Liquid Staking — Effect on Protocol Security
Staking! Staking!! Staking!!!
Staking is a term that is so frequently and generally used within the blockchain space these days. We have almost everyone in the space talking about one staking program or the other and you can hardly stay on the web without coming across one of such programs. You might ask, “What exactly is staking and why is there so much fuss and news about it in the world today? These and more, we will expose in this article as we talk about staking and the very many reasons people stake and probably, the best way to make the process more efficient. That would bring us to liquid staking and how this benefits the Protocol security.
With staking, you are talking about keeping or holding the coins of a blockchain project in a cryptocurrency wallet or staking platform in order to support the network of that project and also provide security. To fully grasp this concept, we have to understand what a blockchain is. A blockchain is a chain of data (records) referred to as blocks and linked together by cryptography (code). The blockchain is a growing chain and so a new block has to be added to the growing chain in order to secure it. Now, this doesn’t end there as there’s more to the blockchain than meets the eye. A user might begin to ask, “why would I want to secure a network that doesn’t belong to me or my father?” Staking comes with rewards for users who stake but to understand the basics of rewards, we would have to understand how blocks are added to a growing chain. Two mechanisms for this exist: the proof-of-work and the proof-of-stake. We’d delve into them briefly and see where the staking process comes in.
As stated earlier, one very key aspect of the blockchain technology is the addition of blocks to the growing chain. Let’s talk about the two common mechanisms that exist.
Proof Of Work
In this mechanism, a mathematical puzzle (hash) is set in place and miners would race against time to be the first to solve it, with the winner getting the right to add the next block to the growing chain. The miners usually get rewarded for success.
Proof of Stake
This mechanism has the same aim but uses a different approach. Here, the users would have to lock their stake and get a chance to be picked by the protocol to be the one to add the next block to the growing chain. The more you lock, the more rewards you get for helping to secure the network.
The concept of liquid staking is gaining traction as users try to maximize the potentials of their staked assets in order to earn more rewards. To understand liquid staking, we need to understand certain things. When you stake, you’re effectively locking your assets to help maintain the effective running of the protocol you’re staking for/on. The assets are locked and you can basically do nothing with them except claiming the rewards that are yours. That’s where the term “Total Value Locked” (TVL) comes in. With liquid staking, the aim is to help the user make use of their staked assets while they’re still locked. How does this work?? The Liquid staking platform allows you to stake your asset as you normally would. The assets are locked but there’s something else that happens. The protocol issues you representative tokens. One very strong example is the case of Persistence’s next-gen liquid staking platform, pSTAKE. Let’s say you stake your $ATOM on pSTAKE, you’d be issued representative tokens, stkATOM. The representative token is a replica of the staked token that acts as a receipt for the staked token. The twist to this is that it is then given the same value as the staked assets and can be traded on DeFi platforms. The stkATOM has a 1:1 value ratio as the $ATOM. With the stkATOM, you can retrieve your staked ATOM and without it, you can’t. This allows the user to earn normal rewards by virtue of staking ATOM and gain additional rewards by using the staked representatives for various processes in the DeFi space (Lending, Borrowing and LP rewards for providing liquidity). You can see that in the LP programs for stkATOM and stkXPRT on Sushiswap where users can take advantage of huge APYs. Now we understand this, we’d try to look at the effects that liquid staking might have on protocol security.
Liquid staking and Protocol Security
Now we would try to see the possible effects that liquid staking would have on protocol security.
As stated earlier, one very important factor when it comes to staking is the amount of yield that the staker hopes to get from the process. One very common feature now is that generally, the amount of yield from PoS staking is less that what’s obtainable from DeFi staking. This scenario would make DeFi staking look more attractive and users would feel less inclined to commit their tokens to a lower yielding platform. When this happens, there’s risk within the network as more stakers would prefer to carry out DeFi activities with their tokens for better yield. When the staking rate reduces, the network becomes less secure and you can’t really blame the stakers who are really after high yields. Many active validators would then have a majority of the remaining stake with them, thus leaving the network at risk of an attack. That’s where liquid staking comes in. Stakers can commit their gems to the PoS platform to earn rewards. They would then be issued representative tokens that can then be taken to the DeFi space for more yields. It’s a win-win for all parties involved.
Increased staking incentive
As stated earlier, the there is an increased desire to stake as users know that they can earn double rewards. In the absence of a liquid staking protocol, users can choose to stake in a PoS protocol to participate in network security and receive rewards, or they can decide to participate in the DeFi ecosystem to get themselves a nice profit. Liquid staking allows them to do both and so encourages users to stake on the PoS networks, thus maintaining the security of the network.
Exposure for the Project
When users begin to see staked representatives of certain assets in the DeFi space, they begin to look into the projects. This would bring exposure to the projects. Let’s say a random user goes to Sushiswap and sees the stkXPRT-ETH pool, they’d be tempted to look into the asset used to generate thestaked representatives. This would take the user all the way to XPRT and then to the Persistence Protocol. More users would then move to get more XPRT and stake on the pSTAKE platform so they can get rewards for staking on pSTAKE and also providing liquidity for stkXPRT-ETH pool on Sushiswap. This further strengthens the security of the network.
Liquid staking has come to stay and now it’s a case of taking advantage of the rewards system. That being said, we cannot overemphasize the effect that liquid staking has on protocol security. More and more opportunities would arise to further strengthen networks through liquid staking and it would be advisable to follow the trend.
Persistence is a protocol powering DeFi by providing next-gen financial products. They have products like AssetMantle, pSTAKE, AuditOne and pLEND coming soon
pSTAKE is a next-gen financial product of Persistence that’s helping users unlock the liquidity of their staked assets and earn more rewards. Currently, you can unlock the liquidity of your staked ATOM and XPRT on pSTAKE with further assets set to be launched in the coming weeks.
pSTAKE website: http://www.pstake.finance
pSTAKE App: app.pstake.finance
Persistence Website: https://persistence.one