Liquid Staking protocol

Escher Liquidity Contract – Union Chain

Introduction

The liquid staking protocol is a core component of Escher’s architecture. It is built on CosmWasm and EVM, deployed across the Union Chain, Babylon, and Ethereum L1. This protocol manages the entire lifecycle of liquid staking, from initial stake to reward distribution.

Key Features

• Staking – Allows users to stake their tokens.

• Minting – Issues liquid staking tokens (eTokens) representing staked assets.

• Burning – Enables users to burn eTokens to reclaim the underlying assets.

• Auto-restaking – Automatically compounds rewards for higher yield.

• Unbonding – Manages the process of unstaking tokens, respecting each chain’s native rules.

• Reward Claiming – Distributes staking rewards to users.

Exchange Rate Calculation

The exchange rate ensures that eTokens reflect the underlying staked assets and accrued rewards:

Exchange Rate = (Total Staked Tokens + Unclaimed Rewards) ÷ Total eTokens Issued

Each chain has different parameters and architectural considerations. Below we describe the Union Chain implementation.

Architecture – eU (Union Chain)

The eU staking mechanism

Staking Hub (CosmWasm on Union Chain)

• Responsible for minting and burning eU.

• Handles staking and unbonding requests in batches.

• Maintains the eU:U ratio, updated periodically with reward data from Union Chain.

• Executes the actual staking of U tokens.

• Collects rewards and fees.

• Processes unbonding requests.

Cross-chain communication between these contracts is handled by the Union ZKGM (usc03) relayer, which securely transmits both messages and tokens.

User Interaction Flows

Staking

1. The user connects through Escher’s chain abstraction layer from any supported chain.

2. The user stakes U tokens into the LST contract and receives eU in return.

3. The cross-chain messaging system batches and transfers the tokens to the Union staking hub.

4. Once the batch is processed, the staking hub updates the LST contract with the new ratio.

5. The user continues earning yield, while eU remains liquid and usable across DeFi.

Unstaking

1. The user connects from any supported chain and sends eU to the LST contract for burning.

2. Depending on liquidity in the LST contract:

   • Immediate Redemption: If available U ≥ (eU × ratio), the user receives U instantly without waiting.

   • Delayed Redemption: If liquidity is insufficient, the request is forwarded to Union Chain. The user must wait the standard 21-day unbonding period + batch delay.

3. After the cooldown ends, the user automatically receives U back in their wallet – no manual claim required.

⚠️ Note: The cooldown period is enforced by the Union Chain itself, not by Escher.

Escher Liquidity Contract – Babylon Chain (eBABY)

Introduction

Escher’s Babylon integration provides liquid staking for BABY, the native staking token of Babylon. The protocol issues eBABY, a CosmWasm-native liquid staking token deployed directly on Babylon Chain.

Unlike Union’s eU (which splits logic between an EVM LST contract and a CosmWasm staking hub), eBABY exists fully on Babylon. Users can still access eBABY seamlessly from other chains through Escher’s chain abstraction layer and Union’s cross-chain messaging.

Key Features

• Staking – Stake BABY directly on Babylon and receive eBABY instantly.

• Minting – eBABY is minted natively on Babylon, representing staked BABY + rewards.

• Burning – eBABY can be burned to reclaim BABY, either instantly (if liquidity is available) or after Babylon’s unbonding period.

• Auto-restaking – Rewards are compounded automatically, increasing the exchange rate of eBABY.

• Unbonding – Native 21-day Babylon cooldown applies when liquidity is insufficient.

• Chain Abstraction Access – Users from Ethereum, Cosmos, or any Union-connected chain can interact with eBABY as if it were local.

Architecture – eBABY (Babylon Chain)

The Babylon LST architecture is simpler than Union’s because it is fully CosmWasm-based:

1. eBABY Contract (CosmWasm on Babylon)

   • Handles minting and burning of eBABY.

   • Stakes BABY with validators.

   • Collects and auto-restakes rewards.

   • Processes unbonding requests.

   • Maintains the exchange ratio (eBABY:BABY).

2. Union Relayer + Chain Abstraction Layer

   • Enables access to the eBABY contract from any connected chain.

   • Handles secure cross-chain token + message passing (via Union ZKGM, usc03).

   • Allows a user on Ethereum, Osmosis, or other ecosystems to stake into eBABY without ever holding native BABY first.

User Interaction Flows

Staking

1. User connects to Escher from any supported chain via chain abstraction.

2. User stakes BABY (directly or via bridged tokens).

3. The eBABY contract on Babylon mints eBABY immediately.

4. BABY is staked with validators, and rewards are auto-compounded.

5. The user holds liquid eBABY, usable across DeFi and other ecosystems.

Unstaking

1. User sends eBABY to the Babylon eBABY contract to burn.

2. the request enters Babylon’s 2 day unbonding period.

3. Once the cooldown ends, BABY is automatically transferred back to the user.

⚠️ Note: Cooldown is enforced by Babylon natively. Escher only manages the abstraction and liquidity layer.

Compound Interest in Liquid Staking

Escher's liquid staking protocol employs an auto-restaking mechanism that compounds rewards frequently, maximizing returns for stakers. Let's explore how this compounding effect works and compare it to non-compounding staking.

Term to maximize:

$P = k \left( 1 + \frac{r}{n} \right)^n - f \sum_{z=0}^{n-1} \left( 1 + \frac{r}{n} \right)^z$

where

P: Final value of staked tokens.

𝑘: Initial stake amount.

𝑟: Annual Percentage Yield (APY) (in decimal form).

𝑛: Number of times rewards are claimed and re-staked per year.

𝑓: Transaction fee. Must be reward claim fee + re-stake fee.

Comparison Graph

Here's a comparison of growth for an initial stake of 1000 tokens over the course of a year: