The Rising Appeal of LDOT: Acala’s Liquid Staking Token

The majority of public blockchains are shifting towards a Proof-of-Stake (PoS) consensus mechanism, wherein validators, responsible for validating network blocks, commit tokens (valuable assets) as collateral in the network. These tokens may be forfeited if validators engage in dishonest behavior. Liquid staking tokens (LSTs) are tokenized representations of the staked assets within a PoS network, enabling individuals to engage in staking and contribute to the network’s security. We believe LSTs will be the new base layer for decentralized finance. This is also why a liquid staking protocol was one of the first protocols that Acala launched on Polkadot two years ago.

In this article, we will explore the origins and ongoing development of LDOT, highlighting its unique attributes and its journey toward becoming an even more exceptional asset in the cryptocurrency landscape.

The Foundation of LDOT

To fully grasp the potential of LDOT, it’s essential to understand its foundation — staking DOT, the native cryptocurrency of Polkadot. Staking DOT involves locking your tokens to secure the network and earning rewards in return, a concept that has always had substantial popularity among Proof-of-Stake networks.

Recognizing the popularity of staking, centralized exchanges entered the arena, offering staking services to mitigate the drawbacks of staking directly on the relay chain. They introduced “one-click staking” to provide users with a more convenient and flexible approach to engaging with network security while alleviating the 28-day unstaking period.

Taking this concept a step further, the introduction of liquid staking tokens emerged. This innovation decentralized DOT staking once again, offering users even more opportunities. In addition to what exchanges provided, liquid staking tokens reduced the minimum staking amount, granted access to liquidity, and presented additional avenues for earning rewards.

The goal of LDOT is to democratize the institution-grade liquid staking experience — non-custodial, world class dedicated validators, consistently better yield, and a certain level of slash coverage accessible to anyone anywhere. Acala also does not operate validators nor benefit from validator revenues via LDOT, to ensure the best interest of the users.

How can all of these features and more be captured in one token? Well here’s a more technical breakdown:

LDOT to DOT Ratio

When LDOT first launched, DOT and LDOT exchange rate was set to 1:10, meaning that by staking 1 DOT, users received 10 LDOT initially. At the time of writing, the exchange rate has increased to 7.4, meaning that the 10 LDOT are now worth 1.35 DOT and this will continue to increase. This exchange rate is internal to the protocol based on the staking rewards accrued, and not affected by market conditions such as LDOT listing prices.

Instant and Fast Unstaking

When it comes to unstaking your LDOT, you can choose amongst three options: normal unstaking, fast unstaking and instant unstaking. Normal unstaking is similar to Polkadot unstaking, where you will need to wait for the 28~ day unbounding period. Although the next two options may appear similar initially, it’s crucial to understand the distinction. Fast unstaking retrieves your DOT from the staking queue, whereas instant unstaking not only accomplishes that but also converts any remaining LDOT into DOT using the Acala Swap feature. This distinction is important because the availability of DOT in the staking queue can vary depending on other users, potentially affecting the speed of the exchange, while using the swap feature may trade price for speed.

Mitigating Risks in the LDOT Ecosystem

LDOT, as well as staking DOT directly on the relay chain, carries certain risks with the potential for a slashing incident being a notable concern. However, Acala takes proactive steps to reduce these risks by carefully choosing validators, considering factors like on-chain identity, slash history, and commission rates. Additionally, Acala works in partnership with other institutions to set up off-chain slash coverage. While it’s important to acknowledge that slashing risks are still present, Acala’s diligent efforts substantially decrease the chances of such incidents occurring.

LDOT External Partnerships and Opportunities

LDOT has demonstrated its effectiveness as a staking method for DOT to the extent that it has garnered external partnerships, thereby expanding the potential opportunities associated with LDOT.

Taiga Protocol (tDOT)

Taiga is a synthetic asset protocol designed to unify different formats of staking derivatives into a highly efficient standard. It consists of a Stable Asset mechanism as well as the Stable Swap engine. Taiga DOT (tDOT) is a synthetic asset pegged to the price of DOT and synthesized by DOT-LDOT and DOT-LCDOT on Acala. tDOT can seamlessly integrate with DeFi primitives, optimize siloed liquidity and act as a cross chain swap mechanism while still benefiting from LDOT staking rewards, protocol and exchange fees. At the time of this writing, an additional 1.4M tDOT has been minted on Taiga Protocol since the crowdloan unlock period. Enter the Taiga Protocol here.

Credora

Credora is a credit intelligence platform to help facilitate credit in a more transparent and seamless way, using privacy-preserving technology to validate creditworthiness, without borrowers having to give up sensitive information. This licensed and regulated platform is offering institution-grade Bitcoin lending using LDOT as source of yield, which is expected to increase institutional-demand for DOT. You can read more about the Credora and Acala partnership here.

Alluviual

Alluvial is developing an enterprise-grade liquid staking protocol designed to operate across multiple blockchains. This initiative seeks to harmonize the technical and security prerequisites of institutional entities with the Web3 philosophy of community-driven collaboration. Acala is chosen to be the technical partner to deliver this solution for Liquid Collective, where the protocol is based of LDOT. Learn more about Alluvial on their website.

Meta Defender

Meta Defender is a decentralized derivative marketplace designed specifically for Liquid Staking Tokens (LST) that operates across multiple blockchains. Its launch on the Acala platform will integrate with LDOT and tDOT empowering Polkadot users to trade DOT staking rewards and overall yields within the ecosystem. Additionally, it will provide an accessible fixed yield product, making DeFi more widely available to a broader audience. Read more about the partnership here.

Euphrates

Euphrates is Acala’s boosted liquid staking protocol built on Acala’s EVM+. It hosts various liquid staking tokens including LDOT and uses incentivized programs to encourage liquidity deposits. Projects can launch a pool on Euphrates and the rewards and incentives are determined by governance. During the crowdloan unlock period (a 4-day period at the time of writing) , it has over 4.2M cumulative DOT staked through this platform. Check the current campaigns on the Euphrates Dapp.

Going Forward

LDOT will continue to innovate to include features like 1-click cross-chain staking and voting in OpenGov, as well as pushing for institutional and consumer demand for DOT. Together, we will bring a new wave of adoption for Polkadot as a technology and as an asset class.