In the ever-evolving world of LSTs; also known as liquid staking tokens, more and more protocols are embracing the introduction of LSTs.
It started from Lido's staked ETH, which is stETH. However, with the recent trend of total locked value flowing from EVM-based chains into Bitcoin, so does the introduction of LST on Bitcoin.
We will also talk about LISA, a Bitcoin Liquid Stacking protocol powered by Bitcoin, enabled via Stacks!
Introducing Bitcoin Liquid Stacking Tokens, powered by the Stacks Blockchain
Stacks' model hinges on the 'Proof-of-Exchange' mechanism, a pivotal shift away from traditional stakeholding protocols.
But what exactly is Stacks' Proof-of-Exchange (PoX), and how does it redefine the landscape of blockchain consensus models? While Proof-of-Stake has been around in the crypto space for years, Proof-of-Exchange works almost similar in terms of earning yield through securing the network.
What is Liquid Stacking; Liquid Staking using the Proof-of-Exchange Mechanism
Liquid stacking is revolutionizing the process of staking on blockchain networks through the Proof-of-Exchange mechanism. Particularly within the Bitcoin ecosystem, it enables users to stack while retaining liquidity, a feat achieved by issuing a liquid stacking token (LST).
This means participants earn staking rewards without the constraints of traditional staking methods, which require locking up their crypto assets.
Key Aspects of Liquid Stacking:
One notable example of this is Stacks' DeFi, where stacking is not constricted by token lock-up, hence expanding access to liquidity.
However, potential risks such as de-pegging of liquid staking tokens could present challenges, though some platforms, like LISA, mitigate this with their stable LST tokens using a Lido-like mechanism.
Liquid stacking is emerging as a secure, efficient solution, transforming how investors manage and optimize their holdings in the evolving landscape of PoS chains.
What is Stacks' Proof-of-Exchange (PoX)?
Here's a shorter explanation of Stacks' Proof-of-Transfer (PoX):
Stacks' Proof-of-Transfer (PoX) is a novel consensus mechanism that combines aspects of Proof-of-Work (PoW) and Proof-of-Stake (PoS). PoX allows users to stake their Stacks (STX) tokens to actively secure the Bitcoin blockchain within the Stacks environment.
The key innovation of PoX is that participants earn Bitcoin (BTC) as rewards for contributing to network consensus, rather than earning rewards in the same cryptocurrency they stake.
This serves two purposes:
PoX creates a symbiotic relationship between Stacks and Bitcoin ecosystems, incentivizing network security while unlocking Bitcoin's capabilities through programmability.
How Proof-of-Transfer (PoX) Works
Proof-of-Transfer (PoX) allows participants called "Stackers" to transfer their Bitcoin (BTC) to secure the Stacks blockchain network. This is different from proof-of-burn where coins are destroyed.
The process works as follows:
So in essence, PoX allows using Bitcoin's proof-of-work as a way to secure the Stacks chain, without modifying Bitcoin itself.
Stackers earn BTC rewards for validating Stacks, unlocking Bitcoin's capital for this new decentralized network and economy built on top of Bitcoin.
What is the difference between Proof-of-Stake (PoS) and Proof-of-Exchange (PoX)?
The primary difference between Proof-of-Stake (PoS) and Proof-of-Exchange (PoX) lies in the consensus mechanisms they employ to validate transactions and secure the blockchain network.
Proof-of-Stake (PoS)
In a PoS system, validators are chosen to create new blocks and validate transactions based on the amount of cryptocurrency they have staked (deposited) in the network. The more coins a validator stakes, the higher the chances of being selected to validate and earn rewards.
PoS introduces the concept of liquid staking, where users can stake their assets on the network without losing the ability to transfer the ownership of these staked tokens. They receive a liquid staking token (LST) that serves as a receipt, proving their ownership of the staked tokens.
This LST can be transferred, traded, or integrated into decentralized finance (DeFi) applications while allowing the original staked tokens to participate in network security and earn staking rewards.
Proof-of-Transfer (PoX)
Proof-of-Transfer (PoX) is a consensus mechanism used by the Stacks blockchain. It is an extension of the proof-of-burn mechanism that uses the proof-of-work cryptocurrency Bitcoin to secure the Stacks blockchain.
In a PoX system, miners (called "Stackers") transfer their committed Bitcoin to other participants in the network, instead of burning it like proof-of-burn. This allows Stackers to earn rewards in Bitcoin by securing the Stacks network.
PoX chains like Stacks are anchored to and inherit some security from an established proof-of-work blockchain, which in Stacks' case is Bitcoin. A hash of each Stacks block is recorded in OP_RETURN outputs on the Bitcoin blockchain, allowing Stacks to record its history and making it infeasible to falsify without also falsifying Bitcoin's history.
The key benefits of PoX are:
The PoX functionality is implemented via a Clarity smart contract on Stacks. Details are specified in SIP-007, with upgrades coming in Stacks 2.1 covered in SIP-015.
How to Get Stacks or Bitcoin Liquid Stacking Tokens?
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#1: LISA
LISA is a platform that allows you to earn stacking rewards on your STX tokens without having to lock them up for long periods (called stacking cycles).
