves creating a copy, or a ‘fork,’ of the entire blockchain state, like Ethereum’s mainnet. This allows us to test Ion in an environment that closely mirrors the actual blockchain, including real-world data and interactions.

In addition to testing in isolated environments, we conduct fork tests to evaluate how Ion performs in conditions closer to reality. Testing on mainnet forks allows us to simulate actual integrations with our partner liquid staking providers and automated market makers (AMMs). By doing so, we can observe how the protocol behaves in an ecosystem with realistic data and assets, ensuring that our system is robust against not only theoretical issues but also practical challenges that could occur in a live environment with more protocol interactions.

For example, when users create leveraged staking positions on Ion, the protocol compares the cost of acquiring additional collateral—between directly minting an asset from a liquid staking provider and purchasing the asset on Uniswap—in order to calculate the cheapest route for each user. As these costs can rapidly shift due to other trading activites, fork tests allow us to simulate these external actors’ influence on real time liquidity and ensure that our strategies remain effective under real mainnet conditions.

As such, fork tests are crucial for identifying issues that might not surface in local testing environments, especially those related to external market conditions such as liquidity shortages, and helps us defend against liveness failures and increased consumer risk in time-sensitive scenarios.

Business Logic Reviews

While it is important to ensure that the code operates as intended, it’s equally crucial to assess if the economic and business logic is inherently secure. Even flawless code can’t compensate for a business model that is susceptible to financial attack vectors. Therefore, our security research includes a thorough examination of the economic and business logic related to lending ETH and borrowing it against staked and restaked assets. In this fashion, we can preemptively identify and mitigate any potential financial vulnerabilities that are not evident within the code itself.

By implementing these rigorous testing methodologies, we’re playing a large role in securing and safeguarding user assets within Ion. But this is just the start.

External Audits

In addition to the team’s efforts to test Ion internally, an extensive review of the protocol would not be complete without the help of external security researchers and auditors.

Security Audit

We partnered with OpenZepplin to audit the codebase and analyze the economic security for our first market, the LST/ETH market. In the future, we plan to continue auditing the protocol as we introduce new markets, strategies, and functionalities. Our next innovation taking priority for audits is the LRT/LST market, which will be the second market we launch on mainnet.

Audit Competitions

Hats Finance is set to host an audit competition to further bolster the security of the protocol before we launch the first market on mainnet. In audit competitions, security researchers and auditors compete to rigorously test and evaluate the safety of protocols for a portion of a prize pool. This gets more eyes on our contracts with the potential of someone catching a vulnerability that previously went unseen. Hats Finance has a great reputation for hosting audit competitions with protocols such as Ether.fi and Stakewise.

Our audit competition will begin on January 22, 2024, and it will require security researchers to use numerous tools and strategies to compete for their portion of the $40,000 prize pool. Security researchers will have the opportunity to be rewarded for identifying low-, medium-, and high-severity issues in the code base. While not required, we’re also supporting the option to use formal verification on a predefined set of contracts for additional rewards. Stay tuned for more announcements and updates as we approach the start date!

Conclusion

It’s clear that security is not a destination, but an ongoing journey. No checklist or audit can ever provide a foolproof guarantee against all risks. This is why, at Ion Protocol, our commitment to security is eclipsed by none. Post-deployment, our vigilance will be unwavering as we continue to monitor the protocol for any signs of invariant violations, ongoing attacks, and shifts in market conditions that could impact security.

The upcoming audit competition, in partnership with Certora and Hats Finance, marks the next critical phase in the journey toward our mainnet deployment.

Welcome to Testnet V2

The time has finally come. Today we’re releasing Ion Protocol’s testnet to the public—it’s time to reveal what we’ve been working on behind the scenes.

Here’s a timeline of what’s to come:

• A New Rewards System — Points & More (Mid Jan)
• Hats Finance Audit Competition (Jan 22nd)
• Beta Mainnet Launch (Early Feb)

Below we’ll share how to use the testnet and an overview of the different features we’re going to market with, but first, a summary of who we are.

What is Ion Protocol?

Ion Protocol is a lending and borrowing platform built specifically to support staked and restaked assets. Our vision is to create a unified market to empower stakers’ and restakers’ collateral as the de-facto store of value in DeFi. We aim to provide our users with the best platform available to earn with their LSTs and restaking positions.

Getting Started

When you first arrive to the webapp, you’ll connect your wallet and switch networks to Ion Protocol Testnet.

Intro 

We’re excited to welcome Lido, the final member of the first cohort of partners we’ll be supporting on our mainnet launch! As the market leader in the liquid staking ecosystem, we want to ensure we can bring capital-efficient and secure lending and borrowing to the largest staking audience possible.

Let’s explore the significant impact that Lido has had on liquid staking and LSTFi, and how Ion Protocol is positioned to extend stETH’s utility even further.

Lido — Growth and Current Initiatives

Lido has been the predominant issuer of liquid staking tokens (LSTs) over the past year. By depositing ETH in the protocol, users receive a tokenized representation of their stake that can be utilized across various DeFi applications, earning additional rewards. Since its inception in 2020, Lido has reached over 9 million ETH staked.

