Chukwunelo Ebuka Alpha

Nov 30, 2021

5 min read

StaFi Protocol’s Liquid staking platform — A case for Protocol Security

Protocols and projects are springing up in the DeFi space and they’re helping solve a lot of use cases within the space. Staking is one way via which these projects and protocols can remain secure to carry out the activities that they do but what exactly is staking?? Staking simply refers to the act of holding or keeping the coins of a blockchain project in a cryptocurrency wallet or staking platform so as to support the network of that project and also provide security. Now you get the drift.

Staking

The staking process (proof of stake) is a lot easier than the mining process of the proof of work as you basically have to commit your stake instead of fighting against time and wits to solve a mathematical puzzle. This means that you get incentivized for committing your stake to a project. The thing here is that when you do, your assets remain locked and so you can’t do much with your locked assets aside from picking the rewards that trickle in. The rewards however, are small when compared to rewards that could be gotten when you commit your tokens to the DeFi space.

What does this mean?? There’d be a reluctancy for users to stake and the resultant effects on these Protocols could be devastating. Users would naturally want to secure the Protocols but they’d also be inclined towards getting more yield from their assets. Is there a way out of this?? Can they eat their cake and have it??? That’s where liquid staking comes in.

Liquid Staking

Let’s talk about liquid staking and how it’s helping users maximize the potentials of their staked assets so as to earn more rewards whilst also protecting the integrity of protocols.

The concept of liquid staking is gaining so much attention as users try to maximize the rewards they can get from their staked assets. To understand liquid staking, we need to go back to where we started: STAKING. Whenever you stake, you’d basically be locking your assets out of the mainstream to help maintain the effective running of the protocol you’re staking for/on. The assets are locked and there’s nothing you can do with them except claiming the rewards that trickle in for you. Now, you understand where the term “Total Value Locked” (TVL) comes from. Liquid staking would help users make use of their staked assets while they’re still locked. This is pretty much fascinating, right?? The Liquid staking platform allows you to stake your asset, just like the conventional staking platforms would. The assets are locked but there’s something else. The liquid staking platform gives the users, replicas of their staked tokens. One very strong example is the case of StaFi Protocol. Let’s say you stake your $BNB on the StaFi Protocol App, you’d be given representative tokens, rBNB. 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. TherBNB has a 1:1 value ratio as the $BNB. With the rBNB, you can retrieve your staked BNB and without it, you can’t. This allows the user to earn normal rewards by virtue of staking BNB and gain additional rewards by using the staked representatives for various processes in the DeFi space (Lending, Borrowing and LP rewards for providing liquidity).

Effect of StaFi’s Liquid Staking on Protocol Security

Earlier, we raised concerns about the effect that having locked assets could have on protocol security as users would want to withdraw their staked assets in search of greater yield in the DeFi space. Now we would try to see the possible effects that liquid staking would have on protocol security as users can now eat their cake and have it. Three major effects would be derived.

At the beginning, we stated clearly that there was one very important factor in the staking process and that is the amount of yield that the staker hopes to get from the process. We also know that, statistically, the amount of yield from PoS staking is less than what you can obtain from DeFi staking. This scenario implies that DeFi staking would look more attractive to users who would feel less inclined to commit their tokens to a lower yielding platform. If this happens, there would be risk within the network as more users would prefer to push their tokens to the DeFi ecosystem for more yield. When the staking rate goes down, the network would become less secure and you can’t really blame the stakers who are really after high rewards. The active validators would then have a majority of the remaining stake with them, thus leaving the network at risk of an attack. Liquid staking solves this easily. Users can stake their gems on the PoS platform to earn rewards. They would then be issued representative tokens that they can use in the DeFi space for more yields. Everybody wins. The stakers and the Protocol.

It’s normal to note that there is an increased desire to stake when users know that they can earn double rewards. When there is no liquid staking protocol, users can choose whether to stake in a PoS protocol to participate in network security and receive rewards, or participate in the DeFi ecosystem to get themselves a nice reward. With liquid staking, they can do both. This encourages users to stake on the PoS networks, thus maintaining the security of the network.

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 his/her favourite DeFi pool and sees a rSOL pair, the user would be tempted to look into the asset used to generate the staked replicas. This would take the user all the way to SOL and then to the Solana ecosystem. More users would then move to get more SOL and stake on the StaFi protocol app so they can get rewards for staking on StaFi and also providing liquidity for any of the rSOL pairs. This further strengthens the security of the underlying network.

Conclusion

Liquid staking is here and all we have to do is look for ways to take advantage of the rewards system. With that, we cannot overemphasize the effect that liquid staking would have on the security of protocols. We would see more and more opportunities to further strengthen networks through liquid staking and it would be really great to follow the trend. We are lucky to have StaFi Protocol pushing this narrative for us. It would be really great to join the bandwagon.

Contact

StaFi website: https://stafi.io

StaFi Twitter: https://twitter.com/stafi_protocol