Staking is usually the main way to maintain the security of the PoS network. For a PoS network, the more and more dispersed assets in the network participate in the validator staking, the better the network’s security. Usually, starting from the PoS network itself, they provide incentives to validators, firstly to reward them as contributors, and secondly to encourage more validators to participate in network staking and verification.
In fact, for any PoS network, it is unrealistic to allow token holders to independently participate in the network validator staking. One is the cost perspective. For example, the minimum threshold for Ethereum’s PoS validator is 32 ETH. Based on the price of ETH 3,800 US dollars, the cost threshold to directly become a validator is about 121,600 US dollars, but the APR is only 2.21%, and the capital utilization rate is extremely low. On the other hand, the staker needs to have the ability to run the client independently to avoid fines. Overall, it is unrealistic for non-professional token holders to directly participate in the staking of any network as a validator.
Therefore, the emergence of the liquidity derivative pledge track, namely LSD, just solves the above pain points. On the one hand, token holders can entrust token pledges to the LSD protocol (no capital scale is required, usually assets worth tens or even tens of US dollars can participate), and the protocol will participate in the pledge of the PoS network on behalf of the pledger, and return part of the income to the pledger. At the same time, the LSD protocol will also return an LST token to the pledger, which is equivalent to the value of the pledged assets and can be used to obtain new income in LSTFi to improve the utilization rate of funds. This has a good driving effect on improving the pledge rate of the PoS network.
Except for the Ethereum ecosystem, other ecosystems are not large in LSD
However, from the current LSD track, except for the Ethereum ecosystem, the LSD scale of other networks is not large. On the one hand, in terms of scale, the current liquidity pledge scale of Ethereum is 13 million Ethereum, about 50.23 billion US dollars. According to the current 32 million Ethereum participating in the pledge in the Ethereum beacon chain, the liquidity pledge accounts for about 40.6%.
In addition to Ethereum, other PoS ecosystems such as Cosmos and BNB Chain are relatively small in scale, and the ratio of liquidity staking sources is not high. For example, among the ATOM tokens staked by Cosmos, although its overall staking rate is as high as about 63%, only about 2% comes from liquidity equity.
On the other hand, although LSD projects are rising, the leading LSD protocols represented by Lido, Rocket, Binance Staked, etc. have obvious monopoly effects in the field of ETH LSD staking, among which Lido alone accounts for 75% of the entire ETH LSD market share, and the market share of emerging LSD protocols is extremely low. In particular, the leading LSD protocols such as Lido are centralized models, which may have the risk of monopolizing most of the proportion, reducing the overall income of the LSD sector, and reducing the staking desire of the pledgers. In addition, excessive concentration of funds may cause security risks to the PoS ecosystem.
In addition to LSD, the re-staking track centered on EigenLayer, namely the LRT track, is also centered around the Ethereum ecosystem. Some LRT protocols including Kyper DAO, Renzo, Ether.fi, EigenPie, YieldNest, Swell, etc. are all built around LST and ETH assets to provide staking services, and lack support for native tokens on other chains. Similarly, EigenLayer also has shortcomings in maintaining network security. For example, in a PoS network, if EigenLayer’s incentive mechanism conflicts with the existing PoS incentive mechanism, it may reduce the validator’s commitment to network security. EigenLayer may cause some validators to gain more rights and control, thereby increasing the centralization risk of the network. Centralized networks are more vulnerable to attacks and manipulation, weakening overall security.
So overall, LSD and LRT may not be the best solutions for PoS ecosystem to obtain security:
● The LSD sector is severely monopolized and centralized. The scale of pledged income has decreased due to monopoly and it threatens the security of the PoS network, which deviates from the original intention of PoS.
● The multi-layer nesting model of LSD and LRT is risky, especially since some of the leading LSD protocols are too large in scale. Once a security problem occurs and a run occurs, it will be catastrophic for the Ethereum ecosystem. The Terra ecosystem is a lesson for this.
● The LSD and LRT tracks are mainly based on Ethereum. It is difficult for other PoS ecosystems to encourage more users to pledge through liquidity pledge and re-staking, and the problem of low capital utilization is difficult to solve.
● Except for the Ethereum ecosystem, there is a lack of infrastructure to support other PoS ecosystems to expand the scale of staking, and the trend of multi-chain development is hindered.
