Community Call | How does Bifrost protect the protocol and asset security?

Below is an interview our CEO and Co- Founder Lurpis with Polkaworld about the security of Bifrost protocol and its assets.

• Introduction: Hello everyone. I am Liangzi from Polkaworld. Today, the topic of our call is a community-sharing Q&A about Bifrost. We have collected some questions from community members, and today we invited Lurpis, CEO and co-founder of Bifrost. Let’s answer them. Before the community Q&A, let Lurpis briefly introduce Bifrost and what is its well-known vToken.
• Lurpis: Thanks to Polkaworld for the invitation. Bifrost is a full-chain LSD developed based on XCM. The main difference between Bifrost and other LSDs is that Bifrost is a Layer1 protocol based on Polkadot Parachains for LSD services. Compared with traditional LSD, the main feature is that we can aggregate the liquidity of LSD and standardize LSD. Bifrost can issue corresponding LSD through cross-chain interoperability bridges, including XCM on other chains. The most significant difference is that the ultimate vision of Bifrost is to be able to mint any LSD on any chain. Through the SDK provided by Bifrost, we can mint $ASTR LSD on Moonbeam or mint $ETH LSD on Astar.

Q: Can you briefly explain what vToken is?

vToken is a generic term Bifrost uses for its Liquid Staking Assets. Currently, we have launched seven types of vToken:

• vDOT
• vKSM
• vETH
• vFIL
• vGLMR
• vMOVR
• vBNC

These are all Liquid Staking Derivatives of original token, and users can get staking income by holding vTokens.

vTokens can be sold anytime and used to deploy different DeFi strategies to generate more derivative income. vTokens improve the overall utilization of funds. vTokens also enhance the degree of decentralization of the overall network by lowering the minimum staking requirement enabling more users to participate in the validator staking.

Q: What is the difference between staking directly on Polkadot and Bifrost?

The threshold for staking through Polkadot.js is relatively high, and the income is unstable. Taking DOT as an example, DOT staking requires an unlocking period of 28 days, and a validator must be selected. Through Bifrost staking, vDOT can be obtained as liquidity and used to participate in liquidity farming and lending. There is no need to learn how to select validators and reduce learning costs: Bifrost can optimize the validator selection strategy through the SLP protocol to automatically select high-quality validators to maximize revenue.

Q: What is the benefit of staking through Bifrost, instead of staking directly on Polkadot chain? How does Bifrost compound interests?

Optimizing the validator selection algorithm, Bifrost automatically balances validator votes, and maintains the optimal strategy for node selection.

vToken offers compound interests. SLP first calculates the vToken and token ratio, receives staking rewards, then increases the vToken exchange rate and stakes the rewards into the validator again. Therefore, vToken is compound interest, and holding vToken can get compound interest.

Bifrost provides a higher staking APR by optimizing validators, the compound interest of income, and the derivative income of liquidity farming. So, it is higher than participating in staking on the original chain.

Q: What is the composition of vToken reward? How income and composability are distributed?

vToken is divided into basic income and derivative income. The basic income is just the staking income. On the latest version of the Bifrost Dapp, you can see how much income is awarded, daily.

Derivative income is the income of vToken used in different strategies.
For example, the income of vDOT liquidity farming is 5.2%. The derived income depends on how users use vTokens. Users could cross-chain their assets to other parachains to obtain higher income.

Q: Can vToken be issued ‘maliciously’? Is it possible to avoid additional issuance?

The issuance of vToken on Bifrost is restricted by the code, and there is no way to issue additional tokens artificially. Whenever a token is minted, a corresponding vToken will be minted. The code is open source and audited; it is impossible to overissue from the code level.

There will be no run on the full reserve, and no bad debts and loopholes will occur. The SLP protocol of vToken is the underlying protocol of Bifrost. It has been verified by time and different types of vToken.

1. Audited by multiple code audit companies
2. Internal cross-team mutual audit
3. Real-time monitoring and alarm of minting amount & reserve amount. A notice will be triggered once there is a specific difference between the reserves of vToken and token.
4. We also have an emergency response plan (after the alarm is triggered, it can be shut down through the reserved emergency shutdown interface)

Q: Why can’t users withdraw vToken earnings separately?

It can be withdrawn separately. For example, if you mint 100 vDOTs with 100 DOTs today, after some time, 100 vDOTs are equal to 105 DOTs. You can redeem 4.76 vDOTs = 5 DOTs; the remaining 95.24 vDOTs will still equal 100 DOTs!

You can also cooperate with the automated processing parachain, such as OAK, to write some auto-processing logic to realize this function.

