With the success of Ethereum Merge, Ethereum has officially shifted from POW to POS. In the POS network, Staking is a topic that cannot be avoided. Users can obtain staking benefits by staking tokens in the network to provide security for the network, but the assets in staking cannot be used within a certain locking period. Staking derivatives can release the liquidity of Staking assets and improve asset utilization. This article will take you through derivatives projects focusing on Staking and explore how they build the Staking economic scenario in the multi-chain future.

The foundation of cross-chain liquidity

Cross-chain liquidity is a topic of great concern in the current cryptocurrency market. It involves the conflict between DeFi income and Staking income under the PoS consensus, cross-chain costs, and the balance between security and liquidity under the PoS consensus. To solve these problems, Staking derivatives came into being.

Staking derivatives essentially issue corresponding certificates to the native tokens participating in Staking. Holding the certificates can obtain Staking income. After the staking cycle ends, the certificate can be rigidly redeemed back to the native token. Such a design can solve the problem of conflict between DeFi income and Staking income under the PoS consensus. By converting Staking income into tradable derivatives, users can trade in DeFi, thereby achieving the liquidity and income of Staking tokens at the same time.

Simultaneously, Staking derivatives can address the issue of cross-chain costs. Traditional cross-chain transactions involve certain fees and time costs, which can diminish the user experience. By converting tokens into cross-chain assets and binding them to a single cross-chain derivative, users can directly trade these derivatives across different blockchains without incurring high cross-chain fees and waiting times.

Furthermore, Staking derivatives can resolve the conflict between security and liquidity under the Proof-of-Stake (PoS) consensus. In PoS consensus, to ensure network security, it is crucial to incentivize users to lock tokens in Staking. However, this also reduces token liquidity, making it challenging for users to use them for other purposes. By converting tokens into cross-chain derivatives, users can stake their tokens and earn corresponding rewards while also converting them into derivatives usable for DeFi transactions when needed, achieving a balance between security and liquidity.

Source: Dune

Value Capture in Derivatives

When it comes to Staking derivatives, we believe that this field will become an indispensable infrastructure, capturing value from both the underlying chains and upper-layer applications. As PoS networks develop, the value of Staking protocols will continue to grow. The success of Lido, the largest on Ethereum 2.0, is a notable example, achieving a new market cap high with the successful merge of Ethereum.

For users, Staking derivatives bring new DeFi gameplay, such as arbitrage opportunities with derivatives. If derivatives experience a discount, long-term holders can profit more by purchasing derivatives than by directly buying spot assets. Users only need to purchase derivatives and then redeem the native assets at a 1:1 ratio. This discount range essentially becomes a low-risk, high-reward arbitrage space. Therefore, users who understand the mechanics of derivatives have the opportunity to earn higher returns in the ecosystem.

In the overall development of DeFi in the public chain ecosystem, Staking derivatives bring a yield advantage to the ecosystem. If the future of Layer1 ecosystems adopts derivatives to achieve DeFi, the combined yield of basic Staking returns with DeFi returns from Staking derivatives will be higher than the ordinary DeFi yield, considering projects’ subsidies. For instance, leading DeFi projects on Ethereum currently boast stable yields that may exceed 5% in the long term. However, by combining DeFi with Staking derivatives, a 5% interest rate plus a 15% Staking yield results in a DeFi product with a stable 20% annualized return, thus attracting more users to the ecosystem. Currently, mainstream cross-chain staking protocols include:

