Explore the future of Cross-Chain Interaction Derivatives Protocols

Kyle Liu, Investment Manager, Bing Ventures

With the success of Ethereum Merge, Ethereum has also officially shifted from POW to POS, and in the POS network, staking is a topic that has not been bypassed. Users can earn staking rewards by staking tokens in the network to provide security for the network, but the assets in the staking cannot be used for a certain lock-up period. Staking Derivatives can release the liquidity of staking assets and improve asset utilization. This article will take you through the Derivatives projects focusing on staking, and see how they build a staking economic vision for a multi-chain future.

The foundation of Cross-Chain InteractionLiquidity

Cross-Chain InteractionLiquidity is a topic that has attracted much attention in the current Crypto Assets market, which involves the conflict between Decentralized Finance and staking benefits under PoS Consensus, the cost of Cross-Chain Interaction, and the balance between security and Liquidity under PoS Consensus. To solve these problems, staking Derivatives came into being.

Staking Derivatives are essentially the issuance of corresponding certificates to the native Tokens participating in Staking, and holding the certificate can obtain staking rewards. At the end of the staking cycle, the voucher can be rigidly redeemed back to the native token. Such a design can solve the problem of the conflict between Decentralized Finance income and staking income under PoS consensus, and allow users to trade in Decentralized Finance by converting staking income into tradable Derivatives, so as to realize the liquidity and income of staking Token at the same time.

At the same time, staking Derivatives can also solve the problem of cross-chain interaction costs. Traditional cross-chain interaction transactions require a certain fee and time cost, which will drop the user experience. By converting Token into Cross-Chain Interaction assets and binding them to a single Cross-Chain InteractionDerivatives, users can trade these Derivatives directly between different Blockchain without having to pay high Cross-Chain Interaction fees and waiting times.

In addition, staking Derivatives can also solve the problem of conflicting security and liquidity under PoS consensus. Under the PoS Consensus, users must be encouraged to lock their Token in staking as much as possible in order to ensure the security of the network, but this will also dropToken Liquidity, making it difficult for users to use it for other purposes. By converting Token into Cross-Chain InteractionDerivatives, users can stake Token and earn the corresponding rewards, while also converting it into Derivatives that can be used for Decentralized Finance transactions when needed, achieving a balance of security and Liquidity.

Source: Dune

Value capture of Derivatives

When it comes to staking Derivatives, we believe this space will become an indispensable infrastructure and capture value from the underlying chain and upper-layer applications. As the PoS network grows, the value of the staking protocol will increase. ETH 2.0’s largest Lido is a success story, and with the success of Ethereum’s Merge, Lido’s Market Cap has reached a new high.

On the user side, Staking Derivatives bring users a new way to play Decentralized Finance. For example, Arbitrage opportunities for Derivatives. If the Derivatives are discounted, long-term holders can make higher profits by buying the Derivatives, which is more advantageous than buying Spot directly. Users only need to buy Derivatives and then redeem the native asset at a 1:1 ratio, and this discount range is actually a low-risk and high-yield arbitrage space. Therefore, if users understand the mechanism of Derivatives, they have the opportunity to obtain higher returns in the ecosystem.

In terms of Decentralized Finance development in the entire public chain ecosystem, Staking Derivatives bring Decentralized Finance yield advantages to the ecosystem. If the Layer1 ecosystem uses derivatives to achieve Decentralized Finance in the future, then without considering project subsidies, the Decentralized Finance yield of the underlying Staking yield combined with Staking Derivatives will be higher than the ordinary Decentralized Finance yield. For example, Ethereum’s top Decentralized Finance project is currently able to achieve a long-term stable rate of return of more than 5%. However, if you combine Decentralized Finance with Staking Derivatives, 5% Interest plus 15% Staking Return, this Decentralized Finance product will have 20% long-term stable annualized return, thereby attracting more users to the ecosystem. Current mainstream cross-chain interaction staking protocols include:

