Last summer, Polkadot made a little bit of history of its own after confirming that the first five projects were occupied Parachain Slot On its canary network Kusama. Different blockchains are connected to Polkadot’s main relay chain for security, but are otherwise independent, parachains represent a new way of doing business in blockchains, a method designed to improve Scalability and governance at the same time allow maximum vision for the possibility of fork-free upgrades. The five projects are Karura, Moonriver, Shiden, Khala and Bifrost.
Fast forward to today and the first parachains are about to expire, releasing over 1 million locked Kusama (KSM) tokens to the market. Given that KSM currently has a supply of 9 million, fundamental economics suggest that prices will suffer as previously inaccessible tokens suddenly re-enter circulation. Of course, price volatility affects staking and liquid staking — although the latter innovation allows users to spend their tokens even when locked.
eat your cake
we are all familiar pledge: This is the process of “locking” tokens into the system as collateral in order to secure the network. In exchange for participating in this effort, rewards can be obtained.
In Polkadot’s complex Nominated Proof of Stake (NPoS) ecosystem, stakers can be nominators (whose role is to nominate validators they trust) or validators, but in both cases the same economic incentives apply. As mentioned above, the problem is what happens at the end of the staking period. Securing the relay chain (not to mention several parachains) pays off handsomely, which is all well and good, but if the price of the native token plummets, it could become the laughing stock of the entire enterprise.
While liquidity staking does not protect the underlying price of the pledged asset, it ostensibly enables users to safely release on-chain liquidity and take advantage of the yield opportunities offered by numerous decentralized applications.This can be achieved by issuing a separate token, which representative value It matters a lot. Since this liquid derivative essentially acts as a native token in the market, it addresses the risk of sudden price instability after the unbundling period ends.
The model enables users to maintain their liquidity and utilize the underlying token, whether through transfers, spending, or transactions as they see fit. In fact, stakers can even use their derivatives as collateral to borrow or lend across different ecosystems to participate in other decentralized finance (DeFi) opportunities. The best part is that staking rewards continue to accumulate on the original asset locked in the staking contract.
But what happens when the pledge period ends, I hear you ask. Well, derivatives are simply swapped back into the native token to maintain a stable circulating supply.
In short, it’s a case of eating cake and eating it.
The future of proof-of-stake?
Proof-of-stake consensus mechanisms have been receiving increasing attention, especially as we approach the launch of PoS for Ethereum 2.0. Blockchain’s transition to proof-of-stake has long been expected to reduce energy consumption by more than 99 percent, leading environmental critics to point their condemnation at bitcoin and its controversial proof-of-work model.
There is no doubt that PoS is the environmentally sound option, even if some PoW criticisms are exaggerated due to the improved energy matrix favored by miners. Although the consensus mechanism has many improvements over its predecessor, there is still work to be done. Proof of stake is far from a set science, it is an innovation that can and should be improved. We can start by increasing the number and capacity of PoS validators.
This is the idea behind Polkadot’s NPoS model, which attempts to combine the security of PoS with the added benefit of stakeholder voting. In my opinion, liquidity staking builds on these advantages by solving a long-standing dilemma for users: whether to lock their tokens or use them in DeFi decentralized applications (DApps).
Of course, this dilemma doesn’t just bother users. It damages the entire DeFi landscape. For some cryptocurrencies, the percentage of circulating supply locked in staking can exceed 70%.For example, at the time of writing, nearly three-quarters of Solana’s Sol Tokens are staked – over 80% BNB, according to to Statista. It doesn’t take a genius to know that having only 30% of the token supply available for DApps is a net negative for the industry as a whole.
While proof-of-stake systems require an active stake community to be secure, DApp developers want to facilitate transactions — and transactions require tokens. As a result, the emergence of liquid staking has been welcomed by both parties, especially DApp creators, who are forced to offer higher and higher APY to convince users that their assets are better deployed in lucrative DApps rather than staking contract.
Liquid staking is one of the brightest innovations in DeFi’s short history by maintaining a stable circulating supply, addressing worrying price volatility, and helping users generate higher returns (staking payouts plus DApp earnings). Let’s hope more stakers realize this.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making a decision.
The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Lurpis Wang | Co-founder of Bifrost and an entrepreneur in the Web3 space. He was an early full-stack developer on Sina Weibo. After Lurpis co-founded Bifrost in 2019, the platform became one of the first teams to use Substrate, received funding from the Web3 Foundation, and won the inaugural Substrate Hackathon Award.