While the interchain economy has seen an explosive growth in recent years, issues of capital efficiency continue to plague the ecosystem. Particularly, despite the existence of several liquid staking protocols (LSPs), over $15bn of assets are currently natively staked and thus locked and unusable within these networks.

Built on Neutron and led by former Lido Finance and P2P contributors, Drop aims to strengthen the economic viability of the interchain by putting these staked assets to work.

Overview

Securing a Proof of Stake blockchain requires one to stake their assets which forces holders to make their tokens illiquid by locking them up, in exchange for yield – an interest on one’s deposit, either sourced from inflation, protocol feels, or a mixture of both.

This illiquidity imposes a capital constraint on the interchain economy, impeding ecosystem growth and forcing users to decide between securing the chain or putting their assets to work elsewhere. Unlocking tens of billions of dollars in untapped economic potential for the Interchain requires building a secure and trust-minimized liquid staking solution that is open, accessible, and has a broad range of compelling DeFi use cases. This is what Drop is dedicated to solving.

Drop is a cross-chain liquid staking protocol implemented as an integrated application on the Neutron blockchain. Its CosmWasm smart contract architecture allows it to leverage the Inter-Blockchain Communication (IBC) protocol as well as Neutron’s Interchain Transaction (ICTX), Interchain Queries (ICQ), and Interchain Accounts (IA) capabilities in order to read the state of other blockchains and adjust delegations made by the protocol’s remotely controlled accounts. Upon receipt of supported assets, the protocol mints liquid staking receipt tokens using the Token Factory Standard.

This allows Drop to offer trust minimized liquid staking services while scaling with minimal additional overhead and risk. Provided that protocols are compatible with the above protocols, enabling the support of a new network or asset to be onboarded will be a relatively standardized process.

Liquid staking tokens increase capital efficiency in several ways:

1. Liquidity and flexibility – When tokens are staked natively, they are typically locked up and cannot be used for other purposes. While this immobilizes capital, it can be solved by issuing a derivative token that represents the staked asset, allowing holders to retain liquidity. These tokens can be traded on secondary markets, used as collateral in DeFi protocols, or for other financial activities.

2. Reduction of opportunity cost – The primary source of yield in crypto economies originates from staking rewards, but LSTs allow holders to participate in other yield generating opportunities without foregoing staking yield, reducing the hurdle rate for DeFi adoption.

3. Improved market dynamics – Locking a large portion of tokens can reduce market liquidity and potentially lead to higher price volatility. By making these tokens liquid, general ecosystem liquidity is improved and volatility is reduced.

Neutron Chain and Integrated Applications

Neutron is an integrated application network that grants smart contracts the power of an appchain, enabling developers to build breakthrough applications and onboard users from anywhere. In order to understand Drop, a basic understanding of Neutron and Integrated Applications is required.

Cosmos has traditionally had a distribution problem, which can mostly be attributed to the complex onboarding process of the ecosystem. Few Cosmos applications have fully leveraged their appchain’s capabilities to offer genuinely unique products. The ecosystem’s lack of differentiation can be accredited, in part, to the high development costs and slower iteration speed of appchains, which limits these applications’ ability to evolve and reach product-market fit.

Traditionally, Appchains have had a fundamental advantage over pure smart contract based applications – access to functionality outside of the VM. On the other hand, smart contracts are more accessible, standardized, and modular – they benefit from faster iteration cycles and feature easier maintenance and upgradeability, but are constrained by their VM’s capabilities. Integrated applications draw on the best features of both approaches. They combine powerful enshrined features with the development speed and synchronous composability of smart-contracts, allowing for improved efficiency, security, and reach.

Neutron is designed as the go-to solution for Interchain Smart-Contract deployment. In an effort to translate this Cosmos based innovation into widespread success, effective distribution is needed. In pursuit of this, Neutron is unveiling Integrated Applications, a powerful approach to building DeFi applications that combines the power of appchains with the scalability of smart-contracts.

