Why Liquid Staking is a Game Changer
tl;dr: The ability to both stake your assets and use them as collateral offers an entirely new angle to the Great Liquidity Unlocking.
In Why Crypto Networks Will Win, I described the “Great Liquidity Unlocking” as one of the most powerful elements of this revolution. Namely that any asset, whether physical or digital, could serve as collateral or payment.
Recently, a first-generation Crypto Kitty, one of the initial examples of crypto-collectibles, was used as collateral for a 25,000 DAI ($25k) loan.
Essentially, the owner took his/her artwork from the wall in the house, went to the bank, and offered it up to secure the cash loan.
Except that it was all digital and it all happened on a blockchain. That’s a Liquidity Unlocking example.
But wait, there’s more.
Locking Assets for Yield
Today, there are millions of dollars worth of tokens locked in smart contracts within Proof-of-Stake networks.
What these tokens represent is a commitment by their owners to paying for the security of the cryptoeconomic network (as opposed to paying for it with electricity and computing power which happens on Proof-of-Work networks, such as Bitcoin’s).
Stakers do this not out of the goodness of their heart and not only because they believe in the potential of the particular cryptoeconomic network in the long-term (though those are factors), but because they can earn “staking rewards” (i.e. yield) for having done so.
These rewards range from 1% all the way up to the hundreds. Tezos, for example, is the network that has the most amount of value staked overall and it pays approximately 5% yield. Not bad compared to your bank.
The trade-off, however, is that these tokens are “locked,” which means you can’t use them for anything else.
But what if you could?
Liquid Staking
A new service, Stakehound, promises to keep the best part of staking (the yield), while removing the pain point of staking (the locking).
Stakehound serves as a proxy staker for anyone with tokens. This, in and of itself, isn’t a new innovation. There are others such as Staked.us which do the same thing.
Where Stakehound shines, however, is that once you’ve deposited your tokens with them (which required KYC/AML-a mixed blessing), they give you an stToken. So, if you deposit DASH, you will get stDASH. If you deposit Algorand, you’ll get stRAND and so on.
That “stToken” represents the right to the tokens of the network (DASH or RAND) as well as the staking rewards (i.e. interest payments) that the token earns by having been staked.
However, and this is the Liquidity Unlocking part, now it is possible to take those stTokens and, if you want, use them as collateral for borrowing.
So, you could take your stTokens, just like the owner of CryptoKitties did, and use them as collateral for a DAI (stablecoin) loan. Once you did that, you could
- use the DAI to buy ETH or BTC or whatever for investing purposes
- do your trades
- make your money (hopefully)
and then, when you’re done, pay back the loan, pick up your stToken and you’re set.
And that’s not even the best part….
While you are doing all of your trades, your stToken has been earning interest all along. So it’s technically possible that the loan will have paid itself off because the value of the collateral will have grown due to the interest payments.
Yeah, I know, it sounds crazy, but it actually is possible.
Even as I write this, I’m having a difficult time believing it and I know the founder of the company.
Liquidity Everywhere
Whether there’s something I’m missing or not when it comes to Stakehound, what it represents is an entirely new set of financial possibilities that only exist because of blockchains and smart contracts.
I don’t know what the economy of the future is going to look like. I just know it’s going to be very different than the one we have now.
Stakehound is just the most recent example.
Enjoy the ride…and stay safe.
Note: this is NOT financial advice. Do your own research. Never invest more into anything than you can afford to lose. Don’t be an idiot.