Polkadot created its own history last summer by confirming five of the first five parachain slots on Kusama’s canary network Kusama. Parachains are a collection of different blockchains that attach to Polkadot’s main Relay chain for security but are independent. They represent a new way to do business in blockchain. This maximalist vision is aimed at increasing scalability, governance, and the possibility for forkless upgrades. These five projects were Karura (Moonriver), Shiden, Khala, and Bifrost.
Today is the day that parachains have expired. This will allow over 1,000,000 Kusama tokens (KSM), to be released onto the market. KSM’s current supply of 9 million tokens means that the price will drop as tokens previously unavailable will suddenly become available. Although liquid staking and staking are affected by price fluctuations, the latter innovation allows users access to their tokens even if they’re locked.
Related: What intrigue lies behind Kusama’s parachain auctions
You can have your cake and eat it
Staking is something we all know. It involves “locking” tokens into a system to secure a network. Rewards are earned in exchange for participating in this endeavor.
In Polkadot’s complex nominated proof of stake (NPoS), stakers have two options. They can be validators or nominators. However, in both cases the same economic incentive applies. As we have already mentioned, the problem is what happens after a staking period. While it’s great to receive generous rewards for securing Relay Chains (not only several parallel chains), it can make the venture look sloppy if the native token price plummets.
Although liquid staking does not protect the underlying value of staked assets, it allows users to secure on-chain liquidity and access yield-bearing opportunities provided by many decentralized applications. This is possible by issuing a separate token, which represents one’s stake. This liquid derivative acts as the native token and reduces the risk of price instability after an unbonding period.
This model allows users to keep their liquidity and use the underlying token however they choose, such as spending, trading, or transferring it. Stakers have the option to use derivatives to lend or borrow across multiple ecosystems in order to take part in Decentralized Finance (DeFi). The best part? Staking rewards still accrue on original assets that were locked in the contract.
Related: How liquid stake disrupts the parachain auctions at Polkadot
You may be wondering what happens after the staking period ends. The derivatives can be exchanged for native coins to maintain a constant supply.
It’s basically about having your cake and eating your pudding.
What is the future of proof-of stake?
As we near the launch of PoS for Ethereum 2.0, the proof-of-stake consensus mechanism is being more prominently highlighted. The long-awaited transition to proof of stake in blockchain is expected to decrease its energy consumption by more than 99%. This will leave environmental critics to focus their criticism on Bitcoin and its controversial proof–of-work model.
PoS is clearly the most environmentally-sound option. However, some PoW critics are exaggerated due to the improved energy matrix that miners favor. There are still many improvements to the consensus mechanism that have been made over its predecessor. Proof-of-stake, while not a settled science, is an innovation that needs to be improved. We can begin by expanding the capabilities and number of PoS validaters.
This is the idea behind Polkadot’s NPoS model. It combines the security and benefits of PoS with stakeholder voting. Liquid staking, in my opinion, builds on those advantages by solving the long-standing dilemma faced by users: should they lock their tokens? or use them for DeFi decentralized apps (DApp).
Related: The many layers and types of crypto staking within the DeFi ecosystem
This problem doesn’t just affect users; it also impacts the entire DeFi landscape. Some cryptocurrencies have a higher percentage of their circulating supply locked in stakestaking than 70%. Statista reports that almost three quarters of Solana’s SOL tokens and more than 80% of BNB are staked at the time of writing. You don’t need to be a genius in order to see that only 30% of the token supply is available for DApps. This is a net negative for all stakeholders.
DApp developers are looking to facilitate transactions, and proof-of-stake systems require a staking community in order to be secure. Tokens are needed for transactions. Both parties have welcomed liquid staking, and DApp creators are pleased that they can offer higher APYs in order to convince users that their assets work best in lucrative DApps rather than staking contracts.
Liquid staking is one the most innovative innovations in DeFi’s history. It maintains a stable supply, addresses worrisome price fluctuations, and helps users generate higher rewards (staking payouts plus DApp return). We hope that more stakers realize this.
This article is not intended to provide investment advice. Every trade and investment involves risk. Readers should do their research before making any decision.
These views, thoughts, and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
Lurpis Wang, a co-founder and entrepreneur in the Web3 field, is Lurpis. He was an early Sina Weibo full-stack developer. Bifrost was founded by Lurpis in 2019. It became the first team to use Substrate. The platform also received a grant through the Web3 Foundation and won the Substrate hackathon prize.