How to combine DeFi and Staking? A Brief Analysis of the Pros and Cons of Pledge Derivatives Design


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In the design of pledge derivatives agreement, it is necessary to carefully design derivatives pricing functions to strike a balance between liquidity and network security.

Original Title: ” PoS Public Chain Breakthrough: Deep Combination of DeFi and Staking
Written by: Joe Wang
This article is authorized to reprint from LongHash to Chain Wen

With the recent popularity of DeFi, Ethereum’s transaction fees have risen sharply, and various DeFi projects based on Ethereum have caused congestion on the entire network. In contrast, some mainstream public chains based on the PoS mechanism have not been able to use the development of DeFi to increase their popularity in 2020.

Compared with the PoW (Proof of Work) mechanism that needs to lock “hardware” to generate computing power, the PoS (Proof of Equity) mechanism needs to lock “capital” to reach a consensus. In theory, the PoS project’s token can be 100% pledged to its network, but it will inevitably reduce liquidity while achieving network security, which hinders the development of the DeFi ecosystem based on token mortgage.

For example, according to MINTSCAN data, the pledge rate of Cosmos is as high as 64%, which means that its liquid tokens account for only 36%, and the liquidity of the token is greatly reduced. Moreover, it takes 21 days for Cosmos to redeem tokens from the network. The fluctuations in the secondary market may directly cause many stakers to lose their legal currency standards, and they cannot obtain funds from the market for a long time. That is very low.

Solution: shadow token (shadow token)

As for how to release the liquidity of the pledged tokens, the major development communities have formed a set of solutions, that is, issuing a pledge certificate similar to a bond and returning it to the mortgager as soon as possible, so as to solve the “unlocking period” waiting from the demand side. And the benefits, the similar design is described as a “shadow token” in the article “The bAsset Protocol” by Ryan Park, a South Korean blockchain developer.

From the paper “Why Stake When You Can Borrow” from Gauntlet, a blockchain economic model consulting agency, this type of new products-staking derivatives and Lien Tokens-are more fully deconstructed, using 2020 In the first half of the year, the increasingly mature DeFi product framework was embedded in other PoS public chains to solve the liquidity problem of its pledged assets. for example:

How to combine DeFi and Staking? A Brief Analysis of the Pros and Cons of Pledge Derivatives Design

Polkadot is currently the largest PoS blockchain by market capitalization, with a valuation of nearly 3 billion + US dollars. According to the data of StakingRewards, as of September 25, 60% of DOTs are pledged in the network.

Imagine a scenario: If Polkadot’s verification node is allowed to lend 75% of pledged assets, but in the form of synthetic assets. We temporarily call it sDOT, and sDOT is equal to its initial market price to obtain short-term liquidity for verification nodes.

Afterwards, in order to balance payments, the verifier needs to withdraw his pledge return + block reward, and needs sDOT to repurchase DOT. This kind of “synthetic asset” is called “pledged derivative”.

The synthesized sDOT is a so-called Lien Token, which represents a certificate for holding currency and earning interest within a specified date in the future, and can be actively integrated into various DeFi applications. This design can greatly improve the PoS category. The liquidity of the smart contract platform.

The pros and cons of staking+DeFi derivative design

If there are more mature derivatives in the staking process, similar to the pledged interest-bearing token model, for validators, liquidity (funds) can be obtained to pay for expenses; for ordinary users, there is no need to bother with complicated stakes and delegates. The process of obtaining synthetic interest-earning digital assets directly in the secondary market is a meaningful attempt for the revival of the PoS public chain.

With the rapid development of various DeFi protocols in 2020, it has gradually become possible for complex derivatives on the chain to be recognized by the market.

The article “What PoS and DeFi can learn from mortgage-backed securities” by Gauntlet, an economic model research organization, uses a model similar to mortgage-backed securities to model the PoS network.

At present, the commonly used design in DeFi loan agreements is to mint stable tokens by collateralizing digital assets. If the mortgagor cannot pay the mortgage, it will be liquidated. Similarly, pledge derivatives allow nodes to obtain pledged assets. Assuming that many verification nodes are simultaneously lending to their pledged assets, the security of the entire PoS network will be the same as the default probability of each verification node that pledges and lends to it. (Probability of defaulting) related.

How to combine DeFi and Staking? A Brief Analysis of the Pros and Cons of Pledge Derivatives Design

Simply put, if the PoS public chain carries out large-scale derivatives of pledged assets to obtain liquidity, then they will also inject mortgage loans into the entire system. The advantage is that validators have increased the capital utilization rate, but if the network’s lending standards are low, the breach of appointment will trigger liquidation, which greatly reduces the security of the PoS network.

Therefore, in the design of such agreements, it is necessary to carefully design derivatives pricing functions to strike a balance between liquidity and network security. How much can these validators who want to obtain liquidity lend?


How to combine DeFi and Staking? A Brief Analysis of the Pros and Cons of Pledge Derivatives Design

Currently active projects in this field are distributed in China, the United States, and South Korea. Many design proposals for pledge derivatives come from PoS node agencies, such as Wetez, Liebi Pool, Chorus One, etc. They have accumulated more experience and awareness in the PoS field. It takes innovation to balance the safety of the competition chain and the activity of the ecology.

