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On July 18th, Jonas, a research scientist at the Web3 Foundation, posted on the Polkadot forum suggesting reducing the annual inflation rate of DOT from 10% to 8%, with 15% fixed inflows to the treasury. This is to address Polkadot’s budget crisis and attempt to further revitalise DOT staking and Liquid Staking. Interestingly, since Ethereum’s Shanghai upgrade in April 2023, the market has held high expectations for Liquid Staking in ecosystems like Polkadot, Cosmos, Sui, and Aptos. However, compared to the flourishing ETH/SOL Liquid Staking Token (LST)/Liquid Restaking Token (LRT) track, other blockchains’ staking tracks seem tepid, lacking strong momentum. At this critical moment, Polkadot has launched a reform targeting the inflation rate. Could this be an attempt to force the staking track to develop new variables, and will Polkadot’s Liquid Staking track break through during this challenging time? Polkadot Is Not Alone: High Staking Rate, Low LST Penetration Rate As is well known, Proof of Stake (PoS) chains rely on native token staking to ensure security. Therefore, to incentivize network-wide participation in staking to maintain network security, some PoS chains offer annual staking rewards in double digits or higher, facing high inflation pressure. Polkadot, Cosmos, Sui, and Aptos generally have much higher staking rates compared to ETH. Under high inflation, if token holders do not actively participate in staking, their shares will be gradually diluted by other stakers. According to Staking Rewards data, compared to Ethereum’s approximately 28.58% staking rate, other major PoS chains have staking rates above 50%—Sui at 78.77%, Aptos at 77.44%, Cardano at 62.6%, Polkadot at 58.8%, and Avalanche at 54.89%. Staking Rewards In terms of absolute staking volume, apart from Solana’s unique position with $56.75 billion in staking, Polkadot, Sui, Aptos, Cardano and Avalanche also have staking ecosystems over $3-5 billions, providing the foundation for the further development of the LST track. However, the paradox is that in the current PoS ecosystem, chains like Polkadot face a “high staking rate but extremely low LST penetration” anomaly: DOT has 891 millions staked tokens, valued at over $3.67 billion, but the leading LST protocol Bifrost holds only about 8.563 million DOT, with a total market value of just $35.6 million. This means DOT’s LST share (Bifrost) accounts for only 1% of the total staked DOT volume, with most token holders opting for native staking and nomination pools instead of liquid staking. Assuming Bifrost’s market share remains unchanged, and if liquid staking penetration in Polkadot reaches anywhere around 10%, it would mean Bifrost’s DOT TVL surpasses 55 million DOT, valued over 350 million USD. This scale is sufficient to stimulate the development of DeFi primitives on top of LSTs. This situation of high staking rates and low LST penetration is not unique. Other PoS chains mentioned also face similar issues. The main reason is that the native staking annual yields of new PoS chains are already high enough, but other use cases within the ecosystem are very limited, offering few opportunities and low yields. Even if users hold LST assets, they have limited options for additional yields, reducing the incentive to participate in liquid staking. In contrast, Ethereum’s situation is different, with rich DeFi primitives and composability, LST holders can achieve additional yields through various opportunities. Moreover, with Ethereum’s native staking rate only 3-4%, even a 4% additional yield doubles the original yield, providing more motivation for users to use LSTs. The Great Debate : Polkadot’s Inflation Earlier on in July, several Polkadot ecosystem builders opened up a community-wide discussion regarding the adjustment of the DOT inflation rate and its potential impact on the overall Polkadot network security and DOT staking rate, sharing their perspectives on how to reduce net inflationary pressures. Interestingly, all attendees, including Web3 Foundation research scientist Jonas, Web3 Foundation technical educator Filippo, ChaosDAO co-founder Alice_und_Bob, Mark Cachia founder of Scytale Digital, and Fellowship member Kian, largely support reducing the DOT inflation rate to balance network security, investor interests, and project development needs. As for the specific inflation rate reduction and what kind of dynamic assessment and adjustment mechanism to adopt, everyone has their