An article to understand the unique Staking service model in the Polkadot ecosystem

In the next two years, during the difficult upgrade stage of Ethereum, several public chains will surely emerge while the boss is resting. From the current point of view, Polkadot is undoubtedly the most competitive one. Polkadot (DOT) is undoubtedly the star project that investors are most concerned about recently. The token has achieved continuous rise after the 1:100 split, and its peak market value has reached Top 5 in the encryption market, which is close to its biggest competitor Ethereum. However, many Polkadot ecological projects are not yet well-known, and the most distinctive one is the POS-related Staking derivative service, which truly maximizes the original 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 on the Bitcoin community forum. Three years later, Ethereum adopted PoS as its final consensus mechanism in its technical roadmap planned in its white paper. Complementary to PoS is the concept of Staking, to mortgage tokens to network nodes to compete for bookkeeping, and thus began the development history of Staking.

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"Staking" is not just as simple as proof of equity, there are three layers of value behind it. At the bottom level, network security can be maintained, which is related to the PoS algorithm. The more tokens mortgaged in honest nodes, the smaller the circulation in the market, and the lower the possibility of doing evil. The middle layer is to obtain the benefits of network expansion. The value of a public chain token depends on its ecological prosperity, and staking is precisely the key to promoting prosperity, which can promote the loyalty of users and developers to the network. The upper layer is the governance and voting rights of network development, and the network governance and technical iteration of PoS are more flexible.

At present, Staking services are all decentralized. One is the public chain wallet. As the most important application of the public chain, staking is one of the basic services provided, and it is also the main entrance for users to participate in network construction. And more users choose the staking service provided by mining pools and centralized exchanges, because it not only has traffic, but also greatly reduces the threshold for user participation. PoS tokens of various chains can be locked in one scene. warehouse, and after opening up with the exchange, it is relatively more convenient to buy and sell tokens. Although centralized service providers share some of the revenue and have more say in the network, it seems that there is nothing wrong with more speculative users in the current market.

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However, contradictions and difficulties still exist objectively.

The biggest one is the contradiction between mainnet security and Token liquidity. Since the price of tokens fluctuated violently in the early days of the network, users who locked their positions rashly would lose liquidity and bear the risk of currency price fluctuations. Therefore, users’ willingness to lock positions was very low; at the same time, considering the security of the network, users should be encouraged to To lock more positions, this contradiction needs to be resolved urgently.

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The dilemma of network security is difficult to solve. The profits from mortgage tokens will be taken by the mining pool as a service fee, and some mining pools do not have the cost of setting up servers, but only "management fees". Centralized exchanges and mining pools have the possibility of hijacking the network. After all, users cannot see the real use of these tokens, which may threaten the network security of POS 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 users is also represented by service providers, which in turn forms the "Matthew Effect" and makes the network more and more centralized.

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With the popularity of smart contracts, people find that native application services on the chain are more suitable for solving current problems. Therefore, the proposal of Staking Finance was proposed, which essentially created a new set of value symbols corresponding to the original mortgage tokens. In fact, it stripped off the right to use the network and the right to earn money, and also created a new derivatives market.

The idea of this type of program is very simple. For example, in the Stafi and Bifrost protocols, the user pledges the POS token DOT to a special Staking smart contract, and the contract issues an equivalent amount of xDOT to the user account one by one. At this time, xDOT is the only certificate for unlocking and obtaining corresponding DOT benefits in the future, that is, a "bond". This kind of derivative Token can be circulated in the market, which solves the problem of mortgage token liquidity.

The advantages of such decentralized Staking services will be more prominent. Liquidity is more decentralized and thus more secure. Each POS node can refer to a smart contract template (protocol) to issue, which also strengthens the decentralization of mortgage tokens, avoids the risk of being kidnapped by certain nodes, and ensures network security. If it is done by a centralized exchange or mining pool, not only the derived tokens can only be traded within its system, but also several giant nodes holding user tokens for staking may be born, which increases the risk of the network. At the same time, the use and voting rights of the network still belong to the original token, that is, it is locked in the node that issues the derivative Token, so it is still the token holder, not the centralized organization, that controls the entire POS network.

The Staking Token derivatives ecology will form a new bond-like financial market. The emergence of this market not only expands the influence of POS tokens, but also makes 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, different sparks will definitely emerge.

In the Hongmeng era of Staking Finance, there will be more services for new markets. For example, a new type of trading platform will appear, and the trading mechanism of an automated market maker may also be used, because the prices of DOT and xDOT can be strongly correlated, and its parameter k is easier to find. The practical scenarios of the wallet will also increase, bringing new traffic and users to many wallet applications. After the stable currency mortgage is involved, there will still be derivatives such as lending, asset synthesis, and portfolio income.

Early arbitrage opportunities cannot be ignored. As in the example above, the price of xDOT will deviate from DOT itself, because there are liquidity premiums, income right expectations, time costs, etc. behind it, which will affect the price of DOT itself. Although the two prices have a high correlation in the long run, short-term influence by funds will create certain arbitrage opportunities. Whenever the value deviates, it will eventually achieve mean reversion. Then in the early stage of the market and when it is not stable, Arbitrage is an obvious big opportunity.

In the next two years, during the difficult upgrade stage of Ethereum, several public chains will surely emerge while the boss is resting. From the current point of view, Polkadot is undoubtedly the most competitive one. Looking at the entire Polkadot ecology, Staking Finance is not only unique, but also more likely to be practical.

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