In 2019, these institutions have grown up in the last round of “pledge economy” and accumulated relevant technical experience. Professional validators in the industry seem to have reached a consensus in the new round of decentralized financial cycle-governance engineering The problem of “liquidity of pledged assets” is solved.

According to the classification of the well-known PoS basic layer service organization Chorus.One, the design of “Pledged Derivatives” is divided into four categories:

  1. Native class (Certificate concept proposed by Sunny of Cosmos);
  2. Non-native classes (more mainstream, including Stafi/Bifrost/Acala/Everett, etc.);
  3. Synthetic (derivative design, pledged interest swap contract synthesized by both parties);
  4. Custody (a securitized product in which a centralized institution controls the issuance of pledged assets by a private key).

How to combine DeFi and Staking? A Brief Analysis of the Pros and Cons of Pledge Derivatives Design

From the perspective of protocol design, in addition to the central custodian, the design of decentralized pledge liquidity protocol is divided into two major schools:

  1. Pursue a primitive design that is easy to use and still retains the governance rights for the token holder;
  2. Pursue non-native design that cross-PoS network but may require stricter security risk control.

The delegation voucher is a design based on the original chain. The developer and researcher Sunny of the Cosmos community and the node Chorus.One have a lot of research and proposals in this field, and the Matic Network team is also working on such a design. Project realization.

Many new development teams are more focused on the design of “non-native” pledge derivatives with incentive models.

For example, the teams that have implemented this direction project include the Stafi and Bifrost teams based on the substrate-based pledge derivatives agreement. Stafi has launched its governance token and will release a series of rTokens in Q4. Bifrost has also recently released the Asgard CC3 incentive testnet, which is online 3. The number of hourly nodes broke one hundred.

As far as the team is concerned, Wetez, which was founded by the founder of the Stafi team, Kaba, is an early PoS mining pool in the Asia-Pacific community and has accumulated many years of industry experience. Unlike other projects, Stafi cooperated with a centralized trading platform for crowdfunding financing, which accelerated the speed of its application.

This year, Stafi designed international community operations such as StakingDrop. At StakingDrop, which ended on August 31, 1700+ addresses tied $200 million in pledged assets to the network.

How to combine DeFi and Staking? A Brief Analysis of the Pros and Cons of Pledge Derivatives Design

Stafi Protocol recently released a roadmap for the fourth quarter. It will launch an ERC20 bridge that will cross assets to Ethereum, which can convert FIS or rToken into Ethereum tokens and circulate in Ethereum’s decentralized exchanges, such as Uniswap. And its rToken will be connected to Polkadot/Cosmos and other mainstream PoS chain ecology. rToken will be implemented on FIS first. rFIS is scheduled to go online at the end of November and will start to develop rDOT and rKSM after it runs smoothly. The scenario of rFIS will also be opened on Ethereum, which will focus on Dex decentralized exchange business, and then other Defi application scenarios.

Unlike the Stafi team’s focus on DeFi finance and multi-chain diversification, Bifrost focuses on the construction of the Polkadot ecology. Its founder, Lupris, won the third prize of the 2019 Polkadot Shanghai Hackathon. Prior to Bifrost’s access to substrate, Bifrost had issued PoS mining rights similar to staking derivatives based on smart contracts. In the Bifrost Asgard CC2 incentive test network that ended in August, the cross-chain exchange between EOS and vEOS exceeded 8 million.

The Bifrost development team attaches great importance to product implementation and decentralized community incentives. From the PoC testnet in March 2020 to the later Asgard incentive testnet, after half a year of stable operation of the testnet, the team has accumulated a wealth of information including Runtime non-fork upgrades and Dapp Product development, network block production, rehearsal and repairs, and other valuable experience, organized multiple technology sharing sessions with community media to share Bifrost’s substrate development experience accumulated during the development process, and help its test network to gain a larger user base in the early stage. So as to inform potential developers and users how to develop and use vToken based on Bifrost.

At present, Bifrost has officially launched the third round of testnet incentives. A total of 18,000 BNCs were incentivized from the number of blocks produced by Validator, cross-chain and vToken exchange. After the release of the new version of the node client, the test network exceeded 100 nodes. Bifrost stated that it will continue to access other well-known PoS public chain ecosystems except Polkadot/Cosmos to provide liquidity.

How to combine DeFi and Staking? A Brief Analysis of the Pros and Cons of Pledge Derivatives Design

With the approach of Ethereum Phase0 and the launch of various PoS competition chains (Celo / Solana / Near), we have seen a lot of staking economics (staking economics) model design by leaps and bounds, which will help more proof-of-stakes based on PoS The public blockchain ecology is active, and LongHash will continue to focus on this area in the following content.

This article was sponsored by Stafi and Bifrost.

How to combine DeFi and Staking? Brief analysis of the pros and cons of pledged derivatives design
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