views. A good tl;dr was made by 0xGoku in this thread, many aspects have to be taken into consideration: Overall, if the maximum DOT inflation rate could be successfully reduced to 5% (i.e., halved), and a flexible parametric mechanism established to adjust the inflation rate according to actual conditions, it might result in some immediate loss of direct income for staking users, particularly large holders. However, from a long-term perspective, this is undoubtedly a significant positive for the entire Polkadot community. Once liquid staking solutions and products building on top of them can deliver significant yield improvements, users’ perception towards LSTs will undergo a significant shift - in terms of diversifying and holding LSTs to have exposure to greater yield scenarios. Thus, if DOT inflation could indeed be halved, it would not only likely promote the prosperity of the Polkadot liquid staking ecosystem but also bring more vitality and innovation to the entire ecosystem, greatly enhancing users’ willingness to use LSTs and driving the development and expansion of solutions building on top of liquid staking, to driving more on chain activity and growth. Can Bifrost’s vDOT Ride the Wave? The idea of reducing the inflation rate will undoubtedly create a “crowding-out effect” on Polkadot’s staking/LST ecosystem: As native yields decrease, users will actively turn to LSTs to seek additional yield opportunities, helping to increase LST penetration, promote more efficient capital allocation, and potentially drive more diverse and rich financial services in the entire Polkadot ecosystem. However, reducing the inflation rate may temporarily affect investor confidence, causing some funds to flow out. Thus, the Liquid Staking products within the ecosystem need to be strong enough in terms of yield and security. For example, Bifrost has shown impressive performance in three dimensions: richer composable yields, multi-layered security guarantees, and comprehensive governance rights inheritance (governance inheritance, airdrop inheritance). Richer Composable Yields Bifrost is expanding application scenarios around vDOT on a regular basis. Besides generating staking yields, vDOT can also be used in lending protocols, DEX, and farming protocols in DeFi to generate multiple yields. Bifrost has launched a leveraged staking product called “Loop Stake” for vDOT and vKSM, allowing users to set and manage leverage based on their risk preferences and complete leveraged staking with vDOT and others in one click. This significantly attracts users, as liquid staking on Bifrost becomes a flexible and leveraged investment. Currently, Loop Stake has attracted over 94,000 DOT supplies and nearly 85,000 DOT borrowing demands, achieving initial results. Ordinary users can also leverage vDOT’s composability across chains to directly use Bifrost Parachain services and liquidity on other Polkadot parachains and more heterogeneous chains. Bifrost actively collaborates with other projects and ecosystems within the Polkadot ecosystem to enhance vDOT’s impact and application range, providing more value to users in the ecosystem, examples of this have been, vDOT being the largest collateral asset on Interlays lending market and for securing their decentralised trustless iBTC vaults as well as vDOT popular usage on Hydration Yield DCA feature allowing users to DCA their DOT staking rewards into other ecosystem assets. Multi-layered Security Guarantees Security is the lifeline of Liquid Staking products. vDOT has established multi-layered security mechanisms to effectively prevent various potential risks and attacks: At the base level, it relies on Polkadot’s shared security as a parachain, with security and anti-reorganization protection provided directly by the relay chain. Bifrost Polkadot chain now has over 32 collator nodes, ensuring network availability and making transactions hard to censor. Bifrost uses XCMP (cross-chain message passing protocol) for cross-chain security protection to ensure trustless, secure and accurate message transmission during cross-chain interactions. Given that staking assets essentially serve as node collateral, there is a Slash risk for node misbehavior. To minimize Slash losses, Bifrost evaluates validator nodes’ yields, leverage (self-staking ratio), and historical credit. In case of Slash risk, it switches nodes immediately to prevent loss escalation. An insurance pool, vToken Vault, is also set aside to cover user losses with 5% of protocol