Liquid staking | Breakthrough crypto technology that combines the benefits of staking and DeFi!
The next big thing after staking and yield farming is here. It is more profitable in comparison with the classic staking of PoS coins (2%-10%), and safer and more legit than the many kinds of risk involved in schemes reminiscent of Yield farming. We will talk about liquid staking, or if you wish, we can call it tokenized staking as well.
Let’s begin with the summary of all possibilities that we currently have for earning some extra coins or passive income in the crypto space. We will have a look at staking, dApps dividends, and yield farming.
Staking in PoS
Proof of Stake consensus mechanism came along with an opportunity to get some extra coins for delegating your coins. While some cryptocurrencies will make you a nice bonus for holding and staking your coins, such as Cosmos (8,24%), Tezos (5,57%), or Cardano (4,95%), some others credit you just with a minimal staking reward (NEO 1,06%).
Information from https://www.stakingrewards.com/cryptoassets
In some PoS blockchains, you can get rewarded for bonding your tokens. Unfortunately, you will have to unbond your tokens if you wish to take control of them again. In Polkadot, the unbonding period is 30 days, in Kusama 7 days, in STEEM it’s 4 weeks, HIVE got 13 weeks, so as you can see, the unbonding time differs.
Some PoS blockchains can charge you a penalty for an early withdrawal if you need your assets earlier than the value of the unbonding period — and some don’t allow early withdrawals at all.
There are PoS blockchains, which allow you to use your tokens even when you delegate or stake them directly. In Cardano, Tezos, or Algorand, you can use your tokens instantly, but of course, you get rewards only when at the specific time your tokens were staked or delegated to some staking pool.
Proof of Stake was invented to improve on the previous algorithm, which was Proof of Work. But even Proof of Stake itself deserves improvements.
Dividends from lending dApps
You can earn quite nice dividends from lending programs such as BlockFi, Compound, Synthetix, AAVE, and others. Another opportunity to get rewarded for locking your funds is by providing liquidity to some exchange or service. By using those lending programs and liquidity providers, you can get a reward between 5% to 12% for your cryptocurrencies. You can provide liquidity to both centralized (Binance) and decentralized (Uniswap) exchanges to get rewards.
Yield farming hit the crypto space like a storm. Almost unlimited % of rewards came hand in hand with a high level of risk. Some farming services such as Yearn.Finance (YFI), DFI.Money (YFII), DiFyFinance (YFIII), SushiSwap, Pancake Swap, Beefy.finance, Burger Swap, and (insert any food name you want) started rewarding their users and owners by APY in dozens and even hundreds percent. But from the „yield farming hype bubble“, which occurred during summer 2020, the price of those tokens dropped significantly. So we can't say that all the users realized profit, because those, who still HODL those coins are in the significant losses, sometimes even in -90% loss. The risk was simply too high.
In Yield farming, you provide liquidity through various platforms, and earn interest and obtain also newly minted tokens of those platforms as well. The first Yield generating platform became Compound earlier this year, which started to remunerate their owners who provided liquidity to the protocol with its own native token COMP.
What will a standard investor, who is maximizing his profit, do if some project like Polkadot will offer a 10% staking reward, in which you with your DOT tokens are also securing the networ k. And then some liquidity provider offers 15 % for lending DOT tokens. The traditional investors will grab the higher return of 15 % whatever is the price of a less secured Polkadot network. Because just income matters, right? But is there any other solution? Better for all parties? Yes, it is. It is under development but will be released soon.
The answer is liquid staking. You will have the chance to stake your DOT tokens in exchange for some synthetic tokens such as xDOT or aDOT. These synthetic tokens can further be used for lending, liquidity providing, or any other kind of DeFi application. BAM! Now you got 10 % from staking as well as 15 % from lending! And you are not threatening the security of the Polkadot network, as well as your risks, are much lower than if you only use the typical lending program from lending dApps or even the Yield farming “Ponzi game”.
Advantages of liquid staking
Liquid staking will be such an improvement, which solves three possible opportunity costs in comparison to the traditional PoS staking reward program: an escrow, the unbonding premium, and the unbonding period.
In liquid staking, the tokens remain still in the escrow, but the opportunity costs are reduced to a minimum.