Lido’s LST is known as stETH and it has surged in popularity due to its support in numerous DeFi applications. Its deep liquidity and history of robust security have made it an exceptional asset to use as collateral.

Recently, Lido has made a concerted effort to reinforce the decentralization of its architecture. These improvements are highlighted in their expansion of the node operator set, an emphasis on supporting robust withdrawals, and continued iteration on DAO decentralization.

One of the more notable recent developments in the pursuit of further decentralization was the introduction of the Simple DVT Module. DVT (Distributed Validator Technology) is a mechanism that enables the decentralization of a single validator’s responsibilities across multiple nodes or parties. It splits the validation process ensuring no single entity has complete control over a given validator’s activities.

The Simple DVT Module leverages infrastructure providers like Obol Network and SSV to add more node operators to the Lido Node Operator set. This introduces more diversity in the operator set while benefiting from increased resilience, decentralization, and security.

Simple DVT and numerous other protocol improvements showcase Lido’s priority on minimizing the impact that slashing events could have on stETH holders. These are all factors that affect how we underwrite stETH and other LSTs in Ion Protocol.

Ion & Lido — Building Economic Incentives Around Provider Improvements

We’ve created Ion to be the best platform for earning with staked and restaked assets as collateral. With stETH, it’s possible to earn up to an estimated 15% APR in staking yield on Ion without having to worry about price liquidations.

Two innovative mechanisms make this possible: Precision which verifies the ETH staked in Lido’s validators, and Clarity, predicting slashing volatility within Lido’s validator set.

These innovations are the backbone for our price-agnostic liquidations and staking-specific interest rates. Using Precision, liquidations will only occur if slashing events reduce Lido’s validator reserves, leading to a decrease in value for stETH as collateral in our system. This will reduce the volatility experienced by borrowers, greatly reducing the chances that you lose your capital while maximizing your staking returns.

Our staking-specific interest rates are reactive to Lido’s staking yield, enabling borrowers to earn without having to worry about changes in the staking rate reducing their profitability. All the while, Clarity informs us of potential shortfalls in Ion’s validator reserves due to slashing events, making sure that the stETH in our market is parametrized accordingly.

These innovations help us provide a more capital-efficient and secure borrowing and lending experience for stETH holders. By creating a price-agnostic platform and by taking an asset-specific approach to lending market design, we’ll enable the highest yields possible for those who want to compound their stETH yield.

What’s Next?

Now that we’ve announced all the integrations we’ve lined up for launch, it’s time to follow through…

• Testnet V2 Launch (Jan 8th)
• Whitelisting Goes Live (Mid Jan)
• Hats Finance Audit Competition (Jan 22nd)
• A New Spendable Points System (Late Jan)
• Beta Mainnet Launch (Early Feb)

Be among the first to experience how Ion Protocol empowers stETH holders with price-agnostic liquidations, dynamic staking rates, and heightened security, to deliver a superior borrowing and lending platform.

Next stop, Testnet V2!

A New Frontier — Introducing Ion Protocol

Over a year ago, our team first encountered the concept of restaking, and we soon became enamored with what we believe is the next step in the evolution of ETH as an asset, further expanding on Ethereum’s role as the global settlement layer. We designed Ion Protocol to be the vanguard of innovation for the staking ecosystem and to become the most performant platform in DeFi supporting staked and restaked assets.

Prior to diving into the vision behind Ion Protocol, we will first provide context on the current state of the liquid staking and restaking ecosystem. We will then unveil what we believe to be the largest obstacles impeding the growth of the restaking ecosystem and how Ion Protocol will address them. We will also take a closer look into all the benefits that Ion will enable for stakers and restakers alike, the mechanisms behind the protocol, and what to expect from us in the near future. Let’s get started.

The Birth of a New Ecosystem — Staking & Restaking

Staking has been one of the largest and fastest-growing sectors in DeFi over the past year, scaling to over $60B in staked capital from less than $20B at the beginning of 2023. Following this growth, restaking platforms such as EigenLayer have been able to generate over $1B+ in deposits with the promise of enabling Ethereum stakers to use their assets to secure external networks. These users, known as “restakers,” earn additional rewards on top of their ETH staking rewards from the additional networks that utilize Ethereum security. Similar to the concept of slashing on Ethereum, restakers take on additional slashing risks by opting into these networks. The core features of rewards and slashing, though simple concepts at face value, exist as the backbone of how restaking provides value to staked asset holders…and how it can introduce new forms of risk.

As these networks begin to go live, the anticipation of growth around the restaking vertical has inspired the rise of products meant to lower the barrier of entry for users who want to restake. These products are known as Liquid Restaking Tokens (LRTs), which receive staked asset deposits and create liquid representations of restaking positions. LRTs help users restake to multiple networks simultaneously, decreasing the friction of entering into complex restaking positions. When you enter into a restaking position with multiple AVSs, though you can receive the rewards that these services generate, you become exposed to the slashing risks and conditions of each service the position has exposure to. This dynamic of entering into multiple restaking positions creates a looming problem tied to the innate properties of the positions themselves—the difficulty of assessing the risk related to compounding slashing exposure and the liquidity fragmentation that is a byproduct of the asymmetric risk present between restaking positions.

