Liquidity is the lifeblood of Decentralized Finance (DeFi). As the premier DeFi network of Polkadot and Kusama, Acala is the heartbeat of this resource.
The first of its kind to launch in the Polkadot ecosystem, Acala’s brand new Liquid Staking product unlocks safe, on-chain liquidity for users. Starting with Karura, this liquid capital allows previously locked tokens to flow through Kusama ecosystem dApps. Following this, Polkadot based applications will be the next to benefit. All to enhance a user’s staking experience and reward amount.
As the world leading blockchain infrastructure provider, Blockdaemon is proud to support Acala. From today, our infrastructure and engineering expertise will bring institutional-grade security, scalability and reliability to the network. We will run validators for the LKSM liquid staking pool, and by extension, secure the Kusama network.
In this post, we’ll explore the opportunities liquidity brings, the solution Acala has launched to market and the help Blockdaemon provides along the way.
The Multi-Billion Dollar Proof-of-Stake Liquidity Challenge
Nominated proof-of-stake (NPoS) is the bedrock of Polkadot (DOT) and Kusama (KSM). By staking on each respective blockchain, participants earn cryptocurrency tokens while helping bring economic security to the networks. Currently, over $21bn is staked on Polkadot and roughly $2bn on Kusama.
However, one clear problem has emerged. Staked assets are illiquid. For example, stakers must wait 28 days to unbond their DOT tokens and 7 days for KSM. In addition, during the unbonding period, unbonding tokens are not entitled to additional reward. Hence, there’s an opportunity cost in time and capital for the user. It’s only after unbonding that coins become redeemable and can be reinvested. While they’re staked, coins offer no utility beyond earning staking rewards.
Polkadot and Kusama’s current standard staking is competing with various reward generating DeFi products given users’ limited capital. As a result, it puts many token holders in a dilemma where they have to compare investment option trade offs and pick one that suits their risk preferences. Without access to a staking derivative, funds remain locked and are capital inefficient.
Furthermore, research suggests that lucrative DeFi products may cannibalize the network security of proof-of-stake networks. Staking is the fundamental sybil resistant layer that ensures network agents perform to the norm established by the protocol with on-chain rewards as the financial incentive. Such cannibalization (competing rewards) could potentially compromise network security at large as a substantial amount of risk taking stakers could invest tokens in DeFi instead of investing in the relatively stable staking.
How does Acala unlock liquidity from layer-1, without compromising network security?
Acala’s: A Powerful On-Chain Liquidity Solution
Today, Acala launched its innovative Liquid Staking solution: KSM Liquid Staking (LKSM) on Karura, its Kusama parachain. For the first time, users can unlock the true potential of their Kusama tokens.
How does Acala’s LKSM work?
LKSM is a staking derivative, which represents a token holder’s staking position on the Kusama network. It is a liquid, reward-earning token that includes the staked tokens (principle) and their growing staking rewards, while redeemable at any point to Karura or sell off position to the broader market via a DEX liquidity pool. Staking KSM for LKSM earns a holder 16% APR in rewards. It can be used at any time for various DeFi products. It solves the dual problem of ensuring network security while also increase capital efficiency.
From a stakers’ perspective, liquid staking unlocks the opportunity to stack rewards on top of the original staking position. A staker can stake via Karura’s liquid staking pool and receive LKSM (staking derivative):
- Stacked Rewards Option 1: Put LKSM in the LKSM-KSM pool for “yield farming”.
- Stacked Rewards Option 2: Use LKSM to mint kUSD, and provide liquidity for kUSD-KSM pool for “yield farming”.
- Instant Position Sell Off and acquisition: Instead of redeeming the locked tokens from Karura, users can sell LKSM in a liquidity pool, meaning selling off a position instantly. Same goes to acquiring a staking position from a liquidity pool.
For specific comparisons, please see the flowchart below.
(Disclaimer, above is general knowledge but not financial advice. Please invest at your own discretion and research.)
Blockdaemon: Supporting Acala’s Liquidity Solution
Blockdaemon is proud to partner with Acala to become the first Validator in the Liquid Staking Validator program. As part of this program, Blockdaemon will run validators for the LKSM staking pool. This will, by extension, help secure the Kusama network.
Blockdaemon provides KSM Liquid Staking pool participants a low commission (2%). We also give a strong guarantee that no slashing will occur. Users are insured in the unlikely event that a node malfunction occurs and slashing takes place. This insurance is just one of our four-layers of risk mitigation.
Blockdaemon has built these four-layers of risk mitigation to avoid downtime and protect our customers from any risk of loss:
Layer 1: Physical Infrastructure
Our world-class node infrastructure spans over 8 different cloud and bare metal providers, guaranteeing vendor and geographical diversity. This means we deploy nodes from a suite of secure data centres distributed across the globe to achieve a diversified and resilient network.
Layer 2: Manual Failover
Our world-class engineering teams deliver manual failovers when necessary. This means our engineers manually intervene in failover procedures using our internally documented runbooks. This manual intervention mitigates the risk of double-signing associated with automated failovers.
Layer 3: 24/7 Monitoring
Our team of engineers monitor all protocols we manage 24/7, ensuring our finger is constantly on the pulse of each and every protocol.
Level 4: Insurance
Finally, as mentioned, we guarantee that missed returns as a result of slashing or double signing from any potential node malfunctions are 100% covered by Blockdaemon.
“As the leading blockchain infrastructure provider, pushing for innovation in the staking and security space is a top priority for Blockdaemon. Acala’s Liquid Staking product is poised to unlock billions in liquidity across Polkadot and Kusama, and we are excited to be the first node operator to join this program to help users compound their DOT and KSM staking rewards.”
– Konstantin Richter, founder and CEO of Blockdaemon