revenue. Bifrost undergoes strict security audits by professional thirty party security teams (Common Prefix, Slowmist, Oak Security) to scrutinize SLP’s code, mechanisms, and operating environment, promptly identifying and fixing potential vulnerabilities. Comprehensive Governance Rights Inheritance ETH doesn’t have governance token attributes, so the governance rights and airdrop inheritance for LSTs have received little attention. However, for PoS chains like Polkadot and Cosmos, which have governance attributes, LST governance rights and potential airdrops eligibility are critical. Bifrost adopts a “governance inheritance” mechanism, allowing vDOT to participate in Polkadot OpenGov governance. This way, governance rights remain with the stakers and are not transferred to the Bifrost protocol. Users who want to participate in governance can liquid stake and use their Bifrost LSTs “vTokens” in governance, balancing decentralized governance and staking yields. During this period, if there are ecosystem project airdrops for DOT stakers, vDOT holders can inherit airdrop eligibility, just like DOT holders: e.g., vDOT holders have received airdrops of Polkadot ecosystem meme tokens $PINK and $DED (even if the DED team sent the tokens on the wrong address). This addresses user concerns, further encouraging staking and governance participation. Users who might hesitate to stake due to fear of losing governance rights and airdrop opportunities are now more willing to stake with such guarantees. Conclusion The prosperity of PoS chain ecosystems like Polkadot depends on the thriving Liquid Staking track. LST is a strategic support and key leverage point for PoS chains to build DeFi niche assets, and create on-chain prosperity, activity and growth : LSTs like vDOT can effectively activate the liquidity of staked assets and introduce a new type of DeFi assets with inherent yield attributes, invigorating the on-chain ecosystem with diverse product forms based on yield rights. While Ethereum’s LST ecosystem continues to evolve, chains like Polkadot are also seeking breakthroughs. As Polkadot begins to implement internal reforms like reducing inflation rates, leading participants like Bifrost might touch key transformation points, triggering a positive flywheel effect.

Liquid staking has emerged as the largest part in decentralized finance (DeFi) by Total Value Locked (TVL), serving as a crucial foundational infrastructure in DeFi. After intense competition, each public blockchain has effectively established its own leading Liquid Staking Token (LST) protocol—for example, Lido on Ethereum and Jito on Solana. Turning our attention to Polkadot, Bifrost stands as the leading LST protocol within its ecosystem. Boasting a TVL exceeding $100 million, it accounts for over 60% of the total TVL in Polkadot’s Liquid Staking Tokens (LST). However, this dominance wasn’t always the case. Bifrost entered the Polkadot LST arena relatively late and initially lacked scale advantages. So how did Bifrost, through steady and strategic progress, achieve such a remarkable turnaround in growth? Let’s delve into its journey. From Zero to One: Exploration and Building On July 15, 2021, Bifrost participated in the Kusama parachain auctions and won one of Kusama’s Top5 slots by raising over 140,000 KSM through its crowdloan. Shortly thereafter, the Bifrost network officially connected to Kusama, becoming a Kusama parachain. Through our continuous upgrades and refinements, the Bifrost Kusama parachain entered the stable operation phase of the mainnet. During this phase, Bifrost built the Staking Liquidity Protocol (SLP), launched vETH, and completed the initial exploration of its LST business. Continuous Expansion and Steady Advancement Between 2022 and 2023, Bifrost successfully won a Polkadot slot auction and migrated most of its operations to the Bifrost Polkadot Parachain. It successively launched six LSTs of parachain asset: vKSM, vDOT, vMOVR, vGLMR, vBNC, and vASTR. During this phase, vKSM became the primary contributor to Bifrost’s TVL. Through several Rainbow Boost events, the total minted volume of vKSM grew from about 50,000 to a peak of around 500,000, and currently stabilizes at around 350,000, with a market share exceeding 60%. What Makes vToken So Attractive? While growth may seem superficial and incentives from operational activities offer only short-term effects, the fundamental reason behind Bifrost’s sustained TVL growth—and its explosive surges when opportunities arise—is its continuous