Integration of DeFi and Stacking. This is a breakthrough for PoS chains.
Translation into English. Original and credits go to LongHash.
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 “hardware” to generate computing power, the PoS (Proof of Equity) mechanism needs to lock “capital” to reach a consensus. Theoretically, the certificate of a PoS project 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 a token mortgage.
For example, according to MINTSCAN data, the staking rate of Cosmos is as high as 64%, which means that its liquid tokens are only 36%, and the liquidity of the token is greatly reduced. In addition, 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.
Solution: ‘shadow’ token
How to release the liquidity of the staked tokens? The major development communities have formed a set of solutions, that is, issuing a pledging certificate similar to a bond and returning it to the staker as soon as possible. To solve the “unlocking period” and benefits, we can use the “shadow token”. More in-depth research can you read 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 consulting agency, you can read a more complete deconstruction of these new products-staking derivatives and Lien Tokens. In the first half of this year 2020, the increasingly mature DeFi product framework was embedded in other PoS public chains to solve the liquidity problem of its pledged assets.
Polkadot is currently the largest PoS blockchain by market capitalization, with a valuation of nearly +3 billion US dollars. According to StakingRewards data, as of September 25, 60% of DOTs are staked in the network.
If Polkadot’s verification node is allowed to lend 75% of staked 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. And afterward, in order to balance payments, the verifier needs to withdraw his stacked return + block reward, he 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 liquidity.
The pros and cons of Staking + DeFi derivative design
If there are more mature derivatives in the staking process, similar to the staked interest-bearing token model, for validators, funds can be used to pay for expenses. For ordinary users, there is no need to bother with complex pledges 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 institution, uses a model similar to mortgage-backed securities to model the PoS network.
At present, the commonly used design in DeFi lending agreements is to mint stable tokens by collateralizing digital assets. If the mortgagor cannot pay the mortgage, it will be liquidated. Similarly, staked derivatives allow nodes to obtain staked assets. Assuming that many validating nodes are simultaneously lending their staked assets, then the security of the entire PoS network will be the same as the default probability of each validating node that pledged and borrowed them are related.
Simply put, if the PoS public chain carries out large-scale derivatives of staked assets to obtain liquidity, then they will also inject mortgage loans into the entire system. The advantage is that the 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.
Currently, active projects in this field are distributed in China, the United States, and South Korea. Many design proposals for pledged derivatives come from PoS node institutions, such as Wetez, Liebi Pool, Chorus One, etc. They have accumulated a lot of 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:
- Native class (the concept of credentials proposed by Sunny of Cosmos);
- Non-native classes (more mainstream, including Stafi/Bifrost/Acala/Everett, etc.);
- Synthetic (derivative design, pledged interest swap contract synthesized by both parties);
- Custody (a securitized product in which a centralized institution controls the issuance of pledged assets by a private key).
From the perspective of protocol design, in addition to the central custodian, the design of decentralized pledge liquidity protocol is divided into two major groups:
- Pursue a primitive design that is easy to use and still retains the governance rights for the token holder;
- Pursue non-native designs that cross PoS networks 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 has a lot of research and proposals in this field. 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 based on the substrate-based pledge derivatives agreement are the team of Stafi and Bifrost. 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 now. The number of hourly nodes broke one hundred.
This year, Stafi designed StakingDrop. At StakingDrop, which ended on August 31, 1700+ addresses bound 200 million US dollars of pledged assets to the network.
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 ecosystems. rToken will be implemented on FIS first, and rFIS is scheduled to go online at the end of November. After the operation is stable, rDOT and rKSM will be developed. The rFIS scenario 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 ecosystem. Its founder Lupris won the third prize in the 2019 Polkadot Shanghai Hackathon. Before Bifrost was connected to the substrate, Bifrost had already 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. Like non-fork upgrades, Dapp product development, network block production, rehearsal and repairs, and other valuable experience. Organized multiple technology sharing sessions with communities 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 validator blocks, cross-chain, and vToken exchanges. 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.
What is Bifrost
Bifrost is the DeFi project for PoS tokens, which include both staking and liquidity. It is developed based on Substrate and built on the Polkadot network. As a DeFi project in the Polkadot ecosystem, Bifrost users can swap PoS Tokens into vTokens through the Bifrost Protocol at any time to obtain Staking rewards and liquidity. Getting rewards from the first day, without any locking periods. BNC is Bifrost native token.