Bringing Stellar Liquidity to Polkadot: Loan DOT Collateral for Pendulum’s Spacewalk Bridge Vaults

Proponent Address: 16ihePnYtZfCpAF5th2GKQq2N8gAPa3o4D8ikQNUdreTXUjh
Requested Amount: 50,000 DOT
Date: 08/05/2024
Short Description: Enable Stellar liquidity to the Polkadot ecosystem via the Spacewalk bridge, by loaning 50,000 DOT to be used for collateral.

TL;DR

The Pendulum team is requesting 50,000 DOT from the treasury to be utilized as collateral for primarily bridging stablecoins from the Stellar ecosystem. The DOT will be staked on Bifrost, and vDOT will be used as collateral.

Following positive feedback from the discussion on this topic we are moving forward with initiating this proposal.

Updates since posting:

1. Response to feedback from our Co-founder, Alex Wilke.
2. Video link to prototype off-ramping EURC from Polkadot to bank with Spacewalk and Stellar in the backend.

Summary

The Pendulum team has launched Spacewalk (try it here) a decentralized bridge between the Stellar and Polkadot ecosystems, with an aim to bring interoperability to the two major OG ecosystems. This capability enables:

• The use of Stellar's XLM token and its vast array of stablecoins and standardized fiat ramps.
• Any Polkadot application to directly connect to fiat liquidity in countries like Australia, Brazil, Argentina, Mexico, Tanzania and the European region.
• A simplified user onboarding to Polkadot's DeFi world, enabling use cases like cross border payments, lending, RWAs, Forex, gaming, NFT marketplaces.
• The Stellar community to interact with parachains and dApps in the Polkadot ecosystem.
• The Polkadot community to utilize the on and off ramp capabilities of the Stellar network, in multiple local currencies and regions. See prototype demo.

Increasing the vault collateral is required to increase the capacity of the bridge, such that users can bridge more liquidity from Stellar to Polkadot.

Why Vaults?

The Stellar Classic blockchain does not currently operate with smart contracts which means that an efficient burn-and-mint approach using smart contracts does not work in this case. The XCLAIM protocol can be used for trustless bridging of assets between blockchains where just one of the two is smart contract-capable. In this protocol, vaults are non-trusted intermediaries bound by collateral to ensure benign behavior. Vaults are active on both networks and relay transaction data to Pendulum. This protocol is already used by interBTC to bridge BTC between Bitcoin and Polkadot.

Spacewalk uses a vault system, similar to InterBTC’s mechanism, to ensure secure transfers. Spacewalk has successfully passed a security audit conducted by Certik, ensuring its reliability and safety. This proposal should lead to new liquidity and opportunities for the Polkadot community from Stellar's established ecosystem and fiat-connected infrastructure.

Proposal

Summary

• A one-year lock-up period for the vDOT collateral
• Full loan to be returned after one year
• Reduced liquidation risk with the DOT community having deciding power over the overcollateralization amount above the 160% standard (Vault collateralization Github code here)
• Vaults managed by SatoshiPay, a blockchain technology company since 2014, Stellar partner since 2017, and builder of Polkadot’s parachain Pendulum

Implementation

If accepted, this proposal will transfer the requested DOT to a 5/8 multi-sig account co-owned by the Polkadot community and Pendulum/SatoshiPay team members:
Alex Wilke
Torsten Stüber
Tansel Inanc
Arjun Yadav
Birdo
Alice und Bob
Alex Theissen
Michael Müller

The full DOT will then be staked on Bifrost to accrue staking rewards.
The resulting vDOT will then be sent to the SatoshiPay vault account on Pendulum, in tranches of 10k vDOT.
The vDOT will be locked in a Spacewalk vault with a 200% secure collateralization, to minimize the risk of any potential liquidation

Please note, the multisig is only a device to execute the intention of OpenGov and all liability if executed as intended by OpenGov stays with OpenGov.

Using Bifrost’s vDOT as collateral instead of native DOT offers key benefits, notably in capital efficiency. When using vDOT, the DOT remains staked, continuing to earn an approximate 14% reward during the loan period. OpenGov has recently approved a loan proposal from Bifrost for 500,000 DOT, the largest liquid staking DOT LST in the ecosystem, underscores Bifrost's credibility in the field. Furthermore, teams like HydraDX have also used vDOT for their liquidity incentives which can be found here.

Further additions of vDOT collateral can be requested to the multi-sig as demand increases. Within the Polkadot community, the necessity for technical expertise to directly manage a vault would not be needed in the initial phase as the SatoshiPay team will oversee this process.

Use of Staking Rewards
The staking rewards will be used to incentivize more external vaults to provide collateral for Spacewalk bridge and further decentralize the bridge security network.

Loan Repayment
At the end of July 2025, the DOT collateral provided by the Polkadot treasury will be fully returned to the Polkadot treasury, or an extension will be requested. The plan is as follows:

1. External vault operators will be incentivized to join the network.
2. Once enough external vaults join, the vDOT collateral will be unstaked and sent to the multi-sig account that is co-owned by the Polkadot community members.
3. The vDOT will be returned to unstake the DOT on Bifrost.
4. After the initial DOT is unstaked, it will be sent back to the treasury: 13UVJyLnbVp9RBZYFwFGyDvVd1y27Tt8tkntv6Q7JVPhFsTB

Conclusion

This proposal aims to tightly integrate Stellar and Polkadot via Pendulum's Spacewalk bridge, enhancing liquidity and interoperability. We invite feedback and support from the Polkadot community as we embark on this exciting journey towards an interoperable cross-chain future.