Focusing on cross-chain staking derivative protocols

Author: Kyle Liu, Investment Manager at Bing Ventures

With the successful Merge of Ethereum, Ethereum has officially transitioned from POW to POS. In the POS network, Staking is an unavoidable topic. Users can earn Staking rewards by staking tokens in the network to provide security, but the assets in Staking cannot be used during a certain lock-up period. Staking derivatives can release the liquidity of Staking assets and improve asset utilization. This article will introduce derivative projects focused on Staking and explore how they construct the vision of a Staking economy in a multi-chain future.

The Foundation of Cross-Chain Liquidity

Cross-chain liquidity is a highly discussed topic in the current cryptocurrency market, involving the conflict between DeFi yields and Staking yields under PoS consensus, cross-chain costs, and the balance between security and liquidity under PoS consensus. To address these issues, Staking derivatives have emerged.

Staking derivatives essentially issue corresponding certificates for the native tokens participating in Staking, allowing holders of these certificates to earn Staking rewards. At the end of the Staking period, these certificates can be rigidly redeemed for the native tokens. This design can solve the conflict between DeFi yields and Staking yields under PoS consensus by converting Staking rewards into tradable derivatives, enabling users to trade in DeFi while achieving both liquidity and yield for Staking tokens.

At the same time, Staking derivatives can also address the issue of cross-chain costs. Traditional cross-chain transactions require certain fees and time costs, which can diminish 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.

Moreover, Staking derivatives can resolve the conflict between security and liquidity under PoS consensus. To ensure network security under PoS consensus, users must be encouraged to lock their tokens in Staking as much as possible, but this also reduces token liquidity, making it difficult 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 being able to convert them into derivatives usable for DeFi trading when needed, thus achieving a balance between security and liquidity.

Value Capture of Derivatives

When discussing Staking derivatives, we believe this field will become an indispensable infrastructure, capturing value from both underlying chains and upper-layer applications. As PoS networks develop, the value of Staking protocols will grow increasingly significant. Lido, the largest in Ethereum 2.0, is a successful case, with Lido's market capitalization reaching new highs following Ethereum's successful Merge.

For users, Staking derivatives bring new DeFi gameplay. For example, there are arbitrage opportunities with derivatives. If a derivative is trading at a discount, long-term holders can purchase the derivative for higher profits, which is more advantageous than directly buying the spot. Users only need to buy the derivative and then redeem the native asset at a 1:1 ratio; this discount range effectively represents a low-risk, high-reward arbitrage space. Therefore, if users understand the mechanism of derivatives, they have the opportunity to earn higher returns within the ecosystem.

In the development of the entire public chain ecosystem's DeFi, Staking derivatives provide a yield advantage. If Layer 1 ecosystems adopt derivatives for DeFi in the future, then, without considering project subsidies, the basic Staking yield combined with the DeFi yield from Staking derivatives will exceed ordinary DeFi yields. For instance, it is quite good if leading DeFi projects on Ethereum currently have long-term stable yields exceeding 5%. However, if DeFi is combined with Staking derivatives, a 5% interest plus a 15% Staking yield would result in a DeFi product with a 20% long-term stable annualized return, thereby attracting more users to the ecosystem. Currently, mainstream cross-chain staking protocols include:

• Bifrost is a Web 3.0 infrastructure providing cross-chain liquidity for Staking, offering decentralized, cross-chain Liquid Staking services through a cross-chain communication protocol (XCMP). Bifrost's mission is to aggregate over 80% of PoS consensus chain's Staking liquidity through cross-chain derivatives, providing standardized, interest-bearing derivatives for Polkadot's relay chain, parachains, and heterogeneous public chains bridged to Polkadot, lowering user Staking thresholds, increasing multi-chain staking ratios, enhancing the yield base for ecological applications, and creating a StakeFi ecosystem that empowers users, multi-chains, and ecological applications in a positive cycle.
• StaFi is a cross-chain Staking solution that innovates with a nominated Proof of Stake (NPoS) mechanism, token locking, and enhanced liquidity. NPoS is a mechanism derived from DPoS that addresses the bias issues of DPoS, improving fairness and security. The token locking mechanism allows StaFi users to lock tokens in the protocol to earn Staking rewards. Additionally, StaFi provides liquidity solutions by converting locked tokens into equivalent rTokens, which can be traded and used at any time. StaFi enhances liquidity and flexibility by implementing multi-chain cross-chain and asset tokenization, supporting mainstream public chains and DeFi ecosystems, and providing users with secure and reliable yield methods.
• Kine Protocol is a cross-chain derivatives trading platform aimed at providing efficient, low-cost decentralized trading solutions. Kine Protocol supports functions such as staking, minting, burning, rewards, and liquidity mining, and facilitates cross-chain trading with multiple public chains. The main features of Kine Protocol include the use of Kine Oracle and other technologies to achieve fast and efficient price oracles, enabling derivatives trading between any assets, such as lending, synthetic assets, and options. Furthermore, Kine Protocol employs an AMM + Limit Order trading mechanism, allowing traders to choose trading methods more flexibly. Kine Protocol also offers various reward mechanisms, such as LP rewards, liquidity mining rewards, and Kine DAO rewards, to attract more users to participate in the platform.

The Future of Cross-Chain Staking Track

From the perspective of composability and interoperability, some mainstream public chains currently have significant expansion space and potential in the DeFi field. Compared to Ethereum, these public chains have more diverse designs, allowing them to provide more flexible options in terms of the composability and interoperability of cross-chain assets. With the rise of Staking derivatives, DeFi projects on these public chains will become more active, continuously enhancing their competitiveness by increasing liquidity and participants. To achieve this, these projects will also need more liquidity to support their development.

In addition, in terms of the composability and interoperability of cross-chain assets, the product forms of centralized finance are very diverse, stemming from the recognition of a unified value standard. Once multi-chain resolves technical limitations, the value consensus of major blockchains will tend to align more with the decentralized essence. Under this premise, the gameplay and applications of cross-chain assets will not only be determined by project parties and public chains, but users will have greater freedom, operational capability, and sovereignty in 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 truly realizes "Web3" for users and communities. This future will bring users more autonomy in choice and greater operational space, while also promoting the development of the entire DeFi ecosystem and making a greater contribution to the prosperity of the ecosystem. In this future, Staking derivatives will exist as an indispensable middleware, capturing value from underlying chains and other upper-layer applications, and continuously attracting more users by improving their yield rates.

Conclusion

Cross-chain staking derivatives are a new type of PoS network solution aimed at improving capital efficiency and liquidity, while providing users with broader DeFi application opportunities. However, this innovative tool also carries some potential risks, requiring project parties to take measures to enhance market liquidity, improve security, ensure algorithm fairness, and optimize product experience.

Insufficient market liquidity may lead to severe price fluctuations and high transaction costs. To address this, project parties can strengthen market promotion and attract more users and capital, thereby enhancing project reputation and brand value. Additionally, project parties should implement measures to ensure user asset security, such as multi-signature, cold wallet separation, and regular security audits.

At the same time, the unfairness of cross-chain staking derivatives algorithms and poor product experience may also affect user participation and loyalty. Therefore, project parties should adopt fair algorithm designs and optimized operational processes, provide efficient trade execution and low-cost transaction fees, and design user-friendly interfaces. As DeFi and PoS blockchains continue to evolve, cross-chain staking derivatives are expected to become widely used tools. Based on ensuring user safety and enhancing product experience, this new solution is likely to become a widely used passive savings tool in DeFi.