Just last month, the Bifrost ecosystem staged a thrilling "fund robbery". A user who accidentally lost his private key watched 220,000 vDOTs fall into the hands of scammers, but he was helpless. This was just the beginning of the nightmare. The scammers couldn't wait to exchange these vDOTs for DOTs, just like a hungry beast feasting on them, completely ignoring the slippage losses in the exchange process.
The consequences of this "gluttony" can be imagined: Bifrost's stable pool DOT reserves were quickly drained! The price of vDOT also fell to the bottom, as if overnight, the former "star" token lost its halo. However, the climax of this tragedy has just begun, and a group of "taking advantage of the fire" arbitrageurs have heard the news and are ready to take advantage of the sharp fluctuations in the price of vDOT to build a large position in order to make a fortune.
As a result, a "capital game" driven by algorithms was fiercely staged in Bifrost. The flow of funds in the vDOT pool accelerated, and every exchange affected the nerves of the market. At the center of this storm, Bifrost's SLP protocol and LST stable exchange mechanism played a crucial role. They are like Bifrost's "stabilizing force", maintaining the balance of the system in turmoil.
So, how do these two mechanisms work? What kind of protection do they bring to vDOT in extreme market conditions? Next, let’s restore the whole story, analyze the operating mechanism of Bifrost in depth, and see how it survived this crisis.
1. What happened: 72 hours of terror
It all started on May 18th. On that day, an unlucky user accidentally lost his wallet private key, causing 220,000 vDOT assets to fall into the hands of scammers. Afterwards, the scammers could not wait to exchange the stolen vDOT for DOT. In their eagerness to cash out, they completely ignored the slippage loss during the exchange process, resulting in the rapid depletion of the DOT reserves in the Bifrost stable pool. The price of vDOT also plummeted, once hitting the exchange limit.
Before everyone came to their senses, a group of arbitrageurs with unique vision smelled a business opportunity. They keenly discovered that the price of vDOT had hit the bottom. So, they had an idea and thought: since the price of vDOT is so low now, why not buy a large amount and sell it at a high price after the price rises? Wouldn’t it be easy to make a profit this way?
As soon as they said it, these arbitrageurs quickly invested their DOTs into Bifrost and exchanged them for vDOTs, which were severely undervalued, successfully filling the liquidity gap and rebalancing the capital pool. Some experts who know how to take advantage of the arbitrage space between protocols have gone to other DeFi platforms such as Interlay to raise funds using the DOT lending function, and then exchanged the borrowed DOTs for vDOTs on HydraDX. They accurately took advantage of the price differences between different platforms, using small gains to make big profits, and carried out arbitrage operations of buying low and selling high.
For a while, Bifrost's vDOT pool was very busy, with funds flowing in and out. The originally unbalanced stable pool regained its vitality with the participation of a large number of arbitrageurs.
But there is no such thing as a free lunch. When these arbitrageurs tasted the sweetness and began to redeem vDOT back to DOT, preparing to repay the loan and earn the difference, they accidentally triggered the redemption cap mechanism of the Bifrost protocol. It turned out that the system detected that the recent demand for redemption of DOT was too hot, and was worried that too much redemption behavior might endanger the safe operation of the stable pool. Therefore, Bifrost decisively launched a risk control plan and temporarily stopped more requests for redemption of DOT to maintain the stability of the entire ecosystem.
2. Rainbows after storms: Bifrost’s self-healing capabilities
After a few days of chaos, Bifrost finally survived this "trust crisis". The current situation is encouraging. The stable exchange pool has resumed normal operation. The exchange difference between vDOT and DOT remains at around 2.79%. Although it is slightly higher than before, it is still within the controllable safety range of the protocol. This data just shows that the market's confidence in vDOT is gradually recovering.
Fortunately, despite the drastic market fluctuations, the minting process of vDOT has not been affected at all. Whether it is price fluctuations or capital flows, the minting business on Bifrost has maintained normal operation, which strongly proves the reliability and risk resistance of the Bifrost protocol. Investors can safely stake DOT on Bifrost and enjoy the rich returns brought by staking.
Speaking of staking, I want to emphasize one point: no matter what happens, DOTs staked on Bifrost are absolutely safe. Each of your DOTs is managed by Bifrost's multi-signature account, and there is no risk of private key theft. At the same time, Bifrost practices the concept of transparent governance, and anyone can check the reserve proof at any time to monitor the security of the assets.
In fact, in order to protect the interests of users, Bifrost has taken a series of robust response measures during the market turmoil. For example, they adjusted the minting parameters of vDOT in a timely manner, increased the minting cost, and thus curbed speculative demand. Although these measures cannot completely offset the negative impact of the private key leakage incident, they demonstrate the Bifrost team's ability and determination to quickly respond to challenges and maintain system stability.
What is even more touching is that the Bifrost team has launched a special proposal to help the user who accidentally lost his private key. They proposed to transfer the stolen assets of this user stranded on Bifrost to a safe address to avoid secondary damage. This fully demonstrates the Bifrost team's service spirit of putting users first, which deserves praise from all of us.
