The following artical is mainly about how significant liquidity to Blockchian industry and even the world as a whole. Solutions to the staking economy and the future of it.
foreword
foreword
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Data source: DeFi Pulse
This article addresses the following key points:
what is liquidity
The PoS Problem is the Liquidity Staking Opportunity
Liquidity Solutions
Mainstream release liquid products
Necessary factors for the success of liquidity staking projects
secondary title
what is liquidity
Liquidity refers to the ability of assets to be realized quickly at a fair price. It is the cornerstone of any financial field. Liquidity allows investors to have sufficient counterparties to complete transactions with them when they hope to conclude a transaction. Losing liquidity such as real estate is difficult to short-term Realization at a fair price, or potential losses caused by investors’ difficulty matching counterparties to clear positions in a timely manner, are all caused by lack of liquidity. The problem of asset liquidity is a common problem faced by the global capital market from ancient times to the present. In history, many large financial institutions such as Long-Term Capital Corporation have a large number of bonds with low liquidity and poor credit ratings in their assets. Chain panic selling in China is more inclined to hold assets with high liquidity and strong short-term liquidity, which means that investment portfolios held by long-term capital have potentially huge room for depreciation and liquidity problems. The ensuing default of the Russian government bonds led to the loss of long-term capital’s credit spread strategy, and the rapid depreciation of the Brazilian real caused the loss of long-term capital’s hedging volatility strategy. In addition, it was difficult to realize the fair value of its assets quickly, so that the cash flow was not enough to call for margin. In the end, it was rescued by the Federal Reserve Bank of New York at the cost of 90% of the shares. The case of Long-term Capital also confirmed the consequences of insufficient liquidity.
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The PoS Problem is the Liquidity Staking Opportunity
As lock-up has become the most concerned indicator of many DeFi projects, a large part of it can be attributed to the income obtained from pledge, voting rights and then becoming a liquidity provider and even a network maintenance participant. Why do you need voting rights? Because there is no institution like a bank in the decentralized world to make a final decision on your assets. Voting rights represent the consensus in the decentralized world. There are two ways to allocate bookkeeping rights, which are more laborious than the PoW mechanism. A lot, not only the computing power of the mining machine is required, but the workload of decoding calculations also increases exponentially, causing a lot of resources to be wasted. PoS determines the bookkeeping rights based on the amount of currency held and the time of currency holding, which solves the problem of wasting a lot of resources. , which means that PoS gives an opportunity for ordinary people to participate in community governance.
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Liquidity Solutions
In view of the prevalence of the pledge economy, pledge behavior makes investors lose asset liquidity, and loss of liquidity means loss of value. In addition, the waiting period of the lock-up period makes investors lose control of assets in a short period of time. Liquidity pledges came into being. Liquidity staking is also known as derivative staking, which allows users to retain their liquidity while obtaining staking income. The conversion of pledged assets into derivatives not only gives liquidity to pledged assets, but also allows investors to manage their risks Exposure and thus the possibility of hedging risk. Just imagine that pledged assets can be used for transactions, investment projects, or even pledged again. Tokens of different chains are constantly running between investors and even between chains, and economic activities occur. This will add to the DeFi industry and even the entire blockchain economy. more value.
1 Comparison of Liquidity Pledge and Traditional Financial Market
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Data source: Asset Management Association of China
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Mainstream release liquid products
As more and more projects based on the PoS consensus are launched, it has become normal to generate income from staking. A higher staking rate also means higher network security. However, the trade-off between greater security and greater liquidity becomes a headache.
There are currently many projects dedicated to providing liquidity for pledged assets. The following paragraphs will explain the characteristics and comparisons of these projects.
1 Bifrost
Based on the fact that single-chain smart contracts are difficult to copy to multiple chains, the Bifrost team found after technical research that the combination of Polkadot relay chain and Substrate development framework can solve this flawed problem very well, so the Bifrost project was born. Bifrost is a cross-chain network that provides liquidity for pledged tokens. It is developed based on Substrate and built on the Polkadot network. As a DeFi project in the Polkadot ecosystem, through Bifrost users can exchange PoS currency into vToken through the Bifrost protocol at any time Get Staking income and liquidity. Compared with Stafi, Bifrost is more focused on lowering the user threshold and increasing staking income while providing staking liquidity.
