New Market Seizes New Opportunities: Unique Staking Service Model in Polkadot Ecosystem

Polkadot (DOT) is undoubtedly the star project that investors have paid the most attention to recently. The token has achieved continuous growth after the 1:100 split, and its peak market value has reached the top 5 in the crypto market, approaching its biggest competitor Ethereum. However, many projects in the Polkadot ecosystem are not yet well known. The most distinctive one is the POS-related Staking derivative service, which truly maximizes the value of this blockchain.

Value and Service

The birth of PoS (Proof of Stake) can be traced back to 2011, when a netizen named Quantum Mechanic first proposed the concept of Proof of Stake in the Bitcoin community forum. Three years later, Ethereum used PoS as its final consensus mechanism in the technical roadmap planned in its white paper. Complementing PoS is the concept of Staking, which is to pledge tokens to network nodes to compete for bookkeeping, thus starting the development history of Staking.

"Staking" is not just as simple as proof of stake. There are three layers of value behind it. At the bottom level, it can maintain network security, which is related to the PoS algorithm. The more tokens staked in honest nodes, the smaller the circulation in the market, and the lower the possibility of malicious behavior. The middle level is to obtain benefits from network expansion. The value of public chain tokens depends on the prosperity of its ecology, and staking is precisely the key to promoting prosperity, which can promote the loyalty of users and developers to the network. The upper level is the governance and voting rights of network development. PoS's network governance and technology iteration are more flexible.

At present, staking services are all centralized. One of them is the public chain wallet. As the most important application of the public chain, staking is one of the basic services provided and the main entrance for users to participate in network construction. More users choose the staking services provided by mining pools and centralized exchanges, because while they have traffic, they also greatly reduce the threshold for user participation. PoS tokens of multiple different chains can be locked in one scenario, and after connecting with the exchange, buying and selling tokens are relatively more convenient. Although centralized service providers have taken away part of the profits and have more say in the network, it seems that there is nothing wrong with more speculative users in the current market.

Contradictions and Dilemmas

However, contradictions and dilemmas still exist objectively.

The biggest problem is the contradiction between the security of the main network and the liquidity of tokens. In the early days of the network, the price of tokens fluctuated violently. If users rashly locked their tokens, they would lose liquidity and bear the risk of price fluctuations. Therefore, users were very reluctant to lock their tokens. At the same time, considering the security of the network, users had to be encouraged to lock more tokens. This contradiction needs to be resolved urgently.

The dilemma of network security is difficult to solve. The profit from the pledged tokens will be taken away by the mining pool as service fees, and some mining pools do not have the cost of setting up servers, only "management fees". Centralized exchanges and mining pools have the possibility of hijacking the network. After all, users cannot see the real purpose of the tokens in them, which may threaten the network security of POS-type public chains. At the same time, the governance and voting rights of the network are increasingly concentrated in the hands of these service providers, so the power that originally belonged to the users is also represented by the service providers, thus forming a "Matthew effect" and making the network more centralized.

New Species - Staking Derivatives Smart Contract

With the popularity of smart contracts, people have found that native application services on the chain are more suitable for solving current problems. Therefore, the Staking Finance solution was proposed, which essentially created a new set of value symbols corresponding to the original mortgage tokens, which actually stripped the network usage rights and income rights, and also gave birth to a new derivatives market.

The idea of ​​this type of solution is very simple. For example, in the Stafi and Bifrost protocols, users pledge the POS token DOT to a special Staking smart contract, and the contract will issue an equal amount of xDOT to the user's account on a one-to-one basis. At this point, xDOT is the only certificate for unlocking and obtaining the corresponding DOT income in the future, that is, a "bond". This type of derivative token can circulate in the market, which solves the problem of liquidity of the pledged token.

The advantages of this type of decentralized staking service will be more prominent. Liquidity is more decentralized and therefore safer. Each POS node can refer to a smart contract template (protocol) to issue, which will strengthen the decentralization of the pledged tokens, avoid the risk of the network being hijacked by a few nodes, and ensure network security. If it is done by a centralized exchange or mining pool, not only can the derivative tokens be traded only within its system, but it is also possible that several giant nodes holding user tokens for staking will be born, increasing the risk of the network. At the same time, the use and voting rights of the network still belong to the original tokens, that is, they are locked in the nodes that issue the derivative tokens, so it is still the token holders, not the centralized institutions, who control the entire POS network.

New markets require new opportunities

The Staking Token derivatives ecosystem will form a new bond-like financial market. The emergence of this market will not only expand the influence of POS tokens, but also make the gameplay more diverse. In the future, it can be foreseen that when Staking and DEF are combined to form a new programmable financial architecture, it will definitely create different sparks.

In the Hongmeng era of Staking Finance, there will be more services for new markets. For example, new trading platforms will emerge, and automated market makers may also be used, because the prices of DOT and xDOT can be strongly correlated, and their parameter k is easier to find. The practical scenarios of wallets will also increase, bringing new traffic and users to many wallet applications. After involving stablecoin mortgages, there will still be derivatives such as lending, asset synthesis, and combined income.

Early arbitrage opportunities cannot be ignored. As in the example above, the price of xDOT will deviate from DOT itself, because it is also attached with liquidity premium, income rights expectations, time costs, etc., which in turn affect the price of DOT itself. Although the prices of the two are highly correlated in the long run, they will be affected by funds in the short term. Whenever the value deviates, it will eventually return to the mean. Therefore, in the early stage of the market, when it is not stable, arbitrage is an obvious big opportunity.

In the next two years, when Ethereum is undergoing a difficult upgrade, several public chains will surely emerge while the big boss is resting. Polkadot is undoubtedly the most competitive one at present. Looking at the entire Polkadot ecosystem, Staking Finance is not only unique, but also more likely to be practical.

Author: Geoffrey Ding

Disclaimer: The above views only represent the author's views and do not represent the platform's views