Liquid Staking: Effects on Protocol Security

Community member Chukwunelo Ebuka Alpha covers the emergence of liquid staking and explains how liquid staking helps to bolster PoS network security.
Liquid staking protocol security

Author: Chukwunelo Ebuka Alpha

Original article: Click here.

Note: This is a community-written piece submitted during our ongoing Article Contest campaign. The views expressed within are those of the author and not necessarily those of the pSTAKE team.

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Staking! Staking!! Staking!!!

Staking is a term that is so frequently and generally used within the blockchain space these days. Almost everyone in the space is talking about one staking program or another. You might ask, “What exactly is staking and why is there so much fuss and news about it in the world today?“.

This and more, we will discuss in this article as we explore staking, specifically the many reasons that people stake and the how to make the process more efficient. That will bring us to liquid staking and how it benefits the protocol security.

Staking

With staking, we refer to locking the coins of a blockchain project in a cryptocurrency wallet or staking platform in order to support the network of that project by providing security. To fully grasp this concept, we have to understand what a blockchain is.

A blockchain is a chain of data (records) referred to as blocks and linked together by cryptography (code). The blockchain is a growing chain of transactions with new blocks being continually added to the chain. Now, there’s more to the blockchain than meets the eye. A user might begin to ask, “why would I want to secure a network that doesn’t belong to me or my father?”.

Staking comes with rewards for users who stake but to understand the basics of rewards, we first have to understand how blocks are added to a growing chain. Two common mechanisms for this exist: Proof of Work (PoW) and Proof of Stake (PoS). We’d delve into them briefly and see where the staking process comes in.

The Mechanisms

As stated earlier, one very key aspect of the blockchain technology is the addition of blocks to the growing chain. Let’s talk about the two common mechanisms that exist to facilitate this.

Proof of Work

In this mechanism, a mathematical puzzle (hash) is set in place and miners race against time to be the first to solve it, with the winner getting the right to add the next block to the growing chain. The miners usually get rewarded for success.

Proof of Stake

This mechanism has the same aim but uses a different approach. Here, the users lock their stake with a validator, which gets the chance to be chosen by the protocol to be the one to add the next block to the growing chain. The more you stake, the more rewards you get for helping to secure the network.

Liquid Staking

The concept of liquid staking is gaining traction as users try to maximize the potentials of their staked assets in order to earn more rewards. To understand liquid staking, we need to understand the basics of staking. When you stake, you’re effectively locking your assets to help maintain the effective running of the protocol you’re staking for/on. The assets are locked and you can basically do nothing with them except claim your rewards accrued from staking. That’s where the term “Total Value Locked” (TVL) comes in. With liquid staking, the aim is to help the user make use of their staked assets while they’re still locked, thus unlocking liquidity of this TVL.

How does this work? The liquid staking platform allows you to stake your asset as you normally would. The assets are locked but there’s something else that happens – the protocol issues you representative tokens. One very strong example is Persistence’s next-gen liquid staking platform, pSTAKE. Let’s say you stake your $ATOM on pSTAKE, you’d be issued representative tokens, stkATOM tokens. The representative token is a replica of the staked token that acts as a receipt for the staked token. The twist to this is that it is then given the same value as the staked assets and can be traded on DeFi platforms.

The stkATOM has a 1:1 value ratio as the $ATOM. With the stkATOM, you can retrieve your staked ATOM and without it, you can’t. This allows the user to earn normal rewards by virtue of staking ATOM and gain additional rewards by using the staked representatives for various processes in the DeFi space (lending, borrowing and LP rewards for providing liquidity). An example is the LP programs for stkATOM and stkXPRT on SushiSwap in which users are incentivized with retroactive rewards. Now that we understand this, let’s look at the effects that liquid staking might have on protocol security.

Liquid Staking and Protocol Security

Competing yields

As stated earlier, an important factor when it comes to staking is the amount of yield that the staker hopes to generate from the process. One very common feature now is that generally, the amount of yield from PoS staking is less that what’s obtainable from DeFi staking. This scenario would make DeFi staking look more attractive and users would feel less inclined to commit their tokens to a lower yielding platform. When this happens, there’s risk within the network as more stakers would prefer to carry out DeFi activities with their tokens for better yield. When the staking rate reduces, the network becomes less secure and you can’t really blame the stakers who are really after high yields. Many active validators would then have a majority of the remaining stake with them, thus leaving the network at risk of an attack.

That’s where liquid staking comes in. Stakers can commit their tokens to the PoS platform to earn staking rewards for helping to bolster network security. They are then issued representative tokens that can be taken to the DeFi space for more yields. It’s a win-win for all parties involved.

Increased staking incentive

As stated earlier, the there is an increased desire to stake as users know that they can earn double rewards. In the absence of a liquid staking protocol, users can choose to stake in a PoS protocol to participate in network security and receive rewards, or they can decide to participate in the DeFi ecosystem for a general greater return. Liquid staking allows them to do both and so encourages users to stake on the PoS networks, thus maintaining the security of the network.

Exposure for the project

When users begin to see staked representatives of certain assets in the DeFi space, they begin to look into the projects. This would bring exposure to the projects. For example, if a user goes to SushiSwap and sees the stkXPRT-ETH pool, they may be tempted to look into the asset used to generate the staked representatives. This would take the user to XPRT and the Persistence protocol. More users may then move to acquire more XPRT and stake on the pSTAKE platform so they can get rewards for staking on pSTAKE while also providing liquidity for the stkXPRT-ETH pool on SushiSwap. This further strengthens the security of the network, as the staking ratio on the network increases with more XPRT staked via pSTAKE.

Conclusion

Liquid staking has come to stay and now it’s a case of taking advantage of the rewards system. That being said, we cannot overemphasize the effect that liquid staking has on protocol security. More and more opportunities will arise to further strengthen networks through liquid staking and it would be advisable to follow the trend.

About pSTAKE

pSTAKE is a liquid staking solution that unlocks the potential of staked PoS assets (e.g. ATOM). PoS token holders can deposit their tokens on the pSTAKE application to mint 1:1 pegged ERC-20 wrapped unstaked tokens, which are represented as pTOKENs (e.g. pATOM) that can then be transferred to other wallets or smart contracts on the Ethereum network to generate additional yield.

Currently, pSTAKE issues 1:1 pegged ERC-20 liquid staking representative tokens on the Ethereum network, with a long-term aim of building a multi-chain protocol issuing liquid staked representatives on multiple networks including the Persistence Core-1 chain.We have a bag full of new features and an exciting roadmap for the coming months so follow pSTAKE on Twitter and hop onto our Discordchannel to stay up-to-date with the latest developments.

Developed by Persistence

Persistence is enabling exposure to multiple asset classes such as Liquid Staking (pSTAKE), NFTs (Asset Mantle), and Synthetics (Comdex). Persistence ecosystem products are designed to stimulate global liquidity and enable seamless value exchange.

Persistence’s Core mainnet is a Proof-of-Stake chain powered by Tendermint BFT consensus engine. Persistence’s multi-chain tech stack (currently supporting Cosmos, Ethereum, and other Tendermint-based chains) abstracts away the complexities for developers and enables them to create DEXs, marketplaces, lending/borrowing platforms, etc.

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