Current prevalent problems with staking solutions are;
More tokens are minted as reward for validators providing security to a network. This only works if you measure your rewards in the inflationary token, however server costs are measured in fiat, for sake of simplicity, USD. When a token’s supply inflates, it normally suffers a direct inverse correlation with price. If you double supply, you would halve price. So the net result for validators is often negative. Cost in USD-USD value of tokens received over time.
Inflationary models are also unsustainable as you can’t infinitely keep minting new tokens, supply should be limited to ensure ongoing viability for early adopters.
As mentioned in the previous section, server costs are measured in USD, however rewards are in tokens, to offset this, you need to sell tokens, when a tokens price depreciates to the point where it no longer covers the opex expenses, you need to discontinue the service. For this reason, staking is mostly a very mutable solution where staking farms will move from one coin to the next to ensure maximized profit due to fluctuating prices.
A token provides security for its network. If you have a public blockchain that tokenized real-estate. And let’s assume it has $200M worth of tokenized real-estate. However, the underlying token staking value is worth $2M. Then in a staking model, it would cost you ~$2M to attack an object of value equal to $200M. The value of the underlying securitized token is what protects the network and its assets. So the value of the underlying security assets, should exceed, or at least match, the value of the managed assets.
To circumvent this, we designed a system that has;
This was achieved via 2 popular DeFi mechanisms, collateralized debt, and liquidity pool lending.
Collateralized Stable Debt Tokens or CSDT are USD pegged stable tokens minted from provided collateral. This allows validators / delegators to provide collateral in any native supported asset (BTC/ETH/BNB/FTM on genesis), and mint CSDT. The collateralized ratio of each asset is set via governance and on genesis would be BTC 150%, ETH 150%, BNB 150%, FTM 150%
A practical example of how this works;
We deposit 1,000,000 FTM into our Collateralized Debt Contract, the validators via their approved oracles have agreed (via consensus) that the current price for 1 FTM is $0.02. The value of the deposited FTM is $20,000. FTM is collateralized at 200%, so the minting value would be $10,000, or 10,000 CSDT that can be minted.
An important disclaimer here, it is best practice to not mint the maximum allowed as this sets a very high liquidation price for your assets. The way the stability of the price is managed is via the liquidation of assets should the token price depreciate. In the above example, should FTM price fall to $0.018 the collateral FTM would be liquidated and made available for auction at 5% discount, so that another user could purchase the FTM for CSDT (CSDT goes back into the system, your collateral debt is paid off, and they now own the FTM). If however in the example above the collateral provider instead decided to mint 5,000 CSDT, then the liquidation price would be ~$0.01 and they have a lot more safety and room to manage their collateral.
With CSDT created, we can now create a validator by staking CSDT. Rewards will be paid out in CSDT. Current rewards are set at 13% with a staked target of 67%. So if there is 1,00 CSDT minted, and 67 are staked the reward will be 13% annually. Should more than 67% be staked, this will decrease to 7% over time, and should less than 67% be staked, then this will grow to 20% over time.
Since CSDT is USD pegged, it means that your returns are fixed against your operational costs.
For those reading so far, from the previous section you would have noticed that these rewards however are inflationary. The reason for this is to bootstrap the network, the initial interest for staking, will be paid by Xar.
Now that there is a liquidity pool available of assets (via the Collateral Debt Contracts) it means that users of the system can borrow assets. This is collateralized lending with the ratio set per supported asset. Additional assets over and above CSDT assets can be supported.
Practically, this would mean a borrower can provide BTC as collateral, and borrow ETH against this, with the interest being set based on the ratio of liquidity providers to borrowers. Judging by current rates, this is around ~4%. This interest is then paid to the liquidity providers (stakers) and offsets that value of staking rewards.
Eventually with network growth and liquidity providers, this will offset the ~7%–10% of required staking rewards and arrive at a non-inflationary model.