StaFi — Staking Finance — is the first decentralized protocol that is utilized for cross-chain staking liquidation. It means that this protocol allows users to unstake their assets from the staking pool of a PoS blockchain. It provides a secure decentralized way to enable liquidity of the validators’ staked assets and other staking derivatives.
There have been centralized protocols before for addressing the problem of liquidity while staking assets and derivatives for PoS blockchains. StaFi is the first decentralized protocol that solves this problem without risking security and taking away a centralized authority from space.
What is a staking derivative, and why is a cross-chain liquidity protocol needed?
Proof-of-stake consensus mechanism uses the staking of assets or a derivative, which is a token that derives its value from an underlying asset, to secure blockchain transactions. In this, players must stake their assets in a staking pool of the network as proof for validating a transaction. The systemic belief behind this is that a user staking enough of his assets in the system would never try to hack it, as it would result in his loss.
It solves the problem of extravagant computing power consumption in the Proof-of-Work consensus mechanism while making the network equally secure. However, there arises a problem in this system, which is that the tokens of the stakers will remain locked for an uncertain amount of time.
Also, to unlock the assets, previous mechanisms have been introduced that involve a third party to circulate tokens, often using side chains or cross-chain networks. It has inherent problems of cross-chain insecurity, centralization of authority, and, most importantly, mass token vulnerability to attacks by handing them to a single party.
Enter the StaFi Protocol
The StaFi protocol helps resolve the issue of token liquidity and the contradiction between mainnet security and networks using Proof-of-Stake consensus mechanisms. And, it does so in a decentralized manner, taking away the control of a centralized authority, as seen in pre-existing models. It improves the democratic nature of blockchain and establishes decentralization.
This decentralized protocol uses smart contracts to build a “staking contract” to initiate a Stake. After he stakes his asset, he receives rTokens, the StaFi versions of the staking tokens. The stake processing and the issuance of rToken are automatically simultaneously executed by the smart contract code without third-party involvement.
Once the validation is passed, the rToken can be used by the validator to trade on the platform or to redeem the staked token. It can also be used to earn staking rewards from the original chain.
The working mechanism of the StaFi protocol
The protocol is composed of 3 layers — The bottom Layer, the Contract Layer, and the Application Layer.
- Bottom Layer: It is the basic blockchain system of the protocol. It is built by Substrate, which is a blockchain development framework. The substrate was developed by the blockchain development company Parity.
- Contract Layer: This layer is used to create various types of smart contracts for staking. These include customized staking contracts for XTZ of Tezos, DOT of Polkadot, ATOM of Cosmos, SOL of Solana, etc. The contracts are consistent with the inflation rates and incentives of the various tokens and yield rTokens (such as rXTZ, rDOT, rATOM, and rSOL, respectively).
- Application Layer: This layer supports third-party APIs to program them for the StaFi-based trading platform. It creates a sort-of trading market for customized decentralized bonded assets. This is utilized for circulating the rTokens on the StaFi protocol.
The protocol runs on its decentralized chain built by Substrate. It is connected to side chains such as Polkadot, Cosmos, Solana, Tezos, etc., and will share the underlying consensus of the respective chain. The primary security and performance are also guaranteed by the respective side-chain.
In this process, the contract layer is the core layer that establishes ownership of the staked token by using its contract code. The protocol employs a distributed key storage protocol and multisig for stake address security.
Token Model
StaFi protocol uses 2 types of tokens — alternate tokens and the native token.
- Alternate token (rToken): It assumes the function of medium for enabling liquidity of the staked assets. These are a group of tokens that are based on the staking tokens, meaning a rToken derives its equity from its respective staking token. They are used to obtain staking rewards and can also be used for secondary trading, yield generation, and redeeming the staked assets. The integrated tokens that can be staked using this protocol include — rATOM (Cosmos), rMATIC (Polygon), rSOL (Solana), rDOT (Polkadot), rXTZ (Tezos), rETH (Ethereum), rKSM (Kusama) and many more.
- Native Token (FIS): The native token of StaFi, called FIS, is based on the ERC-20 token standard and serves multiple purposes within the network. It is used for transaction fees and gas fees, consensus rewards, and governance of the network such as voting, network parameters, and upgrades. The token has a maximum supply of 114,911,733 FIS.
At the time of writing this article, the current price of FIS is 0.338911 USD, reflecting a 2.96% decrease in the last 24 hours. The trading volume within the same period is 1,891,679 USD, with a circulating supply of 60,452,000 tokens, resulting in a market cap of 20,487,823 USD.
Steve Anderson is an Australian crypto enthusiast. He is a specialist in management and trading for over 5 years. Steve has worked as a crypto trader, he loves learning about decentralisation, understanding the true potential of the blockchain.
Source: https://www.thecoinrepublic.com/2023/10/23/stafi-cross-chain-staking-derivatives-protocol-easy-explanation/