8 June, Stafi hosted jointly with BitMax an AMA on Staking Derivatives. We were honored to have Bonna(Zhu Yibang), the head of Staking business and Asia commercial director from BitMax & B-Tech. He shared his thoughts on Staking Derivatives and introduced the development course and future directions of them. Here is the transcript.
- Liam: A brief Introduction to BitMax
Bonna: BitMax.io is founded in 2018 and is an product innovation and technology oriented exchange. Most of our core team members are from traditional financial industry and pioneering companies in the blockchain field, including Morgan Stanley, Goldman Sachs, Deutsche Bank, Barclays Bank, Huobi, FBG, Gemini Exchange, etc,. That means they used to base New York, Beijing , Chengdu, Shanghai and other places in the world. It is an exchange carrying the genes and blood of traditional finance and that make us stand out among others.
After nearly two years of cultivation and development, BitMax.io has made itself into a distinctive exchange, users from South Korea, Russia, India, Vietnam, Turkey, France, the United Kingdom, Germany and the Netherlands, all over the world. We also boasts many well-known institutional users overseas. Our daily transaction volume is at 3–4 billion USD.
2. Liam: As far as we know, BitMax has been an exchange with transaction business as its core business. Recently, however, it is expanding its footprints in Staking. Can you talk about the development focus and why you are making this move?
Bonna: From the perspective of BitMax, we have been committed to expanding our footprints in financial services and products to meet the needs of different users. Of all our users in the exchange, there are a huge number of them focusing on holding and asset management apart from frequent traders. And Staking, in our mind, is a native fixed-income financial product, so we are willing to productize Staking business.
In addition, from the perspective of the market, Staking/PoS is also a business that we have seen with great potential. According to the data from staking rewards.com, the market value of Staking assets that are locked exceeds 9 billion USD. Meanwhile, the year 2020 witnesses a large number of PoS projects landed. Therefore, we hope to provide a product, as a medium to facilitate users’ participation in this business. By doing this, we are also providing ecological empowerment and support for potential and quality projects in our mind.
3. Liam: The PoS project was flourishing in 2019. And basically all mainstream public chains are embracing PoS in 2020. At the same time, doubts about PoS is also growing, especially before the halving of Bitcoin mining rewards. PoS can hardly say a counterpart to PoW. It is said easily controlled by capital, vulnerable to node monopoly and other issues. Many players in the industry have expressed their views on this. I would like to ask how do you think of this from the perspective of an exchange?
Bonna: The node monopoly and capital control of PoS just happens by nature. Although we do not want to see the monopoly of voting rights, but in fact, many PoS projects lack the capability to maintain the operation and development of a large number of nodes for the maintenance of nodes costs a lot of investment. However, and the actual benefits that the network can provide are rather limited. So the spontaneous operation of a large scale of nodes is difficult to maintain. Over time, the network will become more centralized, concentrating to some nodes with strong financial strength, or some early investors whose cost of holding tokens is low, or even exchanges (because exchanges can use users’ coins to vote).
4. Liam: Of course, amid all doubts, the development of PoS is visible. Previously, Stafi protocol proposed the idea of Staking Finance, which explained different financial services based on Staking, such as Staking as Reward, Staking as Operation, and then Staking as Derivative now. So can this development direction be recognized? Or is it the correct development course of PoS?
Bonna: I agree. in fact, even if we look back at the development of PoW mining, we will find that it is also a business that has gradually changed from technology and geek-oriented business to a mature industry. And it has more of a finance ring to it. Various types of financial derivative business based on bitcoin mining, including hedging, lending, quantitative arbitrage, etc. are flourishing.
As for Staking/PoS, as I mentioned before, it is what we think is a native financial product in the crypto industry. Then this attribute determines that it will gradually derive various financial products in the future. And this will happen faster than that of PoW. We believe that the opportunities and conditions are riper every day for the explosion of Staking derivative finance:
1) The liquidity pain points of Staking are gradually acknowledged by users. Due to the existence of the Stake period of most Staking projects, participants cannot obtain good liquidity while at the same time of make profit, nor can they quit flexibly. And this has greatly killed the user’s enthusiasm and participation.
2) The development of DeFi ecology. DeFi also has the attribute of deposit-like interest, so the community has mentioned that there is a conflict between that design and its development. Users would be lost to other projects in regard of yield, etc., DeFi even compromise staking and chain security. How to integrate DeFi and Staking has become a challenge. Staking derivatives may be a solution.