LISA offers two liquid stacking tokens instead of one: LiSTX uses a rebasing mechanism for balance growth, while vLiSTX appreciates in value as stacking rewards accumulate. This design ensures both liquidity and adaptability, maintaining LiSTX at a 1:1 ratio with STX, whereas vLiSTX’s value diverges over time due to rewards.
Locking STX grants users LiSTX, which grows in the balance to reflect stacking yields. LiSTX can be traded at any time: It can be redeemed for STX at face value or traded against STX and other assets on supporting exchanges.
LiSTX specifically can always be redeemed 1:1 for the original STX you deposited, plus any rewards earned over time represented by the increased LiSTX balance.
Website: https://www.lisalab.io/
X Profile: https://twitter.com/LisaLab_BTC
Liquid Stacking Token: $LiSTX, $vLiSTX
#2: StackingDAO
StackingDAO is a liquid stacking platform built for STX holders, StackingDAO is launched on December 2023.
StackingDAO uses rebasing mechanism that grants you stSTX once you stack your STX token. The conversion value of stSTX back to STX increases every cycle; this is not the same as LISA's rebasing mechanism.
Website: https://www.stackingdao.com/
X Profile: https://twitter.com/StackingDao
Liquid Stacking Token: $stSTX
What is Rebasing in Liquid Staking?
Rebasing in the context of liquid staking refers to the automatic adjustment of the supply of liquid staking tokens in response to newly accrued staking rewards. The purpose is to maintain the peg between the liquid staking token and the underlying staked asset.
For rebase tokens, which are one type of liquid staking token, the number of tokens in each holder's wallet increases or "rebases" upward as new staking rewards are earned. This increases the circulating supply of the rebase token proportionally to the rewards earned.
The pivotal aspect of rebasing is that it allows liquid staking token holders to automatically and trustlessly receive their share of newly earned staking rewards without any extra transactions or actions required. Their percentage of the total supply remains constant.
For example, if you held 100 staked ETH represented by 100 stETH (Lido's rebase token), and the next day 1 ETH in rewards was earned, you would then hold 101 stETH after the rebase.
Rebasing happens automatically through the protocol's smart contracts in a decentralized manner. It helps maintain the peg between rebase tokens and the underlying staked asset as rewards accrue over time.
So in summary, rebasing refers specifically to the supply adjustment mechanism for rebase-style liquid staking tokens, in order to propagate newly earned staking rewards to token holders.
Example of how Rebasing Works in Liquid Staking Tokens
To illustrate how rebasing works within the liquid stacking framework, let's consider the following example. Imagine a user has staked their tokens and received liquid staking tokens (LSTs) in return. These LSTs are pegged 1:1 to the value of the original staked tokens and allow the user to participate in other DeFi activities without foregoing potential staking rewards.
Now, suppose the market price of the staked asset rises significantly. To maintain the peg, the rebasing mechanism might automatically increase the supply of LSTs. Here’s how it could look in practice:
Even with the supply change, the user's total holding value remains the same at $120, but the rebasing mechanism has allowed for the LST quantity in their wallet to reflect the current market value of the underlying asset.
In the reverse scenario, should the value of the underlying asset decrease, the rebasing algorithm would decrease the supply of LSTs proportionally. The result is a system that responds to market conditions to uphold the value proposition and stability of liquid staking tokens, which is crucial for their acceptance and integration within the broader ecosystem of decentralized finance.
Why Should You Hold Liquid Stacking / Liquid Staking Tokens over Native Token?
Holding liquid staking tokens is revolutionizing the DeFi space by offering a smarter, more fluid way to interact with staking mechanisms.
#1: Capital Efficiency
Capital efficiency is the strategic advantage of liquid staking. By allowing assets to work double duty, stakeholders can unlock a higher potential return on their investments.
#2: Access to Liquidity
One of the most compelling advantages of liquid staking is the accessibility it grants to your staked assets.
By locking your cryptocurrency into a smart contract with a liquid staking protocol, you receive back a liquid token which represents the value of your stake. This token can be immediately traded, used as collateral, or even lent out to others.
Risks and Considerations of Liquid Staking or Stacking
Venturing into the realm of liquid staking introduces an array of potential risks that participants should consider carefully. Here are some of the risk to be vary of:
#1: Smart Contract Risk
Engaging with liquid staking protocols means interfacing with smart contracts. These complex pieces of code can harbour vulnerabilities, becoming targets for hackers. Thus, users must be mindful of the smart contract risk involved, as it could lead to the loss of staked assets.
#2: Market Volatility
Liquid staking derivatives are not immune to the whims of the market. Staking tokens' value tracks the market conditions of underlying crypto assets, which can be incredibly volatile. This puts the derivatives' value at the mercy of broader market movements.
#3: Platform Diversity
With relatively fewer liquid staking platforms available, thorough research is essential. Choosing a platform means evaluating its security, features, and track record, as not all offer equal benefits or protections.
#4: Reward Variability
One shouldn't overlook the lack of standardized rewards in liquid staking. Platforms vary widely in how they dispense staking rewards. Users must therefore be astute in their selection to secure favorable terms.
In brief, liquid staking demands a careful approach. Users are advised to examine each platform for its smart contract integrity, stability amidst volatile markets, and the reward structure it offers.