Of course, there are more solutions to maintain PoS network security and improve capital utilization than just LSD and LRT. The recent market-oriented LSP protocol has brought a better solution. Based on the innovative Node Slicing and OmniVerify Chain solutions, it capitalizes the user’s asset rights and node income rights and gives them liquidity. Compared with existing solutions, the LSP protocol is expected to achieve better results in PoS network security and promote the balanced development of the PoS network system, and PoS will return to its original intention.
LSP protocol “node slicing” solution
The LSP protocol is a new PoS liquidity derivative pledge solution. One of its features is the use of the Node Slicing solution as a core processing method for nodes during the protocol execution. Similar to LSD, PoS asset holders can pledge directly through the LSP protocol. The LSP protocol verification network will pledge funds to different PoS networks through the OmniVerify Chain network, and after verifying and hosting the decentralized network, the pledge certificate will be sliced. The sliced assets will include the user’s asset rights and node income rights.
Although the process of returning sliced assets seems similar to LSD, what is returned is not just an LST asset. Based on having all the capabilities of LST assets, it is also an asset that can represent asset rights and node income rights (LST assets do not have complete equity utility), that is, the process is a process in which users directly participate in the PoS network verification through the LSP protocol and obtain all the income rights obtained by the node. At the same time, the sliced assets can be freely exchanged and held in the LSP protocol trading platform, and can also be further traded in some LSTFi or even some LRT protocols.
Improving the scale and decentralization of PoS staking
In fact, from the perspective of the PoS network itself, it requires large-scale, decentralized users to participate in the verification of the network. From the perspective of scale, it is definitely difficult to meet the demand by simply attracting more retail traders to participate, so from this perspective, it is very necessary for some whale users, large node verifiers, and mining pools to participate.
A considerable number of these users run their own clients instead of participating in staking through the LSD protocol (potential risks are too high), but this method greatly reduces the utilization rate of funds, so the LSP protocol can become a good starting point. Using the LSP protocol, the above can more lightly carry out the funds in and out of the mining pool shares, and will not be affected by the fluctuation of assets in the mining pool staking nodes, making the public chain network more secure and reliable.
By utilizing the LSP protocol, nodes no longer need to go through complicated transaction confirmations and asset transfer pressures when exchanging asset ownership. Node holders can directly sell the node assets that need to be traded through the LSP trading platform, making it easier to exit, rather than requiring redemption to exit from the LSD and LRT platforms.
Of course, the decentralization of POS network staking nodes is equally important. On the one hand, the sharding scheme of the LSP protocol eliminates the potential threat of large stakers to the security of the PoS network. On the other hand, it is also expected to attract more decentralized users to participate in staking.
For users who need to participate in node staking, they do not need to participate in the construction of the network in a real sense. They can directly purchase node slices under the network ecosystem through the LSP protocol. This greatly reduces the threshold and deployment pressure for new users to participate in the public chain ecosystem, and also avoids various potential security threats in this process.
Adaptability to multiple PoS networks
Ethereum is currently the main market for LSD and LRT (centralized service providers dominate), and most emerging LSD and LRT protocols usually choose Ethereum ecosystem as their first choice in order to better capture users and funds. Therefore, it is unable to provide the original independent functionality of nodes to more ecosystems, including the data verification function of the network to which it belongs as an independent node. When it is unable to participate in verification, it also loses the core value of nodes as a guarantee of network data security, which is what we call a deviation from the original purpose of PoS.
This has resulted in the scale of Ethereum’s liquidity derivatives growing larger and larger, while other PoS ecosystems have difficulty in scaling up, which in turn has caused many emerging PoS networks to face certain difficulties in maintaining security and capturing stakers.
The LSP protocol is natively compatible with all PoS ecosystems, rather than being deployed at the bottom of one or several PoS networks like the LSD protocol. Therefore, the LSP protocol is not only aimed at Ethereum, but also other PoS ecosystems, which means that you can also pledge through the LSP protocol and get the return of slice equity assets.
When a large number of nodes on the same public chain network participate in the LSP protocol, or when a public chain network user interacts with the LSP protocol for the first time, a node pledge pool dedicated to the network ecosystem will be opened to ensure that these sliced certificate assets come from the same public chain network. After the node pledge pool is established, the node network that joins later will enter this pledge pool by default and conduct the required asset transactions or holding activities with other pledged certificates.