• Bifrost is a Web 3.0 infrastructure that provides cross-chain liquidity for staking. It provides decentralized, cross-chain Liquid Staking services for multiple chains through the cross-chain communication protocol (XCMP). Bifrost’s mission is to aggregate more than 80% of the staking liquidity of the PoS consensus chain through cross-chain derivatives, and to provide standardized cross-chain interest-bearing for Polkadot relay chains, parachains, and heterogeneous public chains that bridge with Polkadot. Derivatives can lower user staking thresholds, increase multi-chain staking proportions, improve the revenue base of ecological applications, and create a StakeFi ecosystem that empowers users, multi-chains, and ecological applications and creates a positive cycle.
• StaFi is a cross-chain staking solution whose innovations include a nomination-based proof-of-stake (NPoS) mechanism, token locking, and increased liquidity. NPoS is a mechanism derived from DPoS, which can solve the tendency problem of DPoS and improve fairness and security. The token locking mechanism allows StaFi users to lock their tokens in the protocol and obtain Staking benefits. At the same time, StaFi also provides liquidity solutions to convert locked tokens into equivalent rTokens, which can be traded and used at any time. StaFi improves liquidity and flexibility by implementing multi-chain, cross-chain and asset tokenization, supports mainstream public chains and DeFi ecosystems, and provides users with a safe and reliable way to earn income.
• Kine Protocol is a cross-chain derivatives trading platform designed to provide efficient, low-cost decentralized trading solutions. Kine Protocol supports functions such as staking, minting, destruction, rewards and liquidity mining, and supports cross-chain transactions with multiple public chains. The main feature of Kine Protocol is to use technologies such as Kine Oracle to implement fast and efficient price oracles, and can realize derivatives transactions between any assets, such as lending, synthetic assets, and options. In addition, Kine Protocol adopts the AMM+Limit Order trading mechanism, allowing traders to choose trading methods more flexibly. Kine Protocol also provides a variety of reward mechanisms, such as LP rewards, liquidity mining rewards, and KineDAO rewards, to attract more users to participate in the platform.

Source: Bing Ventures

The future of cross-chain staking track

From the perspective of composability and interoperability, some current mainstream public chains have great room for expansion and potential in the DeFi field. Compared with Ethereum, these public chains have more diverse designs, allowing them to provide more flexible options in terms of composability and interoperability of cross-chain assets. With the rise of Staking derivatives, DeFi projects on these public chains will become more active. These projects will continue to improve their competitiveness by increasing liquidity and increasing participants. To this end, these projects also require more liquidity to support their development.

In addition, regarding the composability and interoperability of cross-chain assets, centralized financial products exhibit a diverse range of forms, stemming from the recognition of a unified value standard. Once multiple chains overcome technological limitations, the value consensus among major blockchains will lean more towards the decentralized essence. Under this premise, the strategies and applications of cross-chain assets will not solely be determined by project teams or public chains; users will have higher flexibility, operational strength, and greater sovereignty when utilizing cross-chain assets across various smart contracts and consensus mechanisms.

Therefore, the future of the cross-chain staking track is very clear. It will be a multi-chain future that belongs to users and the community and realizes true “Web3”. This future will bring more independent choices and greater operating space to users, and will also promote the development of the entire DeFi ecosystem and make greater contributions to the prosperity of the ecosystem. In this future, Staking derivatives will exist as indispensable middleware, capturing value from the underlying chain and other applications on the upper layer, and attracting more users to participate by continuously improving user profitability.

Source: DefiLlama

Summary

Cross-chain staking derivatives represent a novel PoS network solution aimed at enhancing capital efficiency and liquidity, providing users with broader opportunities in DeFi applications. However, this innovative tool also comes with potential risks that require project teams to take measures to strengthen market liquidity, improve security, ensure algorithmic fairness, and optimize the user experience.

Insufficient market liquidity may result in significant price volatility and high transaction costs. To address this, project teams can enhance market awareness, attract more users and capital, thereby improving the project’s reputation and brand value. Additionally, measures should be implemented to safeguard user asset security, such as multi-signature authentication, segregation of hot and cold wallets, and regular security audits.

Simultaneously, algorithmic unfairness in cross-chain staking derivatives and a suboptimal user experience can impact user engagement and loyalty. To mitigate this, project teams should adopt fair algorithmic designs and streamlined operational processes, providing efficient trade execution and low-cost transaction fees, along with designing a user-friendly interface. As DeFi and PoS blockchains continue to evolve, cross-chain staking derivatives are poised to become a more widely used tool. With a focus on ensuring user security and enhancing the user experience, this innovative solution has the potential to become a widely adopted passive savings instrument in the realm of DeFi.

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1. This article is reprinted from [Bing Ventures]. All copyrights belong to the original author [Kyle Liu]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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