Q: Talking about security, how does Bifrost mainly protect the security of funds? If we consider contract security and non-custodian security, will this generate slash penalties? How to insure users against the risk of Bifrost team escaping with their funds?

Bifrost code is open source and transparent, the security of funds is guaranteed by code constraints, which human beings cannot control, and trust is established through blockchain.

1. SLP protocol is audited by several top code auditing companies
2. Internal cross-team mutual auditing
3. Minting volume & reserve real-time monitoring and alarming
4. Emergency handling of Bifrost’s mechanism is designed to be an entire chain LSD. The core logic is excellent after the verification of time. All vTokens are developed based on the LSD protocol, and Bifrost is focused on making the overall security of LSD higher than the chain of multiple business lines or multiple business products. The general protocol security is also very safe and reliable.

Concerning the question about the Bifrost team escaping, the user’s assets are in the protocol, and there is no way to misappropriate the asset. Even if Bifrost has no one to maintain them, these assets will be on-chain, and users can take them out anytime.

The problem with a slash is that slash penalties are possible, and the Slash Bifrost whitepaper defines three ways to deal with it.

1. 20% of vToken commission revenue will go to vToken Slash public insurance fund.
2. 5% of BNC as insurance for the protocol.
3. If there is a slash vToken, the public insurance will pay out first; if it is not enough, the protocol insurance will be used to pay out. Suppose both the public and protocol insurance are insufficient to pay out. In that case, the vToken exchange rate will be adjusted downward, equivalent to the joint payout by all vToken holders. All vToken holders share the risk of slash, which is reduced, and as the SLP protocol runs longer, it becomes safer.

The probability of a slash is very low, and the amount is very small. The public insurance money solves the problem, and the SLP protocol has been running for a year and a half. There was only one slash due to an upgrade on Kusama, which was eventually cancelled through governance.

Q: Talking about redemption, when DOT is staking on the Polkadot chain, the normal redemption time is 28 days. The vDOT redemption time is 0~28. Why is the redemption time shorter than the normal redemption time? Can you clarify whether Bifrost has an immediate redemption function?

vDOT redemption has a matchmaking function. When minting a vToken, the protocol checks whether people actively seek to redeem in the redemption queue. If so, DOT will be paid to the redeemer first instead of staking. Through this, users receive their DOT back faster, with the redemption time shorter than the actual time. This depends on whether there is a new mint, so the redemption time is 0~28 days.

vToken can be redeemed immediately and can be redeemed through our lightning redeem. With the lightning redemption, assets can suffer market price fluctuations and slippage, with the DOT received directly. At present, Bifrost can meet the liquidity requirements of users.

Q: What are the risks of Farming on Bifrost? What are the risks for LPs? Is there a possibility of impermanence loss and how does Bifrost solve a possible lack of liquidity?

If vToken/Token trading pairs are provided, vToken farming has almost no risk. The only risk is that the comprehensive income is lower than the risk of staking income because providing LP needs to be paired, and half of the tokens have no staking income. If the staking income is higher than the farming income, it will be converted into vToken for higher income, and there will be no loss. Transaction fees and incentives will maintain a high level of liquidity, and Bifrost will optimize the vToken transaction pair algorithm to increase capital utilization.

Q: When we used DOT to mint vDOT, why was the minting ratio not 1:1? How the vToken staking income is distributed?

Because the price of vDOT relative to DOT has been rising, when vDOT is redeemed, the original token and the income are withdrawn together. The vToken includes staking income, and the staking income of vToken is issued by increasing the exchange rate, so the exchange rate of vToken/vToken will gradually increase over time.

Q: In this system, what is the revenue source of Bifrost?

The revenue sources include a 10% commission fee, a 0.1% unstake fee, and on-chain transaction fees. The protocol will make money if the vToken minting scale is large enough.

Q: Why is DOT inflation around 10%? In every era, the treasury will destroy all the funds if they are not released. Can the continuous destruction of these funds counteract some of the inflation?

In every era, the treasury destroys 1% of the DOT balance. If the treasury revenue increases and the balance increases, then the destruction will also increase, which can counteract part of the inflation.

Q: The average staking income of DOT is 15%? And vDOT’s basic staking income is 24%? Why is Bifrost staking returns so much higher? Is the source of staking rewards from the Bifrost project? In case of Bifrost fails, how do users get their assets back?

The income of vDOT includes basic staking income and derivative income. Basic staking income benefits immensely from Bifrost’s optimization algorithm for validator staking. This is usually 1% to 5% higher than the direct staking income. The other part is derivative income, such as using vDOT to provide liquidity. Therefore, the high income of vDOT is sustainable, and there will be no situation of inability to pay. At the same time, vDOT is completely decentralized, and the ownership belongs to users. Assets can be retrieved by interacting with the blockchain at any time. For example, here is a comparison chart from Bifrost’s Polkadot Decoded speech.