The Interchain Transactions (ICTX) module allows smart contracts to register and control accounts on remote blockchains, as opposed to replying on trusted multisigs which can be cumbersome. Neutrons Interchain Queries (ICQ) enable applications to query both the state and transaction history of any IBC connected blockchain. This allows cross-chain applications to compute directly over the state of another blockchain, reducing maintenance overhead and increasing security.

As an integrated application, Drop is synchronously composable with an array of DeFi primitives, including Duality (Neutron’s in-protocol orderbook), Astroport (Curve v2 style AMM), Mars (credit protocol enabling lending/borrowing, margin trading, and perps), Levana (perps), Apollo (vault strategies), and more. This ecosystem offers a strong and coordinated set of use cases for Drops LSTs. Furthermore, it provides a streamlined, synchronous UX for more advanced use cases such as delta-neutral or leveraged staking.

Synchronous Composability

As a function of being an integrated application, Drop's unique smart contract architecture has several advantages over existing liquid staking models. One of which is synchronous composability, translating to higher yields and greater flexibility for users. Synchronous Composability allows Drops smart contracts to interact seamlessly and atomically with other smart contract applications on Neutron, allowing Drop to unlock new capital efficient use cases.

Contrary to insulated liquid staking protocols, Drop stakers will have the opportunity to enter leveraged staking positions without incurring either trading fees or slippage. Estimates show this will save stakers 2%+ of their assets, helping them avoid a loss.

Drop benefits form co-location with trading infrastructure such as Duality Labs and Astroport Finance, enabling users to auto-compound rewards more efficiently – resulting in improved rewards for Drop stakers. Thanks to both synchronous composability and accelerated unstaking, Drops staking assets (dAssets) can be arbitraged more efficiently, resulting indAssets able to maintain a tighter exchange rate for stakers looking to exit their positions.

Drop’s Security Culture

Drop’s codebase has, and will continue to be, tested throughout its development. In turn, Drop recently completed its first security audit with Oak Security, a leading CosmWasm auditing firm, with a second audit being scheduled with OtterSec ahead of launch. An early version of Drop is currently deployed on pion-1 (Neutrons testnet) and the protocol’s instance is being updated to match changes made as part of the Oak Security audit. As an integrated application on Neutron, Drop inherits the full economic security of more than $2bn ATOM restaked on the Cosmos hub through replicated security.

Partnerships

Levana Perps – Levana will support fully collateralized perps trading for all dAssets. Users will have the opportunity to deposit dAssets as liquidity to earn yield or use them as collateral for leverage trading.

Nolus Protocol – Nolus has partnered with Drop to offer self repaying leases on dAssets across the interchain. At launch, users can secure up to 3X their dAssets to maximize yield or lend dAssets for additional rewards.

Celestia – Drop will enable staked TIA positions of any size to flow into Celestia sovereign rollup ecosystem as $dTIA.

Cosmos – Drop will enable staked ATOM positions of any size to become liquid, transforming them into $dATOM, which users can deploy across DeFi to earn additional rewards.

Liquid staking tokens increase capital efficiency in several ways:

1. Liquidity and flexibility: when tokens are staked natively, they are typically locked up and cannot be used for other purposes. While this immobilizes capital, it can be solved by issuing a derivative token that represents the staked asset, allowing holders to retain liquidity. These tokens can be traded on secondary markets, used as collateral in DeFi protocols, or for other financial activities.

2. Reduction of opportunity cost – The primary source of yield in crypto economies originates from staking rewards, but LSTs allow holders to participate in other yield generating opportunities without foregoing staking yield, reducing the hurdle rate for DeFi adoption.

3. Improved market dynamics – Locking a large portion of tokens can reduce market liquidity and potentially lead to higher price volatility. By making these tokens liquid, general ecosystem liquidity is improved and volatility is reduced.

Neutron Chain and Integrated Applications

Neutron is a smart contract blockchain that grants smart contracts the power of an appchain, enabling developers to build breakthrough applications and onboard users from anywhere. In order to understand Drop, a basic understanding of Neutron and Integrated Applications is required.