The advantage of liquid staking is the owner of the assets still owns the governance rights to those assets and at the same time, they can use their assets and earn staking rewards as well.
So, how can you practice liquid staking? This is a million-dollar question, but we did some research for you. Some of the mentioned projects are from the Polkadot ecosystem which is where a lot of innovation is happening at the moment.
Acala is one of the most frequently mentioned projects in the Polkadot ecosystem. The Acala Network has two main missions within the Polkadot ecosystem.
First, Acala will release its own multi-collateral stablecoin called aUSD, which will be at a rate of 1: 1 against the USD (similar to MakerDAO and stablecoin DAI). aUSD will be generated through collateral from the Polkadot ecosystem, Bitcoin, Ether, and ERC-20 tokens.
Then Acala Network will also create its Acala DEX, inspired by Uniswap, which will be used to trade tokens using aUSD.
Acala will be built on Substrate, so it will be compatible with all Polkadot Network projects. Acala will also release its Canary network (such as Kusama for Polkadot) called Karura, which will run on the Kusama Relay chain.
However, Acala Network’s liquid staking will only work for DOT or KSM tokens, so Acala’s capabilities will be limited.
Birost is a DeFi project based on the Substrate platform, which will run as a parachain on Polkadot in the future. The main goal of Bifrost is to unlock tokens that users now have in their staking and cannot handle freely.
Bifrost is a project whose goal is nothing less than to make liquid staking available to all PoS projects within the Polkadot ecosystem (even for Polkadot itself). Therefore, users will not stake their DOTs directly to the Polkadot network, but through the Bifrost network. In return for your stacked DOT, Bifrost will provide you with vDOT (generally vTokens), which you can then dispose of in the system.
For example, Bifrost will provide liquidity for the upcoming parachain auctions or for the market of choice of validators that awaits us.
Bifrost will also provide users with its own decentralized Exchange-based exchange for vToken trading called vTokenSwap. vTokens are derived assets — their value is derived from their underlying asset (eg DOT or KSM).
The first version of the exchange will support trading in the vTokens themselves, in the next phases Bifrost will bring connections with other centralized and decentralized markets, as well as communication with other PoS chains such as Ethereum.
We’ve written a separate article about Bifrost, so if you plan to study it in detail, feel free to do it!
StaFi (Staking Finance) is a DeFi protocol with its own tokens: rToken and FIS. rToken will serve as a hedge against market volatility and the FIS will be used to pay fees.
StaFi will use Frontier, a DeFi aggregation solution that will help provide liquidity to wrapped tokens such as wALGO, wEOS or wADA, which might otherwise have liquidity problems on their own.
Ramp DeFi’s focus will be more on the world of stablecoins (ERC20 tokens rUSD and eUSD) or their synthetic equivalents.
With Liquid staking on Mantra DAO, in addition to the staking reward, you will also receive OM tokens, with which you can participate in the voting administration of various matters, such as the next level of inflation, grant allocation, or future interest rates.
Holding OM tokens will grow your reputation over time through the KARMA protocol, which will help with other rewards in the Mantra DAO protocol — for example, you can get better interest rates or get better conditions for depositing your coins.
Mantra DAO plans to bridge connect its platform with third parties for lending such as Compound.
The future of DeFi looks promising thanks to Liquid staking. For investors, liquidity providers, and finally for the network and its security.
Projects such as Polkadot and Kusama will benefit from increased security, and users can safely enjoy the benefits of staking while retaining the coins for use in DeFi.
Projects that do not respond to this “upgrade” will be left behind. The opportunity cost for those who will not use Liquid staking will simply be too high. Most economically-thinking investors prefer to take the opportunity to increase their passive income from their tokens while enabling a better level of network security.
Liquid staking is one of the other major improvements in the Proof of Stake protocol, which in 2021 is shuffled with cards that so far looked like they were clearly dealt with!
Stay tuned for further information about the Polkadot ecosystem projects here on Medium, our Twitter channel Polkadotters as well as in our Facebook Group Polkadot unofficial! We also have our own validator node on the Kusama network so please nominate us if you like what we do — you can find us under POLKADOTTERS, any nomination is really appreciated! Or, if you are feeling really generous, you can send some DOTs to our donate address 🙂