Introduction

The concept of DeFi emerged in 2018, utilizing decentralized smart contract to deliver traditional financial services, operating on blockchain in the form of code. In 2020, the DeFi narrative exploded, becoming the most user-populated and widely applied sector in the cryptocurrency industry. This sector includes lending platforms like MakerDAO, AAVE, and Compound, trading platforms like Uniswap and Sushiswap, and derivatives platforms like dYdX. Beyond infrastructure, DeFi has extended into various applications, providing more functionalities for the cryptocurrency ecosystem.

Liquid staking services are relatively niche within the DeFi field, mainly targeting tokens of blockchains using the PoS consensus mechanism. PoS (Proof of Stake) links the opportunity to generate new blocks with the amount of stake held by a user, considered by many as an improvement over the PoW (Proof of Work) algorithm. PoS was initially proposed by Quantum Mechanic in 2011 and subsequently implemented by Peercoin and NXT through different approaches. This mechanism requires participants to stake tokens (equity) on the blockchain, akin to depositing funds in a bank, with rewards distributed based on the amount and duration of the staked tokens. PoS assumes that by locking some interest in the chain, akin to a security deposit, decisions driven by self-interest will be more rational. Additionally, it incorporates reward and penalty mechanisms to prevent misconduct, making node operations more controlled and secure against attacks. Moreover, PoS has evolved into variants such as DPoS and PoSA.

Source: stakingrewards

From the information on PoS assets, Ethereum currently has the highest staked value, with a total of $96.3 billion worth of assets staked, a staking ratio of 26.99%, and a staking yield of 3.43%.

The core of liquid staking services is to overcome the liquidity lock-up problem of traditional staking products. By allowing users to stake their tokens and receive tokenized staking certificates in return, these certificates can be traded and used in various DeFi activities, thus providing liquidity for staked assets. This reduces the barriers to PoS staking and makes the staking process more convenient, targeting mainly small and medium-sized holders of PoS blockchain tokens.

pSTAKE, a liquid staking product established in 2019, provides liquidity for users’ PoS-staked assets, allowing them to earn staking rewards and participate in DeFi activities. This article will detail the implementation of its staking service, analyze its economic model, and discuss its current development status.

What is pSTAKE Finance?

The pSTAKE Finance protocol is developed by the Persistence One team, which was founded in Singapore in 2019. Persistence is a Layer 1 blockchain based on the Tendermint consensus, dedicated to supporting DeFi Dapps and focused on unlocking the liquidity of staked assets. pSTAKE Finance is a liquid staking protocol for PoS, supporting liquid staking for Ethereum, Cosmos, BNB Chain, and the Persistence chain. The protocol launched its governance token in September 2021, held a public sale on Coinlist in November 2021, and officially launched its product in February 2022. Recently, the team announced plans to expand liquid staking to the Solana ecosystem and launched the first season of the pSTAKE airdrop on Solana.

In July and November 2021, pSTAKE Finance secured a total of $10 million in two seed funding rounds, led by Sequoia Capital, with participation from notable investors like Coinbase Ventures and Kraken Ventures. In May 2022, Binance Lab announced a strategic investment in pSTAKE Finance, demonstrating significant financial backing.

Technical Implementation

pSTAKE Finance offers token staking services. When users stake their tokens with pSTAKE, they receive staking tokens (stkTokens) in return. These stkTokens can be used in DeFi to earn additional yields. Currently, the protocol supports liquid staking on Cosmos, BNB Chain, and Persistence.

Source: app.pstake.finance

The protocol consists of two main components: pBridge and pSTAKE smart contracts. pBridge serves as a bridge between Ethereum and the PoS networks supported by pSTAKE. It can be used to mint pTokens, which are ERC-20 wrapped tokens pegged 1:1 with the staked PoS tokens locked in the bridge. The pSTAKE smart contracts are responsible for minting and issuing pTokens and stkTokens.

The stkTokens minted and issued by the pSTAKE smart contracts are tradable. The assets on the PoS network are initially delegated to a whitelist of validators according to a predefined allocation ratio. This ratio is initially determined by the team but later managed by pSTAKE governance token holders. All stkToken holders in the ecosystem share the slashing risk. As delegations are spread across multiple validators, the slashing risk is significantly mitigated.