The project has designed a mechanism that allows users to exchange PoS currency into Bifrost vToken through the Bifrost protocol at any time. vToken is a cross-chain asset issued by users based on Bifrost exchange. Holding vToken can obtain pledge income, and vToken can be freely traded in different chains. Transactions, mortgage loans, payment Dapp, and can sell and redeem the original chain assets at any time without waiting for the release time. Holding vToken can obtain pledge income, and based on the characteristics of vToken built on the parallel chain, it can also enjoy the income of cross-chain pledge. Users can obtain vToken through various channels such as exchange, DEX, wallet, Dapp, airdrop, etc. Holding vToken means participating in staking on the original chain, obtaining income while retaining governance rights. The original chain assets converted into vTokens are locked in the transfer bridge of Bifrost, and the weight of the votes obtained by the Staking proxy node is used for staking of the original chain nodes. Users can participate in the governance of the original chain through BNC voting.
2 Stafi
Stafi is based on Substrate's NPoS consensus, and NPoS can ensure that the pledge amount is evenly distributed among validators. The solution provided by the Stafi protocol is that investors will get equivalent bond rTokens while pledging, and the bond rTokens can be traded. While obtaining pledge income, they can choose to sell bonds, and the selling behavior will be combined with pledged assets and Proceeds are passed along to the bond buyer. The bond being bought and sold does not have the action of releasing the pledge and re-pledging, so the security of the network is not affected. rToken will be protected by two types of nodes, one is Stafi Validator (SV), SV is used to provide protection for the entire protocol, and the other is Special Stafi Validator (SSV), SSV will provide protection for all pledge contracts. One problem with NPoS is that it cannot prevent sybil attacks, and tokens from unknown sources or stolen tokens can also become validator nodes or participate in governance links.
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Data source: stafi
3 Kira
Based on the Cosmos SDK framework, Kira will generate its derivative token sToken 1:1 when users pledge assets. This derivative token realizes the liquidity of pledged assets without trust and access permission. sToken can not only be transferred, traded, but also leveraged to pledge, and at the same time, it will also generate rewards brought by the pledge. MBPoS prevents Sybil attacks and security issues through governance-driven nodes and does not rely on cloud infrastructure. Kira will charge network fees, and its core logic is that more PoS supports staking derivatives or the more competitors like Stafi enter the market, the better Kira will be.
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secondary title
Necessary factors for the success of liquidity staking projects
solid economic model
Whether to support smooth switching between chains
Will cross-chain destroy the original structure
Governance
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Prospects and challenges of liquidity staking
Will the released liquidity accelerate the economic cycle
Is there a reasonable mechanism to balance the emergence of run tides?
A complete economic cycle includes four stages: prosperity, recession, depression and recovery. Liquidity is a double-edged sword. Insufficient liquidity will lead to liquidity drying up. Similarly, even though the emergence of virtual currency solves the problem of inflation through technical means and decentralization, coupled with the fact that derivatives pledges naturally come with double leverage, will the liquidity released by derivatives pledges accelerate the formation of bubbles and accelerate the economy? The cycle repeats the mistakes of 312. Secondly, due to the convenience brought by the Internet information age to people's life, the information is more symmetrical, and the speed of information transmission is accelerated, which makes the correlation of emergencies suddenly increase when the market goes down. A reasonable balance run mechanism can alleviate the chain reaction such as market panic to a certain extent.
Summarize
Summarize
references:
references:
2.ChitraTarun. (2020.6.16). arxiv.org.
GRZELAKMATEUSZ. (2020.9). KiraCore.
4.Liam, & Middle. (2020.8). stafi protocol.
5.Staking Finance. (2020.10.18).
6.stakingrewards. (2020.10.18).
7.Asset Securitization Business of Asset Management Association of China. (May 7, 2020).
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