XFAI Staking: How it’ll work
XFAI has a new type of staking mechanism, and as such its upsides need to be explained in detail.
Unlike traditional staking which is a form of debt and therefore calculated in terms of APR or APY, XFAI staking is permanent, and therefore closer to transforming your XFIT permanently into XFAI DEX “shares’ represented as Liquid NFTs.
The XFAI Liquid NFTs represent a share of the Deep Pool of the Slippage Optimization Contract (SOC). The SOC is part of the magic of the DEX which allows for near-zero slippage between any two tokens. Whenever a swap occurs on the DEX, the equivalent amount of XFAI tokens (in terms of exchange value) gets removed from the DEX and sent to a “deep pool”. Only the SOC has access to the Deep Pool.
How the SOC exactly minimizes slippage in a sustainable way is quite technical and requires a future blog post in itself, but the main idea of it is that the more XFAI gets accumulated in the Deep Pool, the more efficient the SOC will function and the higher the exchange value of XFAI becomes within the DEX.
Liquid NFT holders have a 1% share of the Deep Pool at their disposal, with a continuous vesting period of 1 year. In other words, anyone holding a Liquid NFT can redeem their NFT’s underlying value. But how is that underlying value of a Liquid NFT determined?
The formula for determining the DEX share for a Liquid NFT is defined as:
Share = (amount_staked / total_xfit_reserve)
To determine the XFAI percentage that a Liquid NFT has within that 1% of the deep pool, we use the formula:
XFAI_share = share / total_shares
In other words, if your Liquid NFT’s “share” is for example 1% of the shares of all stakers, that Liquid NFT has the underlying value of 1% of 1% of the XFAI within the deep pool.
Remember, the exchange value of XFAI within the deep pool grows non-linearly. Every additional XFAI token that goes to the deep pool also increases the token’s exchange value within the DEX.
One can immediately notice that there is a time component to the calculation. The earlier one stakes (i.e. the lower the total_xfit_reserve in the contract is), the higher their share is for a given amount_staked. This results in earlier stakers receiving a bigger share of the DEX, than later stakers. This means that 99% of all XFAI ever burned will never return to the market. Only 1% of the burned XFAI can be sold in the market by Liquid NFT holders. This creates an extreme supply reduction of XFAI on the DEX. “But how much am I getting for my investment?” You might ask.
Let’s take a simple hypothetical example: For the sake of simplicity, let’s assume that we have a DEX with only one single token pair X-Y, where Y in this case represents an arbitrary token, and X represents XFAI. Let’s also assume that the reserve R_Y = 1e6 and R_X = 1e6. To calculate the adjusted price of a swap (from Y to X), we would use the formula:
P_A = (A_Y * R_X) / (R_Y + A_Y)
Where A_Y represents the amount of token Y that is being swapped. If we were to swap throughout the year 1e8 Y tokens, i.e. A_Y = 1e8, we would end up with two new token reserves, where R_X = 1e6–990099 = 9901; and R_Y = 101000000. In other words, throughout the year, 990099 X tokens went to the deep pool, of which 9901 X (1% of 990099) went to the liquid NFT holders. If a liquid NFT had a 1% share of that 9901 deep pool reward, it would be equivalent to that NFT being approximately 99 X worth. Note though that the reserves for Y and X have changed, the spot price for 99 X after the new reserves would be:
P_S = (99 * 101000000) / (9901) = 1009898 Y
The above example assumes for simplicity’s sake that no other NFT holders sell their liquidity share.
So why design the Liquid NFT around XFAI appreciation instead of XFAI burn flow? The goal of the Liquid NFT is to eventually get it accepted as the most trustworthy money market/lending protocol collateral there could be. Because XFAI is accumulated within the NFT (hence the “Liquid” part), and because XFAI is paired with every other token on the DEX, money markets have a way of setting a trustless lower bound sale price without the need for external oracles. Liquid NFT holders would therefore eventually be able to use their NFTs as collateral and get low-interest loans or high margin positions. Liquid NFTs can also be sold on any NFT marketplace at a higher price than the lower bound which would be used by money markets, this is because outrights buyers would factor in the future burn in the system as well as the future deflationary pressure.
XFai develops tooling for the DeFi space, graphing it to build game-changing products. The XFai DEX is set to invite mid and small-cap tokens to start earning APY on their token holdings. We are aiming to become industry-first in providing a more efficient, transparent, and fair way for everyone to get involved at an early stage. The LGE for XFai’s native token, XFIT, was launched on 16th April 2021. We invite everyone to join the DeFi revolution, spearheaded by XFai.