The Ultimate Way to Hedge against Market Volatility When You Stake on PoS: StaFi Protocol
The consensus mechanism is the central facet of any blockchain. This refers to how all decision-makers in decentralized networks consent to the validity of shared data and ensures that the data is secured on the blockchain. Before a blockchain network can fully operate, consensus must be reached. Consensus mechanisms ensure that:-
- Every transaction on the network is valid and secure.
- Blocks that store transactions are validated and added to the chain
- Illegal transactions and double-spending are avoided.
- New coins are sent into circulation and trust is established in the network.
The Proof-of-Stake concept implies that a user can be able to mine and validate blocks according to the number of coins they possess. Simply put, the higher your coins, the higher your mining percentage.
Proof-of-Stake was brought about as a better alternative to the time and energy-zapping Proof-of-Work mechanism, which was the original consensus algorithm that began the global financial revolution. It has so far been adopted by the majority of the crypto community and is confirmed to be very resourceful and beneficial.
To determine who will validate the next block, PoS algorithms employ a variety of methods.
- The number of tokens staked: the more tokens staked, the more likely a user is to be chosen for validation.
- The staking period: the longer the period selected for staking, the more likely the chance to be chosen for validation.
- Random selection: The lowest hash value, combined with the highest stake is chosen for block validation.
Staking is the by-product of the Proof-of-Stake consensus mechanism. Generally, Projects that adopt the PoS mechanism reward users in their own coin for keeping the network secure. They get rewarded mainly for validation of transactions and contribution to the network’s legitimacy and security, and this is accomplished by staking or locking up their coins on the network.
The rewards earned by a user depend on the amount staked on the network and are normally paid off from the transaction fees on the network.
The central idea behind the Proof-of-Stake mechanism is that those who lock up their tokens on the network will help keep it safe as the future of their investment largely depends on it.
Above are filled with sweet words about the Proof-of-Stake concept; how it is a better alternative to Bitcoin’s Proof-of-Work; how it is highly profitable, how it is very secure, how it is faster and more efficient, etc. The truth remains that the PoS mechanism is a very nice concept and has defied many odds to still be widely adopted today; however, as with every business action, it has its demerits. One of the demerits of the Proof-of-Stake mechanism which we will be discussing in this article is the crypto market volatility problem.
Volatility in traditional finance refers to how much and how quickly the price of an asset changes. If the price of an investment moves up or down sharply on a daily basis, it is considered volatile. Volatility can be used as a reliable indicator of the investment risk involved with an asset.
Due to the digital nature, low regulation rate, and market size of cryptocurrencies in general, its adoption has been massive, as it has made it possible for one to amass huge returns with a large investment amount; on the other way round, it can also lead to a massive loss for that particular big investor should the market face a downtrend.
In the case of staking in PoS networks, the highly volatile nature of cryptocurrencies can be extremely harmful to the assets of users due to the fact that it is locked and cannot be withdrawn until the stipulated period expires.
In a situation whereby the market is on a downtrend, coins staked in the network will also be affected by the fall and stakers will have to endure watching their assets lose value which can be heartbreaking. However, there is currently a remedy to this situation and it is tagged “hedging against market volatility” powered by the StaFi Protocol.
Staking Finance (StaFi)
StaFi is a decentralized finance (DeFi) protocol that solves the problem between token liquidity and Mainnet security by unlocking the liquidity of staked assets through a liquid staking process. StaFi basically solves this problem by issuing alternative tokens (rTokens) on a 1:1 basis to stakers for tokens staked on the original chain.
Reward Tokens (rTokens)
rToken is the solution to hedging over market volatility for stakers. Stakers no longer have to worry about their locked-up tokens no matter what turn the market takes.
By staking in liquid staking services like StaFi, a token holder will obtain bonded assets of the same value as the tokens staked in the original chain. For instance, if a user stakes 1 XTZ, he/she will get rXTZ that is of equal value to the amount of XTZ staked. Additionally, these tokens can be traded on bonded assets market based on StaFi. Unlike XTZ, which is staked and locked on the original chain, rXTZ has no lock period and still continues to generate returns. With this, rXTZ holders no longer have to concern themselves with the extremely volatile crypto market.
How it Works
Staking Contract (SC) is one of the layers on which StaFi protocol is built on and it is responsible for creating staking contracts and interacting with original chains. For instance, the connection of tezos and StaFi will create XTZ-SC. To acquire rTokens, a user with XTZ will initiate a Stake operation on XTZ-SC, then the Staking Contract will generate a multi-signature address, and the user will transfer XTZ to that address through the Tezos original chain. If the transfer is successful, the contract will carry out the Staking operation for the multi-sign address. If the attempt is also successful, the tokens will be locked to the original chain. The StaFi protocol will then acquire proof of the Tezos original chain, which will trigger the already created contract to generate rXTZs in equal amounts to the available XTZ and then send them to the staker.
The development of StaFi and their rTokens initiative have restored lost faith in the crypto industry and with the PoS mechanism especially. Now, users can ultimately hedge against the terrible market volatility of cryptocurrency whilst earning much more than they anticipated.
Stay connected with the StaFi project using the Links below:
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