development and accumulation. The suite of extended services that Bifrost has built around vTokens provides holders with greater capital efficiency and flexibility. These extended services include: Node Delegation Strategy and Slash Protection: Based on VBL, Bifrost adopts a flexible node delegation strategy, which allows vToken yields to be slightly higher than competitors. When nodes experience failures or security risks, it automatically switches nodes to ensure that holders’ earnings are not affected. Moreover, Bifrost provides protection against slashing through the BNC Vault. When a slash loss occurs, the funds in the vault are used first for compensation, ensuring that users’ earnings are not impacted. Governance Rights Inheritance: vTokens can be used to participate in OpenGov governance (currently supporting vDOT and vKSM, with more vToken governance support coming soon). For stakers, governance rights always remain in their own hands and are not transferred to the Bifrost protocol. For users who inherently need to participate in governance, staking for vTokens first and then using vTokens to participate in governance allows them to earn additional staking rewards—why not? Rich Applications: All LSTs aim to unlock liquidity, allowing users to enjoy both staking rewards and liquidity. However, the key issue is how users can realize or utilize this unlocked liquidity. Therefore, Bifrost is always committed to expanding the use cases of vTokens. vToken Use Cases Within the Bifrost Dapp, we’ve aggregated various use cases for vTokens. Using vDOT as an example, let’s delve into these possibilities. Swap vDOT can be swapped to DOT at any time thanks to the deep liquidity we’ve established. Beyond the official pool, we’ve provided liquidity on Moonbeam (Stellaswap, Beamswap), Astar (Arthswap), and Hydration to facilitate swaps across these chains. Earn vDOT is inherently an interest-bearing asset, accruing staking rewards from the underlying staked DOT. However, for vDOT holders, this is just one stream of income. vDOT can also generate additional earnings through supported DeFi protocols. Liquidity Provision: Pair vDOT with DOT to create liquidity provider (LP) tokens, supplying liquidity in the official pool or third-party pools like Stellaswap, Beamswap, Arthswap, and Hydration. This allows you to earn LP rewards. Given the minimal price fluctuation between vDOT and DOT, concerns about impermanent loss are significantly reduced. Lending Platforms: Deposit vDOT into Interlay’s lending pool to earn additional interest. Loan Through Interlay Lending, you can deposit vDOT as collateral to borrow other assets such as DOT or iBTC. Looping Strategy: Borrow DOT, stake it for more vDOT, and repeat the process to engage in arbitrage through looping. Diversified Investments: Borrow iBTC to utilize in broader income-generating scenarios across different platforms. Loopstake On March 13, Bifrost launched Loopstake, a leverage staking tool for Polkadot assets (supporting up to 4x leverage). Accessed via the vToken management interface in the Bifrost DApp, Loopstake offers seamless, one-click leveraged staking. Initially supporting DOT and KSM, there are plans to expand to more parachain assets in the future. In summary, we can say: Anything DOT can do, vDOT can do as well; whatever benefits DOT holders have, vDOT holders also enjoy. The same applies to other vTokens, which is why vTokens are favored by stakers! Currently, vTokens hold a dominant market position in the Polkadot ecosystem. Both vDOT and vKSM command over 60% of the market share, and on many parachains, Bifrost serves as the exclusive LST protocol, occupying nearly 100% of the market share. A New Journey: Omnichain LST and vMANTA Due to the interoperable multi-chain structure of the Polkadot ecosystem, Bifrost adopted a different approach from other LSTs when building the vToken module, namely the SLP. In supporting parachain asset LSTs, Bifrost uses its own parachain as the sole protocol hub rather than deploying on multiple chains. When users mint vTokens on other chains, the process involves three steps: cross-chain transfer → minting → cross-chain transfer. For example, when a user deposits MOVR to mint vMOVR on the Moonriver chain, the MOVR is first transferred cross-chain to the Bifrost chain, minted into vMOVR, and then transferred back to Moonriver for the user. We call this the “Omnichain Architecture.” It enables a chain abstraction level user experience, allowing users on other chains to