A coalition of Ethereum OG is tackling the so-called “lockup” problem, whereby the first generation of participants trading cryptocurrencies on the Eth 2.0 blockchain in transition must commit their coins to a restrictive multi-year contract.
Announced Wednesday, LiquidStake, which was launched by cryptocurrency trading firm DARMA Capital, will allow stakers ether (ETH) to take out USDC stablecoin loans against their staked assets while earning staking rewards from the new network.
Additionally, US-registered investment fund DARMA, founded by former ConsenSys backers Andrew Keys and James Slazas, intends to allocate over $ 50 million in ETH to the new Ethereum custody agreement.
There are obvious economic incentives for participants to take part in Ethereum’s evolutionary shift towards staking because they can earn, say, 15% on those assets over the course of as many months as the network needs to complete further upgrades, DARMA said. founder of the capital Andrew Keys.
“I call it the one way street problem,” Keys said. “Participants will not be able to ‘steal’ these resources. So we created LiquidStake, where users can earn staking rewards and have their stake ETH pledged as collateral to receive a USDC loan. This is very different from BlockFi, Celsius, and other lenders, because in those cases you cannot bet on the ether and you cannot earn the reward. “
Necessity and invention
The first phase (phase zero) of Ethereum’s migration to a proof-of-stake blockchain involves approximately 16,384 validators who each commit a minimum of 32 ETH in a deposit agreement. These tokens will then be aimed to secure and govern a new parallel Ethereum blockchain known as the Beacon, a live environment for testing proof-of-stake, which will ultimately return staking rewards to those validators.
Since the deposit agreement went into effect this week, approximately 52,801 ETHs have been frozen, worth $ 23.8 million. (At least 524,288 ETH split between 16,384 stakers are required to trigger the Eth 2.0 “genesis event” and trigger the update.) In addition to the staking rewards returned to those validators, the earning potential can still be derived from those blocked funds. . This is exactly the kind of innovation seen popping up everywhere in the field of decentralized finance (DeFi).
Read More: Ethereum 2.0 Deposit Agreement Exceeds $ 22.5 Million One Week After Launch
The same can be said of Wall Street engineers who come up with new products in response to changing rules. As CoinDesk’s Michael Casey points out, it doesn’t matter if the behavior restriction rules are imposed by a government regulator or, in the case of Ethereum 2.0, by a protocol. “Constraints create an incentive for financial creativity,” he wrote.
LiquidStake is by no means the only attempt to solve this problem.
Indeed, a taxonomy for liquid staking includes a number of smart contract protocols that issue tokenized credits on staked assets, such as Rocket Pool, Blox, or StakerDAO. Exchanges like Binance and Coinbase are also eager to get in on the action, with various Eth 2.0 staking products in sight.
But LiquidStake is a safe work, strongly supported by what could be called the establishment of Ethereum: the project involves the likes of ConsenSys, Bison Trails, Figment, OpenLaw and Filecoin.
“LiquidStake offers an ideal solution for ETH holders looking to stay liquid while staking,” ConsenSys founder and Ethereum co-founder Joe Lubin said in a statement. “I am thrilled to see DARMA Capital play a significant role in the Eth2 transition with LiquidStake, which has chosen ConsenSys’ Codefi platform as its staking partner.”
Filecoin founder Juan Benet added: “Protocol Labs already uses DARMA swaps for a crucial component in the Filecoin ecosystem, and we intend to do the same with our stake ETH treasury.”
Read more: ConsenSys Capital co-founder sets out to bring Wall Street money to Ethereum
DARMA Capital co-founder Slazas clarified that LiquidStake is for individuals who are about to borrow against collateral, while DARMA Capital is a completely separate entity designed for institutions entering into total return swaps. (Such instruments are arrangements where one party makes payments based on a fixed, fixed or variable rate, while the other party makes payments based on the return on an underlying asset, which includes both the income it generates and any capital gains. )
“The main reason institutions want to enter an exchange is basically that it offers a lot of regulatory and fiscal clarity,” Slazas said. “Is there a great job to be done to clarify whether the transition from Eth 1 to Eth 2 is a taxable event? Since those are in the air and we don’t know what the actual answer is today, if you go into an exchange, you know the tax treatment of what an exchange is. “
LiquidStake’s business model is based on cutting the interest rate and thus a portion of the reward rate, Slazas said. “The exact interest rates and your loan to assess rates will change slightly. But what we’re doing is adding only 5% of what the reward rate is, as our loan fee. “
LiquidStake helps the Ethereum community deal with fear number one over the Eth 2 upgrade, Keys said: liquidity.
“Now they can have all of their ETH deposited to invest, and if they need the money, they can apply for a loan,” Keys said. “It could be to pay the rent, or they could buy more ETH and bet it, or maybe they want to enter the wild world of DeFi.”