Cosmos has traditionally had a distribution problem, which can mostly be attributed to the complex onboarding process of the ecosystem. Few Cosmos applications have fully leveraged their appchain’s capabilities to offer genuinely unique products. The ecosystem’s lack of differentiation can be accredited, in part, to the high development costs and slower iteration speed of appchains, which limits these applications’ ability to evolve and reach product-market fit rapidly.

Traditionally, Appchains have had a fundamental advantage over pure smart contract based applications – access to functionality outside of the VM. Examples include the previously mentioned suite of IBC capabilities such as ICA, ICQ, ICTX. On the other hand, smart contracts are more accessible, standardized, and modular – they benefit from faster iteration cycles and feature easier maintenance and upgradeability, but are constrained by their VM’s capabilities. Integrated applications draw on the best features of both approaches. They combine powerful enshrined features with the development speed and synchronous composability of smart-contracts, allowing for improved efficiency, security, and reach.

Neutron aims to be the go-to solution for Interchain Smart-Contract deployment, and indeed, previous appchains (as well as proposed appchains) such as Mars Protocol and Duality have migrated to neutron due to the benefits of being an integrated application – composability and minimal overhead.

As an integrated application, Drop is synchronously composable with an array of DeFi primitives, including Duality (Neutron’s in-protocol orderbook), Astroport (Curve v2 style AMM), Mars (credit protocol enabling lending/borrowing, margin trading, and perps), Levana (perps), Apollo (vault strategies), and more. This ecosystem offers a strong and coordinated set of use cases for Drop’s LSTs. Furthermore, it provides a streamlined, synchronous UX for more advanced use cases such as delta-neutral or leveraged staking.

Synchronous Composability

As a function of being an integrated application, Drop's unique smart contract architecture has several advantages over existing liquid staking models. One of which is synchronous composability, translating to higher yields and greater flexibility for users. Synchronous Composability allows Drops smart contracts to interact seamlessly and atomically with other smart contract applications on Neutron, allowing Drop to unlock new capital efficient use cases.

Contrary to insulated liquid staking protocols, Drop stakers will have the opportunity to enter leveraged staking positions without incurring either trading fees or slippage. Estimates show this will save stakers 2%+ of their assets, helping them avoid a loss.

Drop benefits form co-location with trading infrastructure such as Duality Labs and Astroport Finance, enabling users to auto-compound rewards more efficiently – resulting in improved rewards for Drop stakers. Thanks to both synchronous composability and accelerated unstaking, Drops staking assets (dAssets) can be arbitraged more efficiently, resulting in dAssets able to maintain a tighter exchange rate for stakers looking to exit their positions.

Drop’s Security Culture

Drop’s codebase has, and will continue to be, tested throughout its development. In turn, Drop recently completed its first security audit with Oak Security, a leading CosmWasm auditing firm, with a second audit being scheduled with OtterSec ahead of launch. An early version of Drop is currently deployed on pion-1 (Neutrons testnet) and the protocol’s instance is being updated to match changes made as part of the Oak Security audit. As an integrated application on Neutron, Drop inherits the full economic security of more than $2bn ATOM restaked on the Cosmos hub through replicated security.

Partnerships

Levana Perps – Levana will support fully collateralized perps trading for all dAssets. Users will have the opportunity to deposit dAssets as liquidity to earn yield or use them as collateral for leverage trading.

Nolus Protocol – Nolus has partnered with Drop to offer self repaying leases on dAssets across the interchain. At launch, users can secure up to 3X their dAssets to maximize yield or lend dAssets for additional rewards.

Celestia – Drop will enable staked TIA positions of any size to flow into Celestia sovereign rollup ecosystem as $dTIA.

Cosmos – Drop will enable staked ATOM positions of any size to become liquid, transforming them into $dATOM, which users can deploy across DeFi to earn additional rewards.