3) The advent of leading projects, such Polkadot, Ethereum 2.0 and so on.
5. Liam: Still about the last the question of Staking Finance. As an essential part of the cryptocurrency, how exchange, or BitMax, captures the value of Staking Finance in development? In addition, Staking assets have always been where exchanges scramble with each other — it is obvious, as can be seen from the staking business of major exchanges. So how is BitMax’s Staking business different from others?
Bonna:: In the design of Staking, BitMax has considered the trend of financialization and derivatization of Staking, and is committed to combining transactions, liquidity and Staking income, so that users can interact with others while obtaining Staking income. For this, we have made possible the following important functions:
1) The quick Staking/Unstaking function, which can realize instant deposit&withdraw;
2) The use of Staking assets as margin to participate in leveraged transactions, enabling users to trade while obtaining Staking income;
3) Automatic compound interest of income.
The biggest difference from other exchanges is that our Staking should be the one that is closest to Staking derivatives. Taking Atom as an example, when a user Stakes, the system will generate an Atom-S asset to represent the Atom, and Atom-S can be transferred to the leverage account as a margin to initiate transaction. This function provides users with a risk hedging method other than “instant Staking/Unstaking”. Users can use Atom-S as a deposit to borrow USDT/BTC/ETH to long other currencies, including ATOM. They can also borrow ATOM spot, double-selling ATOM to hedge the price risk, and all this does not sacrifice Staking earnings because the assets are not Unstaked.
6. Liam: From the perspective of Stafi, Staking assets can flow into the exchange in a better way. The Staking Contract created by Stafi can help users to circulate locked assets (rToken) in a decentralized manner, and can also receive Staking rewards. Tokens will not all enter the exchange, making a swelling node. How do you think of decentralized Staking assets of liquidity?
Bonna: First of all, liquid Staking assets meets users’ needs. It is a balance between PoS security and liquidity. For individual investors, holding liquid Staking assets is equivalent to mining. That’s what we say a beginner’s experience of “holding is mining”. It is simple and easy to understand, so very attractive. It indirectly stimulates the participation of PoS.
Secondly, compared to centralized solutions, decentralized ones are more adaptable and programmable theoretically. As I said before, the integration of DeFi and staking is trending now. Centralized solutions do not allow further integration of Staking assets and DeFi. What’s worse, all tokens are liquidated through exchanges, and this will also lead to centralization problems.
The Staking of BitMax, though, is a centralized way but more efficient to create Staking derivatives. But when we designed it, we also took into account the adaptability of decentralized solutions in the future. As I said earlier, users will be given “-S” assets after Staking. At present, this mapped asset is an internal accounting unit that do not support withdrawals. In the future, if we integrate liquid Staking assets or protocols, the “-S” asset generated by the user is essentially an on-chain asset that can support withdrawal. Users can withdraw them to participate in DeFi. And users who hold this Staking asset outside can also directly charge it to BitMax or use it as a margin. It literally integrates DeFi and CeFi, Cex and Dex together.
7. Liam: Do you know Staf’s Staking derivatives (rToken)? How is rToken in your mind?
Bonna: Yes, I do. Judging from the value proposition, rToken provides a good liquidity solution for Staking Token, and 1:1 pegging of Staking assets is very easy for users to understand. On a practical level, I will pay more attention to the following two points:
1) Security. Essentially, Staking belongs to Layer 0, with the highest security level. While Staking derivatives are actually at Layer 2. Decentralized Staking liquidity solutions need to solve the hosting issue of native Staking Token. There will be some security challenges here.
2) The price of rToken and its relationship with native Token. rToken is an interest-bearing asset, and Token is an interest-free asset. Theoretically, rToken’s price may comprehensively affected by:
-Discounts of fixed-income assets (discounted)
-Staking income (premium)
First, fixed-income asset discount is actually based on the fact that most of the Staking coins need to be locked for a certain number of days. For example, Atom requires 21 days, so rAtom cashes its liquidity in 21 day’s advance. Its pricing should be close to relative 21-day discount bond of Atom in circulation.
Second, rAtom includes the staking income part. The value of this part of the income right should be the discount of future income, so it is a premium to the circulating Atom.
Third, rAtom is tradable, so it also has a liquidity premium, which is reflected in the user’s willingness to sacrifice part of staking income to enjoy liquidity.