Q: Consider users who stake their DOT on Bifrost. If there is any issue or an unexpected market situation, will users assets also be involved?

Bifrost stakes DOT through its sovereign account. There is no private key, and no person or organization can control it unilaterally. Only in an extreme case where the Bifrost parachain is completely exploited by hackers will staked DOT be exposed to risks.

However, it takes 28 days for the DOT to be unstaked, and hacker attacks can be intercepted utilizing proposal governance, etc. At the code level, Bifrost has been audited by different auditing firms, and the SLP protocol has been running for nearly two years with zero accidents. Hence, the probability of emergencies is very low.

Q: Considering the actual market conditions, there is somewhat not sufficient liquidity in the Polkadot ecosystem. How do you solve the problem of inadequate liquidity?

At the current market stage, the whole industry is facing the problem of insufficient liquidity. On the one hand, the market is not active enough. On the other hand, there is a lack of new capital. The Polkadot ecosystem can respond to this problem in two ways:

1. Aggregate the liquidity as much as possible through technological means to improve the utilization rate of the funds.
2. Establish a more secure and decentralized cross-chain bridge to bridge the Polkadot ecosystem with more blockchains to increase liquidity. Bifrost is also working on building liquidity in the Polkadot ecosystem through these two aspects.

Q: What other vTokens (vPHA, vATOM, vASTR, vMATIC, vAVAX) will be launched in the future, and when are they expected to be launched?

Bifrost will release major new products and technologies in the second half of the year. The vTokens that will be launched next cannot be announced to the public yet, but Bifrost already has the technical capabilities to establish and integrate new vTokens quickly.

Q: Will Bifrost launch a lending feature, soon? Is it true that there is a plan of issuing a stablecoin? What can vToken do on top of that?

Bifrost has no plans to do stablecoin business on its own! Still, it will cooperate with stablecoin projects so that vToken can be used as collateral for minting stablecoins, increasing the usage and revenue of vTokens.

Q: Why does Bifrost loan KSM from the treasury? Is Bifrost profitable?

I would call it loaning liquidity from the treasury.

These liquidity loans have two purposes.

1. Make vToken more abundant by bringing more derivative income and application scenarios for everyone holding vToken.
2. Liquidity loans return the earnings to the treasury, which helps the treasury to make more money.

Q: Can you briefly introduce the return to Asgard NFT and when it will be launched? Is the goal here to improve the overall Bifrost liquidity?

Bifrost recently announced the launch of the Back to Asgard NFT program. Users who participated in Bifrost’s Rainbow Boost early got a whitelist spot.

Back to Asgard is a NFT collection tailored by Bifrost for its community. Only community members who have actively contributed to Bifrost through rules and screening mechanisms can obtain it, and holding a Back to Asgard NFT it is of a great importance to members of the community.

Bifrost plans to integrate Back to Asgard NFT within the product.
Back to Asgard holders will be able to benefit by bot off-chain and on-chain benefits and advantages. It will be a unique way to connect DeFi interoperability and NFT roles. Back to Asgard characters will have different levels of rarity and at each level of rarity, corresponds a specific feature and advantage.

The launch date of Back to Asgard NFT is yet to be announced!

Q: Polkadot has launched OpenGov recently, and DOT holders can participate in voting proposals. DOT staked by users on Polkadot.js can vote on proposals. Can vDOT be used to participate in OpenGov voting?

Bifrost itself will support the governance of OpenGov. In the later period, Bifrost’s vToken will retain the ability of users to participate in the governance of the original chain. The function of vDOT & vKSM to support OpenGov voting is under development!

Q: Regarding Gavin’s recent announcement on Polkadot Decoded to redefine the parachain slot auction, it may completely reform the slot auction form and make more extensive use of Polkadot’s network resources in the form of the core. Bifrost is an LSD track in Polkadot. Will changes in the underlying mechanism of Polkadot affect the design of Bifrost? Does Bifrost need to make corresponding adjustments according to Polkadot’s adjustments (at least after this change, there will be no two-year lockup)

The conversion of slot auctions to Coretime will bring about two changes: the threshold for developers to enter the Polkadot ecosystem will be significantly reduced, enabling the fast implementation of more innovation in the Polkadot ecosystem.

The economic model of the parachain will change, and the economic model designed around Coretime will be more closed-loop and efficient.

This change is of great significance to the future development of the Polkadot ecosystem. We are very optimistic about the occurrence of this change. Bifrost will also actively upgrade and adapt according to the latest rules of Coretime.

Q: Thank you for your time!

Thank you! It has been my absolute pleasure.