We’re in the midst of a cambrian explosion of decentralized protocols. From peer-to-peer payments to non-state forms of money to decentralized organizational structures, blockchains are redefining human collaboration in the 21st century. But those new networks can’t rely on the enforcement of rules in the old, slow, fuzzy and nation-bound court system. Instead, they are embracing economic incentives and particularly the usage of cryptoassets as collateral.
At the forefront of this is Proof-of-Stake, which replaces the expensive mining process by using cryptoassets as collateral for enforcing consensus rules. In the last year, networks like Cosmos and Tezos have pushed Proof-of-Stake into the crypto mainstream. Today, we have ahead of us a wave of blockchain networks all launching based on the same design insight. To operate this infrastructure, a new industry of node operators has emerged. We went from theoretical protocols and academic papers to live networks with billions of dollars at stake. And even large exchanges like Coinbase and Binance are entering the fray and have begun offering staking to their customers.
Reutilization of Staked Assets
But while it is clear that the Proof-of-Stake paradigm is upon us, it’s still very unclear how it will play out. When Satoshi created Bitcoin, he didn’t seem to have anticipated ASICs nor mining pools. Similarly, in the infinitely richer design space of Proof-of-Stake, we don’t know what the end state will be and what preconditions will lead to resilient, decentralized networks capable of sustaining censorship-resistance at scale.
One clear demand that is emerging is the ability to re-use and transfer staked collateral. If a user can borrow a stablecoin like Maker’s DAI against their interest-earning staked ATOMs, clearly those gain in value and utility. Similarly, the ability to transfer and sell tokens without going through an unbonding period has substantial value.
The centralized exchanges that have entered staking will easily be able to provide that and much more in their walled gardens. But in Proof-of-Stake, control over private keys means control over the consensus process. So can these networks sustain healthy communities and robust decentralization if token holders are driven to surrender custody to unlock additional capabilities and returns?
In the past six months, many approaches have been explored to unlock innovation around staked assets directly on-chain. These efforts can be subsumed under the term “ liquid staking”. One example of these efforts was built by Chorus One together with Sikka, when we implemented Delegation Vouchers as part of the Cosmos-SDK hackathon in Berlin. Since then, various other teams have risen to the challenge and came up with their own designs. Some examples include Everett, Stafi Protocol, Stake Capital DAO, and Staker DAO.
Today, we are proud to announce that we received support from the Interchain Foundation to form a working group and to produce a research report focused on approaches to liquid staking. The goal is to take a holistic look at the design space, evaluate the different approaches with respect to clear criteria and understand their impact on network security and sustainability. We will focus on aspects such as:
- impact on network security
- centralization risks
- impact on governance
- competition between protocols
- risks and benefits of financialization
- staking in a cross-chain context, e.g. moving assets to / through low security zones, bridges & peg zones
- impact on shared security & launching new chains
We will map out different paths for the future of Proof-of-Stake and hope to create a shared vision for how to ensure open innovation, sustainability and decentralization for Proof-of-Stake networks.
The Liquid Staking Working Group
We’re inviting protocol designers, validators, token holders, and anyone else interested in working on this topic to join the working group and contribute to this crucial research and discussion. The publication of the final report is planned to happen by the end of April.
A core feature of the working group will be our bi-weekly community calls. Our first community call, which will serve as an introduction to the project, will take place January 15th at 5pm CET. During this call, you will be able to find out more about our plans and learn how to contribute. Sign up here to for the calendar invite to this first working group call.
In the meantime, you can find the Liquid Staking Working Group on Telegram and Github ( https://github.com/ChorusOne/liquid-staking), where we already began to gather relevant material. We want to thank the Interchain Foundation for realizing the importance of this topic and hope that our research will help inform stakeholders and improve Proof-of-Stake protocol design.
Your Chorus One Team
About Chorus One
Chorus One is operating validation infrastructure and staking services for Proof-of-Stake networks.
About Interchain Foundation
The ICF is a Swiss foundation funding and pushing the frontiers of blockchain-related infrastructure.
Originally published at https://blog.chorus.one on January 9, 2020.