2023 arrived and found a market still a little apprehensive, with nebulous issues involving important players. But big news emerges during this Bear Market, offering safer and more sustainable options, leaving investors excited for the next bull cycle.
Among them is a very interesting stake variety, which paves the way for amazing tools, in addition to other significant innovations.
For those unfamiliar, the term cryptocurrency staking originally consisted of keeping cryptocurrencies locked in order to receive rewards for validating operations on the network. Currently, the term is widely used for any type of process that allows you to lock your assets into a smart contract and earn rewards for doing so.
That is, it can be a holder and profit from it.
We'll explore some main new features that should be trending in the coming year and give you tips to take advantage of each opportunity.
Innovations on the Ethereum Network
The Ethereum network plays a major role in the development of disruptive technologies that expand the reach and possibilities that blockchain offers. Smart contracts are the best example of this. They created a dimension, which permanently changed how we use digital assets.
The flawless transition from the PoW to PoS model with Merge last year further reinforced the market's confidence in Ethereum and the perception that in its network, many of the most important trends come first. So, let's look at some of the most exciting new features already available in your ecosystem.
Staking and Security
The Proof of Stake model was much celebrated for being a potentially safer alternative compared to its predecessor on the network, Proof of Work. This is because in PoW, it was enough for a malicious agent to overcome the computational capacity (through the virtual hijacking of multiple machines, for example) of its rival validators to gain control of the network.
In the Ethereum PoS model, in order to have control of the network, it would be necessary to obtain ownership of most of the available tokens, which is a very complicated mission. In it, to be a validator, you just need to have 32 ETH tokens and stake them. This made it easier to distribute and increase the number of validators on the network, improving its security.
Saying this, for a moment it might seem like we want to say that Bitcoin has a less secure network because of its POW consensus mechanism than POS altcoins, but it is not at all like that.
As bitcoin has an extraordinary hashrate and very decentralized activity, in its case an attack on 51% of validators is practically impossible. That is why we believe that bitcoin, in addition to being the father of all cryptocurrencies, does not yet have a competitor to match it, in addition to its usefulness differing from that of altcoins.
To be clear, PoW is suitable for those blockchains that have a huge amount of miners willing to keep the network safe and running in exchange for a reward, helping to decentralize. It's simple, the more power put into the grid, the safer it gets.
PoS is the most suitable type of consensus for the rest of the first layer blockchains, since to validate the network it is necessary to have the native token, which if well distributed and easily onboarding validators, helps the network to become decentralized and also safe. If there are few validators, the project is still centralized.
In short, in our opinion there is only room for a PoW consensus blockchain that is secure and sufficiently decentralized, which is the case for Bitcoin.
But that is a subject for another article. Let’s go back to Ethereum…
Sustainable rewards
Ethereum's validators have become investors, not coin miners.
The staked tokens yield a reward in ETH. With the new Ethereum changes, the token tends to be deflationary, as the number of ETH burned daily may turn out to be greater than the number of ETH issued, depending on network usage.
The most significant network change in terms of usability has inspired investors and developers alike, and income farming has become a big trend again.
At Bear Market, stake possibilities are in high demand, but most need more versatile solutions. After all, not everyone has 32 ETH to stake.
Stake options issues
Even solving the problem of inflation, other important obstacles still needed to be overcome. Most investors still did not see the existing options as safe or satisfactory, mainly because they represent a setback in essential principles in the blockchain universe.
Fluidity - Locked Tokens
Another big issue with conventional staking options is the fact that tokens are locked. Even in conventional, relatively secure decentralized solutions, getting tokens locked up is a big issue.
In the case of Ethereum, validators will have to wait until an update brings the possibility of transactions with staked tokens, which can take years. Nobody doubts that this solution will arrive in a reasonably short time, but even so, this is a big problem.
Sovereignty - Staking in CEXes
And who wants to opt to stake on centralized exchanges? After everything that happened last year and all the possible fallout from it, it's no wonder that investors are wary and reluctant to stake on centralized exchanges — especially since it involves ceding custody of their tokens to them.
This alternative, in addition to offering a very low yield, removes investors' sovereignty over their tokens, and this type of product goes against the fundamental principles of cryptocurrencies. For all these reasons, leaving your tokens on centralized exchanges is not an attractive option.
Liquid Staking
So that investors could count on a really innovative solution, it needed to be versatile, allowing:
- the stake of any amount;
- security, with decentralization and self-protection of users over their tokens;
- fluidity, giving investors a way to enjoy their applied tokens.
And that's where Liquid Staking comes in.
How does it work
The idea is relatively simple. A validator who has at least 32 ETH in stake acts as an intermediary. He receives his ETH tokens from investors and stakes them on his platform, sharing with them proportionally the earnings obtained.
When you stake Ethereum on a Liquid Staking platform, you receive a token in exchange that equals the value of your stake. This token is like a synthetic of your applied Ethereum. It can be freely traded and even applied to generate income.
The Lido platform
The main Liquid Staking platform is Lido. In it, it is possible to stake not only tokens from the Ethereum network, but also Solana, Polkadot, Polygon and Kusama. By applying it, you receive tokens with the “st” prefix, such as stETH, which can be used in DeFi applications.
Currently, it already has more than 30 partnerships with blockchain companies, such as Curve, AAVE, SushiSwap and many others. The Lido is worth keeping an eye on!
But be aware: as every protocol involves risks, what we have here is that you deliver your ETH asset to Lido's smart contract and receive a stETH in exchange, a synthetic one.
What it does have is a “promise” that an ETH will be returned if you want to undo the operation, involving peg, liquidity and smart contract risk, although in the case of Lido this is audited numerous times.
Always do your own research and study hard before committing. Soon, we will talk more about Lido in our content.
Distributed Validation
And Liquid Staking is not the only technology with the potential to be a huge trend in 2023. A different validation model is gaining importance and could become extremely relevant in the coming months. The technology has existed since 2019, but more complex applications are only now being developed around it.
In the Distributed Validation model, the validators can divide their part in the formation of consensus between several points, as if they were sub-nodes, or a multisig portfolio. Each of these points has its own private key, significantly increasing security.
Advantages for investors
This technology can solve some big problems of liquidity pools in DeFi. Most of them are custodial and have only one node and one private key. This leaves them vulnerable to attacks. With the use of Distributed Validation it is possible to create decentralized models, with many nodes and points of failure, also minimizing the risk of penalties for downtimes.
Rocket Pool
There is already a platform using Liquid Staking and Distributed Validation to deliver innovative and disruptive products. It's Rocket Pool. It combines the two technologies very well and enables extremely versatile and profitable products to be created.
Any investor can use the platform to create a pool and take advantage of the potential for decentralization, flexibility, security, and profitability that the innovations in the Ethereum network make possible. Of course, this is not an investment recommendation, but you certainly want to know more about Rocket Pool!
Soon, many more diverse, secure and cost-effective products for DeFi applications using Distributed Validation technology should emerge. We will monitor their development and major platforms.