Staking Finance3 — Staking as Derivative
Author：Liam; Middle
This is the third and the last article of this series.
The first article in this series explained the two primitive financial attributes of Staking. Staking as a Reward means that token holders get block-producing rights through Staking, which is the first layer of financial attributes of Staking. Due to Staking requires a certain degree of qualification, Delegate Staking has become mainstream, and professional Staking service providers appeared (Staking as a Service). This is the second-tier financial attribute of Staking. The second article elaborates the third layer of financial attributes of Staking, Staking as an Operation. In addition to participating in consensus through Staking, token holders also need to participate in some additional operations, such as encryption, decompression, and voting. Staking-Slash mechanism is the main way to guarantee security for PoS projects.
In addition to rewards, delegations and operations, Staking also has the fourth financial attribute, the derivability of certain assets which is called Staking as Derivative. It has been proven in the stock and futures market. Staking assets in cryptocurrencies are also derivative because due to the characteristics of cryptocurrency, the liquidity has become the most direct and urgent derivative direction.
Staking assets bear the heavy responsibility of protecting the security of the original chain. During the process of staking, most assets will be locked by the original chain for days or even nearly 2 weeks. During the lockup period, users can get the proceeds of the system token issuance, but the locked assets lost the flexibility against market changes in a timely manner, which may lead to possible asset losses. A special dividend-generating bond that is derived from Staking assets allows users to win dividends meanwhile maintaining liquidity.
For original tokens, this kind of bond is like a shadow. We might as well call it a “shadow coin”. Shadow coins represent the rights to redeem the native token and the rights to obtain the staking income of the native token. This kind of equity is convenient for circulation after being tokenized.
The way to issue this negotiable bond can be centralized, and the subject can be a node service provider, the original chain project party, or an exchange, such as the Ltoken issued by the node service provider Stake DAO. It can, of course, also be decentralized , Such as rToken issued by Stafi Protocal. Different issuers have different advantages, but we believe that a decentralized approach can better build a foundation of trust and prevent human risks.
In the foreseeable future, shadow coins derived from Staking assets will become more standardized and enriched. Standardization can facilitate transactions, and a more enriched environment can meet the different needs of long-tail users. In Stafi’s view, shadow coins will be a very common asset in the Staking Finance ecosystem.
Beyond Liquid Staking
In addition to solving the pain points of users, the richness of liquid Staking assets will bring further asset derivation possibilities. When the original chain’s high Staking rate is guaranteed, if we give shadow coins with the circulation performance and financial derivative performance, more functions can be done more efficiently. It is worth pointing out that if the asset is derived from the original token, the derivatives and the security of the original chain will conflict with each other, which may force the project party to adopt a more aggressive inflation strategy. If so, a downward spiral will drag the original chain an the development down.
The shadow coin not only gives Staking assets with liquidity, letting the transfer of benefits free from the lock of Staking, but also allows the Staking assets to be further derived into various financial products without losing the Staking income and the security of the original chain. It can be said that shadow coins based on staking assets are the cornerstone of the Staking Finance ecology.
Stafi team observed the beauty of shadow coin, so developed a protocol layer to create shadow coins in order to give liquidity to Staking assets. To the outside world, what Stafi does falls into the category of Liquid Staking. Many blockchain research institutions have also put the Stafi project into the research branch of Liquid Staking. In fact, Stafi Protocal is far beyond that.
There are many ways to do Liquid Staking. For example, there is a project on Cosmos. By establishing a trading platform to capture contracts for a period of time, users who want to participate in pledges and those who want to redeem pledges can reduce the time required to redeem pledges. For another example, some exchanges issue staking income for users who deposit coins, and by retaining a portion of the liquid reserve that does not participate in Staking, users who want to redeem can be redeemed at any time. Both of these methods can solve the liquidity problem of Staking assets, but they cannot provide the basis for further financial derivatives of Staking assets, thus cannot create conditions for the prosperity of Staking Finance.
A Shadow coin is just a commencement
As mentioned earlier, in addition to solving the liquidity of Staking assets, shadow coins bear greater financial significance, that is, the possibility of further derivatives of Staking assets can be released without abandoning the benefits of Staking assets. Where there is a shadow, there may also be a shadow of a shadow. We can create more types of contracts based on shadow coins to form more complex, nested derivatives.
We have witnessed more than 20 different types of shadow coins based on StabeCoin Dai. Unlike shadow coins issued based on Staking assets, Dai’s shadow coins are issued based on loan pools. When users provide Dai supply in the loan agreement, the loan agreement generates shadow Dai for the user as a way to redeem native Dai and obtain interest Proof of equity, Shadow Dai can be circulated like native Dai, such as cDai issued by Compound and iDai issued by Fulcrum. In addition, some shadow Dais also have some special financial effects, such as IdleDai, which automatically finds the best interest rate in Compound and Fulcrum. It objectively stabilizes the Dai interest rate. In the world of Dai, “shadows of shadows” already exist.