Introduction

Last week, Ion Protocol took part of another amazing discussion hosted by the team at Swell Network. We shed light on the advancements we’ve made in our underwriting and risk management framework, Clarity, for validator backed assets (VBAs). Our focus for this conversation was to thoroughly explain our approach and shine light on how innovations like Clarity can make DeFi more accessible for stakers, liquid stakers, restakers, and liquid restakers alike.

This is all in anticipation for Swell Network’s impending launch of their liquid restaking token (LRT). This article discusses some proprietary knowledge we’ve developed after months of research, and how we’ve positioned Ion to enable greater access to restaking for everyone.

Ion Protocol: Redefining Lending for Staked and Restaked Assets

Ion Protocol is built as a cutting edge lending & borrowing protocol for staked and restaked assets. This allows users that hold staked positions such as LSTs, LRTs and LST LP positions to lend, borrow, hedge, and compound their yields. Our collaboration with Swell, a trailblazer in the liquid staking and restaking ecosystems, will highlight the benefits of building asset-specific DeFi architecture that enables additional capital efficiency, minimized risk, and ultimately more opportunities for DeFi participants.

Our goal is to provide the best ETH-denominated yields in the DeFi ecosystem, and we’re really excited to bring this to fruition.

The Transition from LST to LRT

Daniel, CEO of Swell Network, noted that LRTs inherit the same advantages of LSTs that have facilitated the surge in LST popularity over the past year, however, they also introduce additional complexity and risk.

As compensation for opting into additional risk exposure and increased slashing risks, restakers are rewarded with additional yields. We predict that riskier AVSs will bear a higher yield, which will be passed on to the LRTs that supply capital to node operators for purposes of supplying security. Our partners at Swell echo the philosophy that risks and rewards must be clearly expressed to the end user in a transparent manner.

Open Problems for Restakers

In our research, we’ve discovered 3 problems that hinder the ability for restaking to scale. The first is the problem of fungibility, which Swell fixes by introducing their LRT. The inherent illiquidity of restaking positions makes them difficult to integrate into DeFi which creates opportunity costs for holders. These opportunity costs are exacerbated by the additional slashing risks restakers opt in to. Such risks also make it difficult to value and create a market for restaking positions.

Addressing Complexity and Risk

The discussion we had placed a large emphasis on the amount of risk that exists within the multitude of various AVSs enabling a wide array of slashing conditions. The lack of fungibility of restaking risk makes it difficult for users to manage their deposits in EigenLayer and for restaking positions to be supported in the greater DeFi ecosystem. Swell aims to address the first problem by creating a fungible representation of restaking positions, known as an LRT, thereby minimizing the user friction and overhead on delegating capital within EigenLayer.

Ion’s Underwriting and Risk Framework

Ion Protocol aims to address the second problem, to reduce the opportunity cost of depositing into Eigenlayer by enabling restakers to not only deposit in EigenLayer, but to collateralize that restaked position and use their capital in the rest of DeFi as well. Ion enables this by innovating on the approach to evaluating solvency for staked assets. Unlike the traditional focus on the speed of liquidating a position, Ion’s methodology assesses the redeemability of the underlying ETH, directly from the beacon chain.

Key Takeaways

1. Verifying Validator State is Crucial: Ion Protocol has established an exchange rate to measure the amount of redeemable ETH in a validator set against the outstanding supply of the LST or restaking position. This rate decreases when validators incur slashings or penalties and enables the risk engine to determine the true solvency of the underlying assets in the protocol.
2. Analyzing Slashing Risk Must Scale: Ion utilizes trustless systems powered by ZKML to predict slashing events by tracking the performance of node operators and validator systems with the aim of scaling the infrastructure across the Actively Validating Service (AVS or middleware) stack.
3. Underwriting in Restaking is Extremely Complex: The complexity of underwriting increases exponentially with the number of AVSs available for restaking. This necessitates the robust risk framework to scale restaking effectively.
4. LRTs have a Responsibility to Perform Operator Risk Analysis: Swell Network focuses on understanding the dynamics of delegation mechanisms and risk management, especially for large positions and diverse node operator setups. They realize the importance of this role as capital delegation to EigenLayer node operators will be managed at the LRT level.
5. Visualizing Risk is Just as Important as Analyzing It: One of the biggest barriers to building robust underwriting systems and informing the users of EigenLayer and restaking platforms will be the ability to accurately identify all of the risk vectors that an entity is opting into. This will make data visualization a priority to facilitate a robust ecosystem of restakers that understand their underlying risk.

Conclusion

The collaborative efforts of Ion Protocol and Swell Network are set to redefine the landscape of restaking in DeFi. By providing a robust risk and underwriting framework, we aim to expand opportunities for restakers, enabling them to maximize the benefits of restaking while minimizing their risk exposure. This includes offering functionalities like compounding staking yield, hedging, or borrowing ETH using price-agnostic systems. The future of staking requires the creation of novel financial primitives that are specialized for the asset class, and we’re excited to bring that to reality.