3. What kind of reassurance does Bifrost’s SLP protocol and LST exchange give to vDOT?
In this incident, some users may be concerned about the security of their DOT staked on Bifrost. But please rest assured, as Bifrost officials stated: "DOT staked on Bifrost is controlled by the keyless Bifrost sovereign account. Bifrost SLP is a decentralized protocol with proof of reserves, and data can be queried at any time."
This means that even in extreme market conditions, your staked assets will be properly kept and will not suffer any losses. Bifrost uses a scientific exchange curve model and risk reserve management mechanism to ensure the relative stability of vDOT prices and the healthy operation of the entire system.
I would like to take this opportunity to share with you the operating principle of the Bifrost SLP protocol and the implementation mechanism of the stable exchange of vDOT. I believe that after understanding its internal operating logic, everyone’s confidence in vDOT will be more firm.
(1) The main operating mechanism of the Bifrost SLP protocol:
1. Users pledge DOT tokens through Bifrost's SLP protocol. Bifrost will lock 90% of the DOT in the Polkadot chain's Staking contract to participate in Polkadot's PoS consensus and block generation and obtain Staking income.
2. At the same time, Bifrost will mint vDOT tokens for users. vDOT represents the share of DOT pledged by the user. vDOT can be used in other DeFi protocols to achieve liquidity of pledged assets. The initial exchange ratio of vDOT is 1:1.
3. As the income from staking continues to accumulate, the exchange rate of vDOT to DOT will gradually increase, for example, it will rise to 1:1.2, which means that 1 vDOT can be redeemed for 1.2 DOT. This reflects the income brought by staking DOT.
4. Users can use vDOT to redeem the corresponding amount of DOT at any time. The redemption amount depends on the current vDOT:DOT exchange ratio. Redemption requires waiting for the Polkadot unlocking period, which is currently 0-28 days.
5. Bifrost will use 10% of the Staking income as protocol fees to incentivize Staking service providers, system development, etc., and the other 90% will belong to vDOT holders.
6. When vDOT is used or traded in external DeFi protocols, its price may fluctuate. If the vDOT price is lower than the exchange rate, it may create arbitrage opportunities.
7. Bifrost uses a set of mechanisms to ensure that the ratio of DOT and vDOT in the system is basically matched to prevent large deviations, and guide market expectations by adjusting parameters such as reward distribution.
In general, Bifrost's SLP protocol cleverly balances Staking income and asset liquidity, allowing users to obtain Staking income and activate most assets through vDOT tokens, allowing DOT to run wild in the DeFi world. The protocol issues vDOT tokens to realize the liquidity of pledged shares and dynamically adjusts the exchange ratio to reflect the accumulation of income. At the same time, Bifrost will also take certain risk management measures to strive to maintain the stable operation of the system.
It can be said that this is an innovative staking tokenization model.
(2) The main operating mechanism of Bifrost LST stable exchange:
1. LST stands for Liquid Staking Token, a stablecoin token issued by Bifrost, whose price is soft-anchored to the value of the native staked token. For example, the LST corresponding to vDOT is lstDOT, and the price of lstDOT is anchored to 1 DOT.
2. Users can use the Swap function to exchange vTokens and corresponding LSTs, such as exchanging vDOT for lstDOT, or vice versa. This process is actually completed within the Bifrost platform.
3. The exchange rate of LST is calculated in real time by Bifrost's AMM (Automated Market Maker) algorithm, which takes into account factors such as the stock of the two tokens in the pool and preset parameters. The goal is to keep LST as stable as possible near the anchor price.
4. When the market price of vToken is higher than the anchor price, vToken can be exchanged for LST at a favorable exchange rate. When vToken falls below the anchor price, LST can be exchanged for vToken for arbitrage. This achieves the relative stability of vToken prices.
5. Users can also provide vToken and LST as liquidity and join the corresponding AMM fund pool. The fund pool will automatically exchange vToken and LST, and LP providers can earn exchange fees as income.
6. Bifrost's SLP protocol will adjust the staking reward distribution for LST, giving more rewards to LST holders to stimulate the demand for holding LST, thereby helping to maintain the price of LST stable.
7. In a broader sense, the LST mechanism utilizes the arbitrage space between the basic pledged tokens and the derived stablecoins, guides market behavior through the AMM algorithm, and stabilizes the exchange rate between the two at a reasonable level, thereby realizing an endogenous stablecoin that "does not require collateral".
In general, Bifrost's LST stable exchange mechanism can be seen as a clever application of an innovative AMM algorithm in the liquid pledge SLP protocol. It is like a bridge that connects the market-based floating price of vToken with its corresponding LST anchor target price. By leveraging the power of market participants' game and arbitrage, the price of LST can fluctuate stably around the anchor price, enjoying the premium income of the pledged tokens and obtaining low volatility close to that of stablecoins.
This dual-sword design gives staked tokens new intrinsic value attributes, allowing them to shine in the DeFi world.