interact with the vToken module on the Bifrost chain to perform remote minting, redemption, swap, and other activities—without the need for intermediate cross-chain steps. This architecture also allows vTokens to derive multi-chain yield combination strategies, achieving maximum capital efficiency. Earlier this year, Manta launched its mainnet. When the Manta chain needed an LST service provider, Bifrost became the preferred choice and received support from the Manta Foundation, primarily because Manta itself has a multi-chain architecture. Manta operates two chains: Manta Atlantic and Manta Pacific—the former being a Substrate chain and the latter an EVM chain. However, Manta aims to avoid ecosystem fragmentation between these two chains. Bifrost’s omnichain architecture allows users on both Manta Atlantic and Manta Pacific to access Bifrost’s LST services locally to mint, redeem, and trade vMANTA. Moreover, applications on both chains can easily integrate vMANTA, providing it with more use cases. This is the unique advantage of the omnichain architecture Currently, vMANTA’s market share among LSTs in the Manta ecosystem has reached over 94%. However, for Bifrost, this is just the first step in its omnichain LST journey. While Bifrost originated from Polkadot, its goal is to leverage the omnichain architecture to provide LST services for more heterogeneous chains—as cross-chain infrastructure matures and trends like chain abstraction and intent-based application development gain traction. There’s still a lot of work to be done!

TL;DR In the Bifrost Tokenomics 2.0 proposal, Bifrost plans to use 100% of protocol profits for BNC buybacks, with 90% allocated to bbBNC holders and the remaining 10% to be burned. Highlights In the second half of 2024, the core mission of the Bifrost Team is to launch Bifrost 2.0. This major update includes several key initiatives: Bifrost will launch its new tokenomics. Complete the cross-chain integration and merging of Bifrost Kusama and Bifrost Polkadot parachains into one. Achieve decentralization of the Bifrost Polkadot Collator set. Ensure compatibility with the EVM ecosystem and establish cross-chain connectivity with Ethereum and its L2. Launch the BNC 2.0 launch campaign. In the field of cryptocurrency, there is a viewpoint that suggests: Tokens are a greater invention than blockchain technology itself. This statement may sound sensational, but it serves as a reminder that tokenomics design is crucial for the success of crypto protocols and broadly for businesses. The Bifrost Tokenomics 2.0 proposal has been released in the community, and the most significant change in the proposal is the introduction of bbBNC (Buy Back BNC). bbBNC, is obtainable by obtaining Bifrost liquid staking token “vBNC” and locking it. Holders of bbBNC receive staking rewards accrued in vBNC, enjoy protocol governance rights, and directly share Bifrost protocol Profits. Bifrost Tokenomics 2.0 Proposal This proposal suggests using 100% of the profits from the Bifrost protocol for the buyback of BNC, with 90% allocated to bbBNC holders and the remaining 10% to be burned. bbBNC, short for Buy Back BNC, is a type of escrow token used for sharing the protocol’s profit. *Protocol Profits = Protocol Revenue - Operation Cost How to obtain bbBNC Users can obtain bbBNC by liquid staking BNC to acquire vBNC and then locking this vBNC to receive bbBNC. The amount of bbBNC a user gets depends on the quantity of vBNC locked and the duration of the locking period. For example, the longer a user locks vBNC, the more bbBNC they receive. This mechanism mirrors the veCRV mechanism in the Curve protocol. In past community activities and Bifrost campaigns, participants earned Raindrops points. After the launch of Bifrost 2.0, these points can be exchanged for bbBNC. These bbBNC will not be minted directly but disbursed from the Bifrost treasury. bbBNC is non-transferable and can be redeemed for locked vBNC upon maturity. However, bbBNC can be redeemed before maturity, but users may face slash for redeeming earlier than the set date. Slash will be fully counted as protocol revenue and will participate in BNC buybacks, burns, and bbBNC incentives. Benefits of Holding bbBNC Holding bbBNC entitles you to the following benefits: Profit Distribution: bbBNC holders will share protocol profits. The distribution proportion depends on the amount of bbBNC held and the length of the locking period. The larger the holding and the longer the lock-up period, the higher the share of