I don’t know if you played a FC game called Shadow Legend. This game does not have an ending. Every time you clear the level, you successfully rescue the princess. But when you return to the starting point, Boss will, again and again, take the princess away again. You have to clear the level again, and the difficulty increases. The repeated derivation of Dai looks just like this game.
The nature of shadow currency is a negotiable bond, which is a basic financial derivative. The current DeFi world is still in its infancy. Compared with the real world, it is in the 1980s. Before the 1980s, the financial world was relatively simple, without no any complex derivatives. In the 1990s, driven by changes in the external policy environment and financial innovation, Wall Street began to invent new cockpits in an endless stream, such as futures trading, options trading, swap contracts, index funds, structured derivatives. As a result, various complex financial products and trading methods become mainstream.
But people say that a day in the cryptocurrency world is a year in the real world. Maybe in years ahead, cryptocurrency industry will enter the next era, filled with complicated financial derivatives.
For cryptocurrencies, the path to financial derivatives is bound to be more affordable and convenient than other assets. The essence of financial derivatives is the contract. The transparency of smart contracts on the chain prevents the risk of human intervention while tokenized contract benefits facilitates circulation and re-derivation.
Without doubt, decentralization does not mean that there is no risk. Although the risk of human intervention is stripped away, the contract may be subject to hacking, or the contract itself may have omissions, or even the contract ’s insufficient incentives for miners will cause the inefficiency of the contract, which will all lead to asset loss. In the case of a small number of derivative levels, this risk is controllable. When there are too many derivative levels, the system will become vulnerable, just like dominoes. The collapse happened at any point of the process will lead to the complete loss of derivative assets at the terminal point.
However, I still believe that through DeFi, crypto world can better handle these kind of risks than the real one, because the former is traceable. The derivation process, though complicated, will be written to the chain completely. No matter how long the process is, anyone can trace back to its original assets as well as every derivation process.
The infrastructure of Stafi Protocal-DeFi Ecosystem
As a protocol layer based on the Staking asset issuance, Stafi Protocal is not only the basis for Staking Finance, but also important infrastructure for the whole DeFi ecosystem.
Typical use cases in DeFi are lending platforms like Compound and Fulcrum. For these platforms, which crypto assets are supported as collateral, and which assets are supported for borrowing, it is an important decision. If these crypto assets involve the native token of the PoS chain, it will inevitably lead to competition between lending and Staking. This competition will be subject to countermeasures by the original chain project party. Second, it will also cause users to face a dilemma. Choose between borrowing interest. This knot must be solved using shadow coins issued based on Staking assets. Supporting shadow coins as collateral and asset types for lending will be a better choice for lending platforms.
The exchanges are the same. For the transactions of shadow coins, supporting will be a better choice. Supporting the transaction of shadow coins gives an exchange an attractive point of the income from Staking. With the increasing fierce competition among exchanges, this advantage will make more and more players support the transaction of shadow coins. Meanwhile, Stafi Protocol will develop ports targeted at exchanges.
We can also say this as for futures contracts, futures contract platforms and trade platforms.When we choose a basic asset, a shadow based on Staking assets is always better than a token on the original PoS chain.
However, if Stafi Protocal aims at winning more trust from various roles in DeFi ecosystem, 2 major problems need to be solved. First, its own security and sustainability issue; second, the inter-chain circulation issue for shadow coins. Stafi will publish more articles explaining our efforts and fruits in this term.
Staking Finance
When you arrive here, you will find us explaining and proving the four financial significance of Staking. With its inner core remains impact, it is expanding vastly, absorbing more and more meanings. Staking was just a basic operation in PoS consensus, that encourages token holders into the maintenance of internet security. Later, due to the requirements of Staking are high, there comes professional Staking providers delegated by individual token holders wit Staking. As days go by, there comes the need for motivating on-chain service in application chains, additional Staking operations emerged, deeply changing the cost-revenue structure of Staking providers. Then, in order to tackle the liquidity issue of Staking assets, the protocol layer was launched. It generates shadow coins for Stakers. The liquidity of shadow coins gives it derivative attributes sanely. Shadows will further generate shadows, so more complex financial derivatives were invented.
We believe that on day, Staking Finance will become a sophisticated ecosystem that is indispensable in the larger ecosystem named DeFi.
About Stafi Protocol
Stafi Protocol is the first decentralized protocol that provides the liquidity for Staking assets.
Website: www.stafi.io
Twitter:@Stafi_Protocol
Telegram: https://t.me/stafi_protocol
