A forthcoming decentralized financing project built in Polkadot (DOT) is seeking to unlock liquidity that would be linked to staking as part of its consensus mechanism.
Called Stafi, short for Staking Finance, the project aims to implement liquid staking at Polkadot and potentially other block chains as well.
One drawback of staking funds for consensus is that they cannot be used for anything else while they are locked. The „liquid staking“ implemented by Stafi would allow users to maintain the ability to perform transactions with their tokens while also participating in the consensus and receiving staking rewards of their money.
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Cointelegraph spoke with Liam Young, CEO and co-founder of Stafi, as well as Bonna Zhu, head of business development in Asia at BitMax. Zhu explained that Stafi is a candidate for the exchange’s incubation program, supporting the project in several ways.
Stafi has closed a USD 600,000 seed fundraising round with investments from Focus Labs, Spark Digital Capital and B-Tech, a Bitmax-affiliated accelerator. He has also received grants from the Web3 Foundation, which supports the development of the Polkadot ecosystem.
How liquid staking will work
Stafi works similarly to several automated Bitcoin Lifestyle performance search protocols in the Ethereum, except that it is limited to staking.
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Users must deploy their funds in a smart Stafi contract that will put them into staking. Users receive an „rToken“ as rDOT that represents their participation in the group. The token is fungible and can be transferred and exchanged later. The rTokens can be exchanged at any time for their participation in the pool with additional tokens accumulated by staking.
This approach effectively creates a synthetic token that represents DOT as a stake, which ideally should have a one-to-one relationship with the underlying collateral. A possible vulnerability of this approach is when part of the underlying stake is „cut“ due to the bad behavior of the validator.
Young explained that, in order not to run out of warranty, losses from clipping are reflected in the token:
„In technical terms it’s a redistribution. We will launch algorithms to distribute the delegates to different validators. Then, if one of the validators is clipped, the delegator is also clipped. […] Maybe with a little delay, but the rToken will be clipped too“.
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But he pointed out that the project will be in charge of choosing validators that will continue to work in an optimal way. In addition, insurance against future cutbacks can also be provided.