Operational Logic

For staking on the BNB Chain, staking 1 BNB currently yields 0.9525 stkBNB. When users deposit BNB into the pSTAKE application, it goes into the pSTAKE StakePool contract. After staking, there is a 15-day unlock period. Every day at 23:00 EST, the BC bot runs a staking transaction that aggregates all deposits in the StakePool contract and delegates them to pSTAKE validators. Once users deposit BNB into the StakePool contract, they start accumulating staking rewards, which is reflected in the increasing exchange rate of stkBNB tokens.

Source: app.pstake.finance

Users can directly unstake stkBNB on the pSTAKE platform. When unstaking, staking rewards stop immediately, the minted stkBNB is burned, and an equivalent amount of BNB based on the current exchange rate is created in the user’s name. After a 15-day period, the user can withdraw the BNB from the pSTAKE application. The bot can only cancel delegations from BNB Chain validators once within a 7-day period. Alternatively, users can directly trade stkBNB for BNB on a DEX, bypassing the 15-day unstaking period. StkBNB can be used in various DeFi scenarios, including trading and adding liquidity on Wombat and Pancakeswap, collateralizing and borrowing on Midas Capital, and leveraging lending and staking on OpenLeverage.

The team states that 95% of staking rewards go to stkBNB holders in the form of stkBNB value appreciation, while 5% is allocated for protocol development during the first three months, indicating a 5% transaction fee.

Validator Rating Mechanism

Validator selection and commission rate setting are key issues for token staking service products. pSTAKE adopts a delegation strategy to choose the best validators in the BNB Chain ecosystem. This strategy uses a validator rating mechanism to help users find the highest returns while ensuring funds are delegated to sufficiently high-quality validators.

pSTAKE’s delegation strategy considers both annual yield and security. Firstly, in terms of annual yield, the annual yield that validators receive on the BNB Chain depends on two factors:

• Commission rate: pSTAKE selects validators with the lowest commission rates to ensure users receive higher staking rewards shares.
• Voting power: The staking ratio of validators determines the annual yield, with validators with lower staked amounts more likely to provide higher returns.

Secondly, in terms of security, when staking with validators on the BNB Chain, users are not penalized. However, if the validators they stake with are penalized or jailed, users may miss out on rewards. Therefore, when selecting validators, pSTAKE considers the history of penalty occurrences and selects validators with the fewest penalties in the past year. This is because if validators are jailed, users need to actively unstake and re-stake with another validator, resulting in the loss of at least one week’s rewards. Additionally, pSTAKE also uses data on validators’ normal operation time in the past six months to select the most stable validators, ensuring validators do not miss out on rewards.

After considering both annual yield and security, pSTAKE determines the comprehensive score of each active validator in the network to select the optimal validator.

Economic Model

pSTAKE is the native token of the protocol, with a total supply of 500 million tokens. Its main purposes currently are governance and incentives. According to its token allocation, 26% is allocated for incentives and community development, 20% for token sale strategic financing, 20% for the treasury, 16% allocated to the team, 6% for retrospective rewards, 5% for public offerings, 3% for XPRT staking, 2% for Alpha Launchpad, and the remaining 2% for promoting the development of the protocol.

Source: docs.pstake.finance

Based on the current distribution of pSTAKE tokens, most of them are still held by team members. The token unlock schedule is as follows:

Source: docs.pstake.finance

Current Development Status

The pSTAKE platform currently supports multiple chains including BNB Chain, Cosmos, dYdX, Osmosis, and recently announced expansion to the Solana ecosystem. The Total Value Locked (TVL) is approximately $6.73 million. On BNB Chain, there are a total of 743 BNB staked with an APY of 2.86%. Currently, the highest APY is on Persistence, with a total of 1.19 million XPRT staked and an APY of 15.42%.

From the historical fluctuations in Total Value Locked (TVL) of the protocol, it appears that the TVL has experienced periods of both growth and decline. Recently, with the announcement of expanding liquidity staking services to the Solana ecosystem, there has been a slight increase in TVL. Overall, the business data performance does not seem to be outstanding.

Source: defillama

Conclusion

Token staking services are products that emerged based on the characteristics of PoS blockchains, and their development relies on the future trends of PoS. pSTAKE’s product design is simple, aiming to lower the barriers to entry for PoS staking services and provide convenience to users. The team is continuously expanding its multi-chain liquidity staking services. However, the current business data performance is average, and there is still some gap compared to industry leaders like Lido. In the future, it will be necessary to explore new demands or incentive mechanisms to attract users and funds.