A coalition of Ethereum OGs is tackling the so-called “lockup” issue, whereby the first generation of participants staking crypto on the transitioning Eth 2.0 blockchain must commit their coins to a restrictive multi-year contract.
Announced Wednesday, LiquidStake, which is being launched by crypto trading firm DARMA Capital, will allow ether (ETH) stakers to take out USDC stablecoin loan against their staked assets while earning staking rewards from the new network.
In addition, U.S.-registered investment fund DARMA, founded by former ConsenSys stalwarts Andrew Keys and James Slazas, intends to allocate over $50 million worth of ETH to Ethereum’s new deposit contract.
There are obvious economic incentives for participants to take part in Ethereum’s evolutionary step vis-a-vis staking because they can earn, say, 15% on those assets over the course of however many months it takes the network to complete further upgrades, said DARMA Capital founder Andrew Keys.
“I call it the one-way street problem,” Keys said. “Participants will not be able to ‘unstake’ those assets. So we’ve created LiquidStake, wherein users can earn staking rewards, and have their staked ETH be pledged as collateral to receive a USDC loan. This is very different from BlockFi and Celsius and other lenders, because in those cases you can’t stake the ether and you can’t earn the reward.”
Necessity and invention
The first phase (phase zero) of Ethereum’s migration to a proof-of-stake blockchain involves some 16,384 validators each committing a minimum of 32 ETH in a deposit contract. Those tokens will then be staked to secure and govern a new parallel Ethereum blockchain known as Beacon, a live environment for testing proof-of-stake, which will eventually return the staking rewards to those validators.
Since the deposit contract went live this week, some 52,801 ETH has been locked up, worth $23.8 million. (At least 524,288 ETH split between 16,384 stakers is needed to trigger Eth 2.0’s “genesis event” and activate the upgrade.) In addition to the staking rewards returned to those validors, earning potential can still be derived from those locked up funds. This is exactly the sort of innovation seen springing up everywhere in the decentralized finance (DeFi) field.
The same can be said of Wall Street’s engineers who come up with new products in response to rule changes. As CoinDesk’s Michael Casey points out, it doesn’t matter if the behavior-constraining rules are imposed by a government regulator or, in the Ethereum 2.0 case, 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 issuing tokenized claims on staked assets, such as Rocket Pool, Blox or StakerDAO. Exchanges like Binance and Coinbase are also keen to get in on the action, with various Eth 2.0 staking products in the offing.
But LiquidStake is a confident play, heavily backed by what could be called the Ethereum establishment: 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’m excited to watch DARMA Capital play a significant role in the Eth2 transition with LiquidStake, which has selected ConsenSys’ Codefi platform as its staking partner.”
Filecoin founder Juan Benet added: “Protocol Labs already uses DARMA’s swaps for a crucial component in the Filecoin ecosystem, and we plan to do the same with our staked ETH treasury.”
DARMA Capital co-founder Slazas made clear that LiquidStake is for individuals who are going to borrow against collateral, while DARMA Capital is an entirely separate entity designed for institutions entering into total return swaps. (Such instruments are agreements in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of an underlying asset, which includes both the income it generates and any capital gains.)
“The big reason for institutions to want to enter into a swap is basically that it gives a lot of regulatory and tax clarity,” Slazas said. “There’s some great work being done to clarify if I move from Eth 1 to Eth 2 is that a taxable event? Given that those are up in the air, and we don’t know what the actual answer is today, if you enter into a swap, you do know the tax treatment of what a swap is.”
The LiquidStake business model is based on taking a cut of the interest rate, and then a part of the reward rate, said Slazas. “The exact interest rates and your loan to value rates will change a little bit. But what we’re doing is we are just adding 5% of what the reward rate is, as our fee on the loans.”
LiquidStake helps the Ethereum community face the number one fear with respect to the Eth 2 upgrade, said Keys: liquidity.
“Now they can have all of their ETH deposited to stake, and if they need money they can take a loan,” said Keys. “It could be to pay their rent, or they could buy more ETH and stake that, or maybe they want to enter the wild world of DeFi.”