StackingDAO: Stacks Decentralized Finance's Liquidity Magnet

Author: Do Dive, DeSpread Research

Disclaimer: The content of this report reflects the views of the respective authors, is for reference only, and does not constitute advice on buying or selling Tokens or using protocol. None of the content in this report constitutes investment advice and should not be understood as such.

1. Liquiditystake Service Overview

In Blockchains network using Proof of Stake (PoS) Consensus Algorithm or similar mechanisms (such as Ethereum), to participate in the Block validation process, a certain amount of native Token must be staked. Although staking occupies a large amount of capital, thereby enhancing the security of the chain, it also brings a problem of inefficiency of funds due to the inability to use staked funds elsewhere, leading to the drop in fund efficiency.

Liquiditystake is introduced to solve this problem, and its service allows assets to be liquidized, allowing participation in the Block validation process without losing Liquidity. Liquiditystake services typically provide the following functions to release the capital efficiency of stake assets:

1. Tokenization of staked assets: When users stake assets through the Liquiditystake service, they will receive derivative Tokens corresponding to the staked assets (such as STETH).
2. Value guarantee and reward distribution: Derivative tokens ensure a 1:1 exchange with underlying assets. Holders of these tokens can obtain block validation rewards through mechanisms such as resetting or adjusting the exchange rate.
3. The utilization of Liquidity and assets: Users can utilize the value of derivative Tokens in various Decentralized applications (dApps), such as using them as collateral for loans or providing Liquidity in Decentralized Finance scenarios.

Participating in on-chain Block validation has a high barrier to entry. For example, becoming validators for the ETH network requires a capital investment of 32 ETH (worth over 10,000 USD), while Solana imposes high hardware costs on validators due to the demanding specifications of the network.

The Liquiditystake service solves these barriers by involving more users in the Block verification process, bringing benefits to both the chain and users, including:

1. Improve security: stake more native Tokens, strengthen the security of the chain.
2. Improve capital efficiency: Users can earn block validation rewards while using collateral assets in Decentralized Finance.

1.1. The role of Liquiditystake

Lido Finance launched in December 2020 as a pioneer in providing Liquiditystake services for the Ethereum ecosystem. In April 2023, after the upgrade of the Ethereum Shanghai, it achieved the function of extracting ETH on the Beacon Chain. With the market recovery, the amount of ETH invested through the Liquiditystake Auto-Invest service has increased sharply.

Source: @hildobby dune dashboard

According to the dune dashboard provided by hildobby, after the upgrade in Shanghai, as of the end of July 2024, approximately 15.8 million ETH were staked, exceeding the 13.6 million ETH before the upgrade. Considering that the Ethereum mainnet was launched in 2015, these numbers prove a sharp increase in the demand for ETH staking after the upgrade in Shanghai over the 15 months. In addition, about 32.6% of ETH staking is processed through Liquiditystake services, highlighting the important role these services play in the on-chain ecosystem.

All protocol TVL trends, source: Defillama

Liquiditystake TVL trend, source: Defillama

According to DefiLlama’s data, Liquiditystake service accounts for more than half of the Total Value Locked (TVL) in all protocols, highlighting its dominant position. Lido Finance has the highest TVL among all protocols, reaching approximately 32.7 billion US dollars.

As of August 1, 2024, the key indicators are:

• Total TVL: 99.16 billion US dollars
• Liquiditystake TVL: $50.7 billion
• Lido Finance TVL: $31.2 billion (ranks first among all protocols, with EigenLayer in second place at $15.5 billion)
• ETH Staking Volume: approximately 34 million ETH
• Liquidity utilization rate: approximately 11 million ETH (32.6% of total ETH stake)

1.2. Applicability to Other Chains

The success of the Liquiditystake service on the Ethereum blockchain has stimulated adoption on other chains, including Solana, Avalanche, and IBC-based chains. Some of these services have also achieved significant TVL, proving their practicality. Following Ethereum, Solana has become the second largest chain in terms of Liquiditystake service volume, with notable protocols including:

• Jito / TVL: $1.84 billion
• Marinade / TVL: $11 billion
• Sanctum / TVL: $758 million

These developments indicate that the influence of Liquiditystake services is expanding in different blockchain ecosystems.