Based on the subscription and redemption relationship between rToken and Token, in the secondary market, there may be some interesting price relationships between rToken and Token, such as when rToken price is too low, users are encouraged to buy rToken, redeem Token for sale, while when rToken price is too high, users are encouraged to buy Token, generating rToken for sale.
8. Liam: How does an exchange assess whether an asset can be listed or even in the trading area? Or is it possible for rToken to list rToken-related transactions?
Bonna: From our point of view, to assess whether to list an asset, the main considerations are: 1) the fundamentals of the asset; 2) the needs for transaction and holding of the asset; 3) liquidity.
The underlying assets of rToken are already the finest mainstream cryptoassets, including ATOM, XTZ, ETH, KSM, DOT, etc. In essence, rToken only exists in another form, so there is no flaws on its fundamentals.
Second, rToken is a medium that releases the liquidity of the Staking assets, so he has an natural demand for transactions. At the same time, rToken is a native interest-earning asset. Holding rToken can obtain Staking income, so it has a demand for holding.
The third is liquidity. From the perspective of the exchange, this should be more of a concern. Specifically, it is necessary to consider whether the rToken and Token transactions will compromise their own liquidity. However, as mentioned before: rToken and Token are closely related, but they are two different coins, though there may be some arbitrage and interesting price relationships between the two. This should be paid close attention.
9. Liam: How does the exchange evaluate DeFi tokens? At present, most of DeFi projects have their tokens, which mainly exercise the governance function, but more and more tokens are becoming a medium for value capture. What do you think of this?
Bonna:From the perspective of BitMax, we attach much importance to DeFi, keep exploring and supporting potential early DeFi projects and tokens. BitMax launched ThorChain (RUNE) in early days, which is a Binance Chain Uniswap and cross-chain liquidity solution. It is in collaborations with projects including KAVA and stablecoin derivatives xDai (STAKE). More DeFi assets and interesting integration products will be landed later this year.
I think the most exciting thing about the DeFi token is its value capture and incentives. Governance function is a just beginning and an experiment. Only the value generated by the DeFi protocol can be truly captured to generate incentives, or the use of the DeFi protocol becomes more seamless and effective, DeFi tokens will become significant. Besides, different functions are designed for different groups:
1) Incentives-liquidity providers
2) Value capture — token holders and investors
4) Seamlessness — users
A good balance must be maintained among them so that a DeFi project can achieve sustainable development. If a token act just as incentives without value capture, it will eventually deprecriate the value of the token. Only value capture without incentives or seamless using experience, it cannot be scaled, so that the value capture becomes a river without the fountain. Without governance, it is like a company without regulations, which cannot survive for long.
10. Liam: As Polkadot and ETH2 land their mainnets in 2020, the market value of PoS projects will double. What impacts may these projects have on the current market, or what opportunities lies ahead?
Bonna: I think that each time a popular project launches, PoS/Staking will be boosted. However, when it comes Polkadot and ETH2, the practical impacts of them, in my mind, are different to others:
1) ETH2 greatly promotes the development of Staking derivatives and decentralized Staking liquidity solutions, for in the early phase of 2.0, ETH2 existed in the form of a beacon chain parallel to ETH1. When a user wants Staking, he need to convert ETH from ETH1 to ETH2 in advance, and this process is irreversible. At the same time, the ETH on ETH2 could not be transferred in the early days. It could only obtain Staking income.
2) Polkadot is to make users more accustomed to Staking, or lock-up of assets to Staking. Different to many other projects, Polkadot has a parallel chain mechanism apart from staking. It invented the concept of Initial ParaChain Offering (IPO), which requires lock-up DOT. Not a few projects under Polkadot are preparing or working on that course. So I think in the future, users will be ever familiar with the behavior of “Staking”, and IPO service providers will also turn up.
Thank you for your sharing Bonna. We have learnt a lot. In conclusion, Staking derivatives are actually a financial product developed on the basis of Staking assets. It’s a new financial products that take user needs into consideration and addresses those challenges for Staking assets. One of the biggest challenges is locking, for the lock-up period shut users out from secondary market during staking. But the rToken of Stafi solves this problem. When the Stafi Protocol is landed, users no longer need to worry about the lock-up period. In addition, it can be expected that crypto exchanges will also actively lay their footprints in the Staking derivatives market. After all, this market (PoS project market value) will become increasingly larger. Let us look forward to the future together.
About Stafi Protocol
Stafi Protocol is the first decentralized protocol that provides the liquidity for Staking assets.