Creating Utility for Tokenized Derivatives of Proof-of-Stake (PoS) Assets Is Critical for DeFi’s Growth

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Two key events define the growth of the industry with cryptocurrencies and the broader blockchain. The first is the emergence of decentralized finance (DeFi), which is backed by blockchain-based digital assets.

DeFi quickly became an alternative financial system that promoted global accessibility and superior financial infrastructure. And today, this new financial system has more than 4 million unique users and is worth more than $ 200 billion.

The second definition event is the transition from Proof of Work (PoW) to Proof of Stake (PoS) blockchain. PoS as a consensus provides an energy efficient and practical way to protect the blockchain. It is also scalable compared to PoW.

But a more important reason for its popularity is to provide users with a way to use their digital assets. Simply lock your digital assets with the PoS protocol and your users will get a guaranteed yield. This is usually significantly higher than the yield of traditional financial systems.

However, as both the value of DeFi and the number of users are increasing day by day, the long staking period of PoS protocol assets leads to a pool of idle liquidity that is currently hampering domain growth. ..

DeFi idle liquidity problem

The market capitalization of PoS assets reached a record $ 594 billion in 2021. Expected rewards from betting on these assets are expected to reach $ 18 billion soon. In addition, the total amount of assets locked under the DeFi protocol is currently $ 214 billion. All of these numbers are impressive on the surface, but they’re actually more hidden than they reveal.

Most of this liquidity is fragmented, underutilized and inaccessible. This is because assets locked by the PoS protocol will be unavailable for extended periods of time and will be siled on individual networks.

These bet assets will gain interest over time, but their ease of use in larger DeFi frameworks will be limited. In addition, this contributes to the indivisible nature of DeFi, making it difficult for networks to exchange value efficiently.

Therefore, to gain full access to DeFi liquidity, industry protocols are now creating tokenized derivatives of PoS assets through a process called liquid staking. However, in order for DeFi to achieve true configurability, the industry must also focus on creating the actual utilities for these tokenized derivatives.

Creating utilities for underutilized liquidity

For inexperienced people, fluid staking is the process of issuing PoS asset derivatives to users. This means that the liquidity of the underlying asset is unlocked without unlocking the asset itself.So the user – – While earning staking rewards for locked assets – – Still, you can place assets for use in various other protocols within the ecosystem.

For example, a user who stakes asset X with the PoS protocol earns an annual yield of about 7% and also receives a tokenized derivative of the asset. – – For example, tX. Then, if the user provides liquidity to the tX-ETH pair in the protocol and the annual yield is about 9%, at the end of the year the user will get a total yield of 16% on a single asset.

In this way, PoS assets are used for consensus to protect blockchain networks, but they can also be used across other protocols, providing full access to DeFi liquidity.

However, while the number of liquid staking protocols is increasing, the industry is still lagging behind in creating suitable utilities for these newly created derivatives of PoS assets. Without realistic use cases, the industry is once again left with underutilized liquidity.

Therefore, the need for time at DeFi is to create a protocol that takes advantage of this newly unlocked liquidity in the right way. There are already some networks going in this direction.

These innovations will ultimately give you full access to DeFi liquidity, facilitate the exchange of value between protocols and networks, and make the industry configurable.

Make DeFi capital efficient

The first iteration of DeFi, with its innovative nature and global accessibility, has brought about a significant influx of capital and liquidity into the industry. However, as the transition to DeFi 2.0 materializes, the industry is now focusing on creating financial products and protocols that allow proper access and use of this liquidity.

In this regard, liquid staking brings a world of new opportunities to DeFi. Combined with the proper utility of bet derivatives, this can drive the success of DeFi and make it a capital-efficient industry in the near future.

Tushar Aggarwal is a Forbes 30U30 winner and founder and CEO of Persistence.

Featured images: Shutterstock / Philipp Tur / Vladimir Sazonov