The above process is achieved through the verification network OmniVerify Chain, which can ensure that the node assets held by users can obtain the original node income and data verification functional value of the network to which they belong while running as an independent node.
Focusing on OmniVerify Chain itself, it is an important underlying infrastructure for the operation of the LSP protocol. The LSP protocol is built on OmniVerify Chain, which includes a Rollup layer and a data availability service DA layer, which provides absolute security and data consistency guarantees for the underlying assets and completes data verification and equity ownership through cloud nodes. In the actual operation of OmniVerify Chain, users actually only need to perform a few simple steps such as delegated verification, purchase/sale of node slices, and other proof certificates.
Since the security and functionality of the user-delegated nodes are guaranteed by OmniVerify Chain, strictly speaking, as long as the distributed network security management of OmniVerify Chain is friendly enough, its asset security is much better than storing it in the user’s hot wallet.
Composability and Programmability
The LSD protocol is composable and programmable.
Composability is reflected in the ability of PoS verification. In fact, in some PoS networks, if we want to make a cross-chain bridge, a game application, a derivatives protocol featuring a synthetic asset protocol, or even some protocols or layers attached to Layer1 and Layer2 (such as Layer3), etc., we need to build a set of verification groups with different schemes by ourselves, and these verification groups need to have certain PoS capabilities. Building a set of verification groups requires sufficient pledges and nodes to ensure decentralization, but this need is based on a lot of economic costs and also lacks certain security. Although EigenLayer can provide certain support, the protocol must be built on the Ethereum system and also faces some centralized risks such as the centralized risks we mentioned above.
The LSD protocol can solve the above problems through composability in this direction. While the LSD protocol itself provides verification capabilities for the PoS network, this verification capability is also extended to its underlying Dapps. For example, the LSD protocol integrates the Solana network and supports users to participate in staking on Solana. Then these SOL-based verification capabilities can also provide support for Dapps on Solana. These Dapps do not need to build their verification groups but can be directly developed and adapted through the OmniVerify Chain of the LSD protocol. The data verification revenue generated by the development of this product will be captured by most of these node slices, which will further expand the profitability of these node slices in the LSP protocol.
In addition, in terms of programmability, the node assets are shared through the LSP protocol, allowing more complex protocols to expand the ecosystem of assets in a composable manner, ensuring the composability of assets. Since the OmniVerify Chain network meets the EVM execution standards, its assets are also programmable. Any developer is allowed to use node-slicing proof certificates to perform any type of asset combination.
Backed by the huge PoS system, the LSP protocol has broad development prospects
Whether it is the LSD or LRT track, in theory, it has benefits for building a security moat for the PoS ecosystem, but in reality, there are still many limitations and security issues. The LSP protocol is of great significance to the development of the PoS ecosystem in terms of wide adaptability, programmability, composability, and many other aspects. It can not only further promote the expansion of the scale of the Ethereum pledge system to disperse, but also accelerate the balance of the scale of the PoS network pledge.
With the LSD protocol, users who participate in PoS staking can participate extensively in different ecosystems, and this more direct way of participation does not have the “nesting doll” attribute and thus does not have the risk of a death spiral.
From a market perspective, the LSP protocol has huge market potential in a broad sense. Some potential directions include:
● Data availability layer, such as AI-based data availability networks such as TAO and RNDR.
● Oracle networks, such as LINK, API3, etc., require nodes to participate in data verification value networks.
● Cross-chain bridges, such as LayerZero, Wormhole, and other networks that require nodes to participate in data consistency verification.
● Other consensus protocols, and consensus verification networks similar to POS mechanisms.
● Rollup-based L2 networks, such as BTC L2, ETH L2, and L2 of more public chain networks in the future.
● Depin networks of cloud computing services, such as Aleo, IO.net, Aethir, etc., use cloud computing to provide computing resources.
These networks cover almost all the non-POW public chain networks in the market. We believe that the overall market valuation of these networks will exceed one trillion US dollars in the next five years. On the other hand, the market-oriented consensus systems are all moving towards PoS, and even some infrastructure in the BTCFi field are following the PoS consensus mechanism. This trend is providing impetus for the development of the LSP protocol. If the LSP protocol can capture most of the nodes in a small part of the main public chain network ecosystem, then the node assets that the LSP protocol can manage and operate will also exceed tens of billions of US dollars, which also indirectly confirms the broad development prospects of the LSP protocol in the future.
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