2. Transfer Proof of Stacks (PoX) and liquid staking

Even chains that do not adopt the Proof of Stake (PoS) mechanism can create a favorable environment for Liquiditystakeprotocol if the Consensus Mechanism involves the process of Token locking or delegation to validators. Stacks, which uses the Proof of Transfer (PoX) Consensus Mechanism, is an example of this.

The PoX Algorithm in the Stacks Block chain is characterized by the interaction between Miners and Stackers. Miners send BTC (BTC) to Stackers to gain the right to create Stacks Blocks and receive STX rewards. Stackers, on the other hand, need to lock a certain amount of STX to receive BTC rewards. For more information, please refer to ‘Stacks Nakamoto Upgrade, a Butterfly Ready to Stand Out’.

Miner and Stacker roles, source: stacks docs

At first, Stacker only needs to lock STX Token to participate in the PoX process, however, after the Nakamoto upgrade planned for the second half of this year, Stacker will play a new role called Signer. Signer will be responsible for verifying, storing, signing, and broadcasting the Stacks Block generated during the Miner’s term.

Stacking vs Staking, source: Hiro blog

As shown in the figure, the ‘Stacking’ process in Stacks is similar to the ‘Staking’ process in Ethereum: 1) Both involve locking tokens to participate in the on-chain consensus mechanism; 2) Both require a large amount of native tokens, and after the Nakamoto upgrade, Stackers also need the operation of nodes, which creates entry barriers; 3) Both require locking assets for a certain period of time and setting a withdrawal period, which drops the efficiency of capital, highlighting the demand for Liquiditystake services.

3. Liquiditystake service: StackingDAO

3.1. Role of Stacking Mechanism and StackingDAO

Source: StackingDAO

StackingDAO is a decentralized application (dApp) that provides liquidity stake services for the Stacking process on Stacks. Similar to other liquidity stake services, users can deposit their STX tokens into StackingDAO to participate in the Stacking process and earn an annual yield of approximately 8% (benchmark at 7%) by obtaining the derivative token stSTX.

The Stacking mechanism on Stacks is similar to the Staking process on Ethereum, both of which introduce a difficult entry barrier:

1. Stacking period: Stacking operates on a two-week cycle, resulting in time constraints for locking, unlocking, and restacking.
2. Minimum STX requirement: It takes about 90,000 STX Tokens to register as a Stacker.
3. Node Operation: After Nakamoto’s upgrade, Stacker needs to run the Node.

The two-week cycle has caused inconvenience for users in terms of time, as they have to lock or unlock their assets according to the cycle. In addition, if users only want to unlock a portion of their assets, they must first unlock all of their assets and then relock the remaining portion, which adds complexity.

To address these challenges, StackingDAO has designed an exit mechanism, which 01928374656574839201 the entry threshold and also reduces the impact on Stacking yield, with the main features including:

• Diversified Stacking Address: StackingDAO distributes STX to 10 different Stacking Addresses to mitigate the impact on yield.
• Interleaved Extraction: Only one of the 10 Addresses is unlocked in each Stacking cycle, allowing for interleaved withdrawals as per user request.
• Issuance of Non-fungible Tokens: When users request withdrawals, they send stSTX to the protocol, which issues Non-fungible Tokens as receipts. After the stacking cycle ends, users can burn Non-fungible Tokens to exchange for unlocked STX Tokens.

This mechanism reduces the time limit and inconvenience during the Stacking process, ensuring that users can obtain and use assets more flexibly while maintaining Stacking benefits.

3.2. rise and Key Metrics

Muneeb announced the launch of StackingDAO, source: Muneeb X

Since its launch in December 2023, StackingDAO has effectively gained follow and attracted rapid growth of users and capital by introducing a point system. The point system rewards users daily based on their holdings of stSTX, encouraging stSTX to be pegged to STX and used in Decentralized Finance protocol:

• Holding 1 stSTX Token rewards 1 point
• Each deposit of stSTX Token into Decentralized Finance protocol rewards 1.5 points
• Each stSTX Token deposited into the Bitflow Stable Swap Pool will receive a reward of 2.5 points.