• Bifrost is a Web 3.0 infrastructure that provides Cross-Chain InteractionLiquidity for staking, providing Decentralization, Cross-Chain Interaction Liquid Staking services for multi-chain via Cross-Chain Interaction Communication Protocol (XCMP). Bifrost’s mission is to aggregate more than 80% of the Staking Liquidity of PoS Consensus chains through Cross-Chain InteractionDerivatives, provide standardized and Cross-Chain Interaction interest-bearing Derivatives for Polkadot Relay chains, parachains, and heterogeneous public chains bridging with Polkadot, drop user staking thresholds, increase the multi-chain staking ratio, and improve the income base of ecological applications, creating a StakeFi ecosystem that empowers users, multi-chains, and ecological applications.
• StaFi is a Cross-Chain Interaction Staking solution with innovations including a nomination-based PoS of Stake (NPoS) mechanism, Token Locking, and improved Liquidity. NPoS is a mechanism derived from DPoS, which can solve the problem of DPoS propensity and improve fairness and security. The Token Locking Mechanism allows StaFi users to lock Tokens in the protocol and earn staking rewards. At the same time, StaFi also provides a liquidity solution to convert locked Tokens into equivalent rTokens, which can be traded and used at any time. StaFi improves liquidity and flexibility by realizing multi-chain cross-chain interaction and asset tokenization, supports mainstream public chains and Decentralized Finance ecosystems, and provides users with safe and reliable earning methods.
• Kine Protocol is a Cross-Chain InteractionDerivatives trading platform designed to provide an efficient, low-cost Decentralization trading solution. Kine Protocol supports features such as staking, minting, burning, rewards, and liquidity mining, and supports cross-chain interaction with multiple public chains. The main feature of Kine Protocol is that it uses technologies such as Kine Oracle to implement fast and efficient price Oracle Machines, and can enable Derivatives transactions between arbitrary assets, such as lending, synthetic assets, and options. In addition, Kine Protocol adopts the AMM+Limit Order trading mechanism, which allows traders to choose their trading methods more flexibly. Kine Protocol also provides a variety of reward mechanisms, such as LP rewards, Liquidity mining rewards, and KineDAO rewards, to attract more users to participate in the platform.

Source: Bing Ventures

The future of the Cross-Chain Interaction track

From the perspective of composability and interoperability, some mainstream public chains currently have great room and potential for expansion in the Decentralized Finance field. Compared to Ethereum, these public chains have a more diverse design, allowing them to provide more flexible options in terms of cross-chain interaction asset composability and interoperability. With the rise of staking derivatives, Decentralized Finance projects on these public chains will become more active, and these projects will continue to improve their competitiveness by improving liquidity and increasing participants. To this end, these projects also need more liquidity to support their development.

In addition, in terms of the composability and interoperability of cross-chain interaction assets, the product forms of centralized finance are very diverse, which is due to the recognition of unified value standards. When multi-chain solves the technical limitations, the value consensus of major blockchains will tend to be more Decentralization. Under this premise, the gameplay and application of cross-chain interaction assets will not only be determined by the project party and the public chain, but users will have a higher degree of freedom, stronger operability and greater sovereignty in various smart contracts and consensus mechanisms using cross-chain interaction assets.

Therefore, the future of the Cross-Chain Interaction staking track is very clear, and it will be a multi-chain future that belongs to users and communities to achieve true “Web3”. This future will bring more independent choices and greater operation space to users, and will also promote the development of the entire Decentralized Finance ecosystem and make greater contributions to the prosperity of the ecosystem. In this future, staking Derivatives will exist as indispensable middleware, capturing value from the underlying chain and other applications on top, and attracting more users to participate by continuously increasing user yields.

Source: DefiLlama

Summary

Cross-Chain Interaction Staking Derivatives is a new type of PoS network solution designed to improve capital efficiency and liquidity and provide users with a wider range of Decentralized Finance application opportunities. However, there are also some potential risks associated with this innovative tool, requiring project parties to take measures to enhance market liquidity, improve security, ensure algorithm fairness, and optimize the product experience.

Liquidity in the market can lead to high price Fluctuations and high Transaction Cost. To this end, the project team can strengthen marketing and attract more users and capital, so as to enhance the reputation and brand value of the project. In addition, the project team should also take measures to ensure the safety of user assets, such as Multisig, cold Hot Wallet separation, and regular security audits.

At the same time, the unfairness of the Cross-Chain Interaction staking DerivativesAlgorithm and the poor product experience may also affect user engagement and loyalty. To this end, the project team should adopt fair algorithm design and optimized operational processes, provide efficient transaction execution and low transaction fees, and design a user-friendly interface. With the continuous development of Decentralized Finance and PoS Blockchain, Cross-Chain Interaction Derivatives will become a more widely used tool. On the basis of ensuring user security and improving product experience, this new solution is expected to become a widely used passive savings tool in Decentralized Finance.