Bifrost — Liquidity staking on Polkadot
Bifrost is the DeFi project based on Substrate which will run as a Polkadot parachain. The goal of Bifrost is to unlock liquidity of the staked funds for Proof of Stake projects within the entire Polkadot ecosystem
Why liquid staking?
Let’s talk about the staking before we dive into the liquidity staking itself. Proof of Stake gives users an opportunity to bond their tokens and receive rewards for making the network more secure. Staking has become really popular among cryptocurrency users because it allows them to hold their coins and earn an interest at the same time. Most popular PoS currencies like Polkadot, Tezos or Cardano can offer up to 15% APY — which is lot in comparison what yield can you get in traditional financial system with your fiat money.
However, staking is not the only way which can earn you an interest. In the world of DeFi, you can invest into the lending dApps, practice yield farming, compete in prediction markets or provide liquidity to exchanges. These services often give a better yield than the one which you would have from the staking. So, the problem is how to get people to stake (and we need a lot of tokens to be staked to provide security for the network) and compensate them properly for their lost investment opportunity cost.
There is a also another big issue with staking — many projects forces users to undergo an unbonding period. For example, this period is 28 days on Polkadot. So let’s imagine that the DOT price went up by 20% today and you decide to sell your funds but you can’t! You can unbond them but you still have to wait for 28 days before your tokens are unlocked.
Welcome to the liquid staking, the new trend which will create symbiosis between DeFi and staking and solve all the pain points listed above.
What is a liquid staking?
Liquid staking is an idea where you can bond your tokens to the network and still have the tokens at your disposal — for trading, DeFi or any other purposes. At the same time, you can decide to unbond them at any moment and you will receive your tokens back immediately.
As you can see, this unlocks immense opportunity for both PoS projects and its users. Teams creating various PoS projects don’t have to be longer afraid of low staking rate and thus having insecure network. And at the same time, people who want to stake don’t have to pay the opportunity cost to in order to receive a staking reward from the network.
Bifrost —liquidity for the entire Polkadot ecosystem
Bifrost is a project whose aim is nothing less than providing staking liquidity for all PoS projects which will run as a parachain on top of the Polkadot. By staking with Bifrost, users will bond their tokens and receive newly minted vTokens in return. For example, when you bond your DOT, you will receive a vDOT which you can further trade.
Here’s a list of features which Bifrost can offer
- Liquidity staking
- Slot auction liquidity
- Voting rights market
- DEX based on the Balancer and Uniswap
Let’s explore all of these features one by one.
The principle is quite simple — users will bond their tokens to Bifrost and will subsequently receive newly minted tokens which one could trade for other types of tokens. For example, if you stake 100 DOT with Bifrost, you will receive 100 vDOT in return. These DOTs can be then traded on the Bifrost DEX which will serve as a gateway to the rest of the Polkadot ecosystem and its DeFi capabilities — and don’t forget, there will be bridge to the ETH so you will be even able to exchange it to the ETH or any ERC-20 token.
Let’s look at an example of how it works.
- User wants to stake 10 DOT on Polkadot with Bifrost
- At that time, token mint price is 0.01
- Bifrost is going to bond the DOT, mints 1000 vDOT and gives it to the user
- After a week, user receives 0.5 DOT as a reward — but this reward doesn’t result in minting new tokens. Rather, the token mint price is raised to the 0.0105
- At this point, use could redeem 10.5 DOT because the token mint price has been changed
This process is quite transparent and straightforward, the more rewards are earned, the better token mint price you’ll get.
Parachain slot auction liquidity
I’ll explain how parachain slot auctions work briefly. Since there’s a limited amount of parachain slots, there has to be a way to compete for them. Therefore, Polkadot provides an auction system where users can bid for their favorite projects. Auction can either fail (and all bonded tokens are returned to their owners immediately) or succeed
- Project will receive up to 4 parachain slots (1 slot is 6 months),
- All tokens bonded to the auction are locked for that period of time
- Users will usually receive compensation for an opportunity cost in the form projects’ native tokens
As you can see, the second point can be really problematic for some users. Imagine you made a bid for your favorite projects with 100 DOTs and these DOTs will be locked for up to 2 years.
So here comes Bifrost to the rescue! You can actually make your bids via the Bifrost protocol and if the project succeeds, Bifrost will mint the vDOT which you can trade while receiving a reward from the project you have voted for at the same time.
Voting rights market
A unique feature offered by Bifrost is the voting rights market. Anyone who wants to stake in the PoS network needs to find the validator or staking pool to which he will bond his tokens. However, this is not easy for many users because finding trustworthy validators can be a difficult task.
Therefore, Bifrost will introduce the bidding mechanism so users can actually vote for the validators with the best results and these validators will stake their tokens — and all of this in a transparent and simple way.
Bifrost will provide its own DEX based on the Balancer’s code to trade the vTokens called vTokenSwap. vTokens are so called derivative assets which means that their value is based on the value of the underlying asset — for instance relationship DOT->vDOT as we mentioned in the liquid staking example.
First iteration of the DEX will support only exchange of various vTokens, in the next phases they are plans to cooperate with other CEX or DEX exchanges which will bring DeFi capabilities and more use cases for the vTokens.
There are other projects competing in the space of providing staking liquidity. We will mention some of them here and describe some differences
Acala is most known for bringing a collateralized stable coin into the ecosystem but they are also planning to provide liquid staking. However, it will be limited to only DOT and KSM and it will not provide a liquidity solution for parachain auction or enable voting rights market.
Stafi (staking finance)
Stafi already has its own, independent mainnet running and there are no plans to participate in the parachain auction in the near future. Therefore they are responsible for the chain’s security.
Liquid staking is very similar to what Bifrost offers. But again, the solution is not complex enough to include the parachain auction liquidity or market for trading voting rights.
MantraDAO is going to support non-custodial staking services for PoS projects. They will primarily focus on Polkadot and its ecosystem but they are eventually planning to add support for coins like ADA, XTZ or ELA.
Mantra will also reward users for staking with their native OM token and they are currently developing multiple lending products. This development process is divided into three phases
- Develop bridge to already existing platforms like Compound
- Use 3rd party lending service providers which will plug-in to the Mantra backend code
- Create own lending platform based on the derivative assets (similar to what Bifrost plans to do)
MantraDAO is a serious competitor in the liquid staking industry, but again, the Bifrost remains only one of these projects which will provide liquidity for parachains auctions.
Bifrost also has its own native token, called BNC. The initial total supply will be 80,000,000 BNCs. Token will server various purposes in the network
- Transaction fees — all are actually being sent to the treasury
- Slash collateral — savings which are going to cover for any potential losses caused by validators’ slashing
- Governance — voting in referendums, node elections or committees
- Capture of staking reward — part of the generated rewards will be used to repurchase some BNC tokens back into the treasury
We believe that Bifrost will play a very important role in the Polkadot ecosystem. Liquid staking will finally unlock the true power of DeFi by injecting the immense sea of liquidity which is hidden in the PoS protocol to the market. And that’s not all, parachain auctions will require a huge amount of tokens which need to be collected from the people — would you rather lock your DOTs for 2 years or use Bifrost to receive the reward from auction and still have the possibility participate in the DeFi with your tokens at the same time?
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