#31: Staking vs Lending

Binance 0% staking, token lending and PoS security implications, Stake DAO, updates on Eth2.0 and incentivized testnets.

This newsletter is supported by Chorus One, an operator of validating nodes and staking services on Proof-of-Stake networks.

Binance is ramping up their staking offering and has announced support for Cosmos and 0% fee staking on Tezos. While many have been awaiting these types of moves, they are now quickly becoming a reality. Coinbase Custody quickly became the third biggest public validator on Tezos even with a 25% fee, their growth somewhat slowed down by Tezos’ bond requirement that Coinbase is posting themselves. It is currently unclear how Binance is approaching the potential of slashing of customer funds.

Token holder education and ways that enable non-custodial providers to compete with centralized, custodial players like exchanges (see e.g. Stake Capital DAO below) need to come into reality for Proof-of-Stake networks to achieve decentralization and avoid a Tron-like destiny in which Binance could control 25 of 27 nodes.

A paper by Tarun Chitra modeling the impact of lending yields on staking participation in Proof-of-Stake networks. The basic conclusion is that a spike in lending rates could see stake migrating to higher yield lending protocols, potentially endangering the security of networks.

Haseeb Qureshi wrote a post summarizing the results. While the core insight is relatively trivial, the paper formalizes factors impacting this equilibrium and uses agent-based simulations to visualize outcomes. The core takeaway is that network monetary policy needs to be flexible to account for this type of attack.

Staking provider Stake Capital announced their plans to form a revenue-sharing DAO around their services. A token that is distributed to users providing collateral (staking) will allow holders to earn part of the fees earned by services offered by the DAO across blockchains.

Another core part of the design is the issuance of secondary tokens (LTokens) representing the claim on collateral provided to and rewards earned by the DAO. LTokens fall into the category of staking derivatives and are designed to overcome liquidity limitations of staked assets in current networks. You can find the whitepaper draft of the Stake Capital DAO design here.

This ambitious vision sees other node operators providing services to the DAO over time. Many implementation details and the legal implications of associated tokens currently remain unclear, but overall this feels like an important experiment worth following.

A block explorer for Eth2.0’s beacon chain testnet: https://beacon.etherscan.io/. Prepare for ETH staking and refresh your memory of the phases of Eth2.0 and learn about the distinction between nodes and clients, as well as the protocol’s design philosophies here.

Many testnet competitions are in progress with the goal to test protocol software and to get validators ready for mainnet:

HARMONY ECONOMIC ANALYSIS - A post diving deep into the economics of Harmony in different scenarios prepared by the team in collaboration with Delphi Digital.

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Staking Economy is written by Felix Lutsch from Chorus One with assistance from Chris Remus, operator of the Chainflow validators. Join us in the Staking Economy Telegram to discuss staking. Opinions expressed are our own and do not necessarily reflect the opinions of Chorus One. All content is for informational purposes only and not intended as investment advice.