Problems liquid staking solves
Hi friends! I want to dedicate this article to the question of what difficulties can be in PoS ecosystems and how to solve them using liquid staking. I tried to present all the information as concisely and simply as possible, so enjoy reading!
Liquid staking
Let’s start with what staking is. It is the process of placing native tokens on the PoS chain to secure the network. In return, you receive rewards that are issued in tokens of the same network. You cannot use staked coins, and if you want to withdraw coins from staking early, you will still have to wait a certain period of time in order to regain access to them. In addition, you don’t receive any rewards while you exit staking.
Meanwhile, liquid staking gives you the liquidity of staked assets by giving you synthetic derivatives of your tokens (like Matic in csMatic) that represent your previously staked capital. It can be used in various other DeFi protocols.
Of course, this way of earning is popularized, because it is reliable, stable and, most importantly, convenient. But despite this, there are some complexities associated with staking.
The problem of centralization
Many CEXs and protocols stake your assets through the same validators. And that could leave that network vulnerable if those validators go down or downsized. As a result, this can put people’s money invested in this network at risk.
Staking centralization is also facilitated by protocols that have a majority stake in a given PoS network and stake assets through a limited set of validators.
However, for the reason that centralized exchanges are either easier to use or they are older, most people still choose to use them. And that is why this problem must be solved. But how?
The Solution
Decentralized liquid staking protocols diversify their stake through different validators so that no single validator becomes dominant in the PoS network. This is not a perfect solution, because comparing validators with given parameters, choosing the right ones, and then voting through a community of millions of users is hard work.
The second solution is to create liquid staking benefits such as comfort, security, bonuses (APY increase, etc.), instant liquidity, and so on.
In the meantime, many users suffer from exchange scams and permanently lose access to their assets, having little or no control over their capital.
But to transition these users from centralized exchanges to decentralized staking protocols, we need to educate and inspire them by sharing how important it is for a PoS network to spread its stake across multiple protocols and validators.
First mover advantage problem
Of course, this seems fair to the pioneers of the ecosystem, but therein lies the problem.
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In fact, the first mover advantage is detrimental to any decentralized ecosystem, as a dominant player can become a serious hindrance to the entire PoS network.
The Solution
In this case, the solution is hidden in the problem itself.
Decentralized liquid staking provides diversification and at the same time is a dynamic ecosystem where multiple protocols can coexist simultaneously. They compete with each other and try to offer their users the best user experience.
Protocols are integrating more and more efficient and useful features, improving their programs in order to attract more people and they will benefit the most. All users now have a huge choice and many benefits.
This creates a healthy competitive environment, but too much competition can backfire, creating winners and losers. This all leads to another serious problem.
The problem of systemic risks
In the long term, scaling liquid staking can be risky if, for example, a liquid rate derivative protocol fails, or if a large decentralized liquid rate protocol is compromised (which is worse).
This could bring down all other connected DeFi protocols, creating massive chaos.
The Solution
Smart contract hacks can happen, and they have happened before. To provide for this, it is necessary to constantly monitor the architecture of the protocols and run bug bounty programs to ensure that these problems do not occur.
Conclusion
ClayStack has always been aware of these issues and is actively adhering to all safety regulations. We always strive to contribute to the growth of the crypto world and to the search for new solutions and innovations for its ecosystem.
