(Dual-Token) Liquid Staking
Overview
(Dual-Token) Liquid Staking is an innovative concept in decentralized finance (DeFi) that allows users to stake a primary asset and receive representative tokens in return. This system offers a unique blend of stability, reward generation, and flexibility in asset utilization. Or in different terms: capital efficiency is maximized.
Basic Mechanism: Generic Explanation
Initial Deposit - Minting
Primary Token: Users deposit a primary asset/token (e.g., EGLD). The primary asset is being staked or sent to a protocol to earn rewards.
In return, they receive a stable token (e.g., JWLEGLD) on a 1:1 value ratio with the primary asset. This token acts like a stablecoin.
Earning Rewards - Staking
Secondary Staking: To earn staking rewards, users then stake the stable token.
Any stable tokens not being staked thus increase the rewards for those who do stake their stable tokens.
After staking their stable token, the users receive a staked token (e.g., SJWLEGLD), which grows in value relative to the stable token.
Some staking options of JewelSwap do not offer a liquid token that represents the staked position. These exceptions are labled accordingly in the docs.
APR Calculation
The APR for staking is dynamic and depends on the underlying revenue source and the ratio between stable tokens and staked stable tokens.
Example: Staked primary tokens (e.g. EGLD), earn some form of rewards from staking or from another protocol. But, e.g. only 20% of stable tokens (e.g. JWLEGLD) are being staked. This means a fifth of the stable tokens earn the entirety of the APR generated by the underlying staked EGLD.
The fewer stable tokens are staked, the further APR increases, offering higher rewards for those who stake. The greater the difference between revenue generating primary tokens and staked stable tokens, the higher the APR.
APR is thus dependent on this ratio and also on the underlying yield generating mechanism.
Unstaking / Redemption
Unstaking: Unstaking the staked token for the stable token is possible at anytime, instantly and at no cost.
Redemptions/Unbonding: Redeeming the stable token for the primary token is possible, but only after a unbonding period. The unbonding period may vary between the different dual-token liquid staking offerings by JewelSwap. Some stable tokens may have a small fee when redeeming them into their primary token backing.
Important
It's important to understand the difference between the primary token (backing), the stable token (1:1 backed and redeemable, always), and the staked token (price appreciating against the stable token).
Benefits of this system compared to classic liquid staking
APR maximization
Because not all stable tokens are being staked, the APR for the staked tokens is higher compared to what the primary asset can normally achieve on it's own.
Example: 20% of stable tokens are being staked. This means a fifth of the stable tokens earn 100% of the APR generated by the underlying staked EGLD. Therefore the APR will be higher compared to normal EGLD staking.
Impermanent Loss mitigation
Because the stable token is backed 1:1 by primary tokens and also redeemable in a 1:1 manner, impermanent loss is heavily reduced on all liquidity pools, compared to a pool paired with a value-increasing liquid-staked token.
In other words: pools paired with the stable token suffer less impermanent loss compared to pools paired with a value increasing liquid-staked token.
Zero Impermanent Loss pools
In Liquid-Staking DeFi, it's common to have a pool on an AMM DEX, which allows easy trading between the liquid-staked token and the actual asset.
But these pools suffer (low) impermanent loss.
By instead using this dual-token mechanism, you can allow users to instantly unstake from the staked token to the stable token and then sell the stable token for the primary token through a trading pool. This way, the liquidity providers are subject to truly zero impermanent loss.
It is true that in theory a position could end up at a loss, but in practice the story is different. If a user decides to withdraw his liquidity from the pool when there is "impermanent loss" and then redeems any excess stable tokens on JewelSwap, he will end up with more primary tokens than he started out with. Thanks to the redemption mechanism, farmers can exit their positions without impermanent loss, always.
Enhanced Risk Management
Users can decide whether they want to stick to the staked tokens and earn an increased APR compared to staking the primary token, or provide liquidity to various different pools.
Thanks to the fact that the stable token is stable in intrinsic value compared to the primary token (backing), it makes more sense to use it for various pools (because there is no additional IL).
A wide variety of pools with different risks (ranging from zero IL) to normal liquidity pools with the possibility of IL, farmers have the freedom to choose their own risk levels.
Furthermore, each stable token that is in pools and not being staked increases the APR for all staked tokens.
Last updated