the profit distribution. Staking Rewards: bbBNC, obtained by locking vBNC, integrates the staking rewards from liquid staking BNC. Governance Rights: bbBNC inherits the governance rights of BNC, allowing holders to participate in the governance of the Bifrost protocol. Boosted farming: bbBNC holders can receive additional incentives when participating in vToken farming. Sources of Bifrost Protocol Revenue As a leading cross-chain liquid staking protocol, Bifrost generates multiple streams of protocol revenue, including: vToken Commission: The protocol earns a commission from staking rewards through its liquid staking services, which are then transferred to the protocol treasury. This is a significant part of Bifrost’s revenue. System Staking: This is generated by staking assets within the Bifrost system account. Tx Fee: As an independent app chain, Bifrost charges gas fees for transactions on the Bifrost chain. A percentage of these fees is allocated to the Bifrost treasury. vToken Swap Fees: Bifrost establishes liquidity pools for vTokens. Users pay fees when using these pools to swap vTokens. Most of these swap fees go to liquidity providers (LPs), and a portion will be shared with bbBNC holders. Expanded Application Revenue: Bifrost will also launch various extension application services centered around liquid staking, including LST leverage staking (Loop Stake). Users utilizing these services will generate revenue for the Bifrost protocol, thereby providing returns for bbBNC holders. bbBNC Early Redemption Slash: If bbBNC is redeemed before maturity, a certain slash will be incurred, and the slash will be fully allocated to protocol revenue. The Significance of bbBNC for the Bifrost Protocol In the current Bifrost Tokenomics, the main revenue of the protocol enters the treasury and is directly used for business expansion (such as vToken minting incentives, liquidity incentives, channel incentives, etc.). This model has played a role in promoting Bifrost’s business growth, but it has not provided direct benefits to BNC holders. In the Bifrost Tokenomics 2.0 proposal, it is assumed that 40% of staking BNC be converted into bbBNC. Based on the current revenue scale of the Bifrost protocol and the price of BNC, the annualized yield for holding bbBNC could exceed 100%. Higher BNC value capture leads to a higher market capitalization for Bifrost, which in turn drives more LST application scenarios. More application scenarios will promote an increase in the comprehensive yield of vTokens (staking yield + vToken restaking yield), resulting in more vToken minting. More vToken minting means more protocol revenue, which will enhance the returns for bbBNC holders, further capturing more value for BNC and forming a positive growth flywheel. bbBNC serves as the engine of this growth flywheel, aligning the interests of token holders closely with those of the Bifrost protocol and providing greater motivation to contribute to the co-development of the Bifrost protocol. Bifrost 2.0 Roadmap The Bifrost 2.0 upgrade has officially launched. Below is the ongoing roadmap. You can join Bifrost Discord community to get the latest updates or participate in the proposal discussions on the Bifrost Tokenomics 2.0 in the gov-discussions channel. Summary DeFi protocols are among the few crypto market sectors that have successfully achieved Product-Market Fit (PMF), with many demonstrating stable profitability. However, DeFi protocol tokens have primarily served as governance tokens, giving holders no share of the revenues generated. These tokens should represent total equity, not just governance rights. We believe that as the community becomes more aware, the market shifts from financial nihilism to value investing, and regulatory policies become more explicit, sharing profits with token holders will become the norm for DeFi protocols. Examples like Uniswap announcing revenue sharing with UNI holders and Bifrost introducing bbBNC in its new economic model are responses to this trend. Founded in 2019, Bifrost has matured through two market cycles, refining its product and operational strategies to achieve stable business and revenue generation capabilities. With its pioneering efforts in chain abstraction, Bifrost has enormous growth potential. As more capital flows into the ecosystem, the protocol’s value and revenue will continue to rise. The launch of bbBNC will officially lead Bifrost towards community governance and community sharing, establishing a robust and resilient protocol.