Key indicators as of August 21, 2024:

• Total issuance of stSTX: about 56.8 million
• Utilization rate of stSTX Decentralized Finance: 45%
• stSTX’s TVL in Decentralized Finance: $36.78 million
• Total issuance points: about 14.95 billion
• User Count: 37,498

As the first Liquiditystake dApp in the Stacks ecosystem, StackingDAO reached a peak TVL of nearly $125 million shortly after its launch. Despite market adjustments, StackingDAO’s TVL still remains at around $80 million, making it the largest dApp in the Stacks ecosystem in terms of funds.

Stacks dApp TVL ranking, source: Defillama

Bitflow is a stable trading protocol that provides the necessary value maintenance for stSTX, and also benefits from the launch of StackingDAO and the introduction of the scoring system. Currently, about 10.5 million STX Tokens are stored in the protocol, demonstrating its rising trend.

The StackingDAO TVL, calculated in STX Tokens, has been rising since its launch and currently holds approximately 58.6 million Tokens. This accounts for about 4% of the total circulating supply of 1.48 billion STX Tokens, and about 13% of the 425 million STX Tokens currently participating in Stacking. Considering that this dApp was launched less than a year ago, these are quite impressive numbers.

3.3. Contribution to the Stacks Network: StackingDAO V2

Starting from late August, as the activation phase of Nakamoto upgrade unfolds, Stacker will transition to the role of Signer responsible for verifying Stacks Blocks. The Signer is similar to validators in Proof of Stake (PoS) chains, so enhancing the stability and diversity of the Signer network becomes a key objective for increasing the security and decentralization of the Stacks Block chain after the Nakamoto upgrade.

Against this background, StackingDAO has launched StackingDAO V2, aimed at simplifying the process of joining Signer. One of the main features of this update is to delegate the STX Tokens deposited in StackingDAO to the new signers on the Stacks Block on-chain, thereby promoting the growth of the network. The update was initially announced in March and is planned to be implemented after the Nakamoto upgrade.

StackingDAO V2 is a mechanism established around the STX Token deposited by users, which is proportionally authorized based on the performance of the Signer. The design aims to achieve the following goals:

• Improve network performance: Delegate STX stake amounts to different Signers to enhance the diversity of the Signer network and incentivize Signers to improve performance.
• Increase user earnings: More STX stake will be distributed to higher-performing Signers, providing users with higher stacking rewards.

Status of Signer joined StackingDAO, Source: StackingDAO

Even before the Nakamoto upgrade is fully activated, 10 entities (not including StackingDAO) have already joined StackingDAO’s Signer program, and delegation amounts have been allocated to these signers since May. After the Nakamoto upgrade is released, the scope of joining signers through StackingDAO is expected to expand, further enhancing the diversity of the signer network.

4. Conclusion

At the beginning of this year, with the increasing interest in the Bitcoin ecosystem, the Stacks network and other projects have also received a significant amount of attention. This follow has driven the rise in the total locked value (TVL) of the Stacks network, reaching a peak of $180 million in April, which is 18 times higher than the $10 million TVL recorded in September of the previous year.

However, as the market enters a consolidation phase, a series of challenges have emerged within the Stacks ecosystem. These include latency issues with the Nakamoto upgrade, as well as the Hacker attack on Alex, the largest decentralized exchange in the Stacks ecosystem. Despite these setbacks, emerging projects such as StackingDAO, Zest, Bitflow, and LISA continue to accumulate TVL and achieve growth. With the Nakamoto upgrade set to be completed in September, the market is once again optimistic about the future of the Stacks ecosystem.

Source: Hiro blog

The Nakamoto upgrade is about to be realized, and the evolution of the Stacks ecosystem is worth watching. It is also worth waiting to see how StackingDAO, with the largest TVL within the ecosystem, will develop in Stacks Decentralized Finance. How StackingDAO successfully becomes a liquidity magnet in Stacks Decentralized Finance will be crucial in the coming months.