Proof of Stake (PoS) is a big deal. Validators are an essential component of PoS. The validator business model has big problems though. This post should help you understand those problems and how Stake Capital DAO approaches them.
Current Problems in PoS
For a long time, it's been clear that validation is becoming commodity. A neutral party can quickly see the 2 most important variables for choosing a validator – up-time and fees. This drives fees down. This makes it difficult for validators to support full-time staff and turn a profit. In turn, this makes PoS networks vulnerable to centralisation. Big players like Binance have come in and are offering validation for free as a way to increase the core of their business, trading fees.
PoS validators also suffer from a lack of loyalty. If your validator does something you don't like, it's trivial to switch to another.
Additionally, it is felt by many in the PoS space that it is a waste to have the collateral locked in staking as completely removed from the economy. If you stake 1 ETH, you can no longer use that ETH for anything else. This means that the value in that ETH is no longer available to drive the overlying Ethereum economy.
What Stake Capital DAO Does
Stake Capital DAO improves alignment between validator and delegator, building a longer-term relationship. It also makes it possible for delegators to earn better returns on their staked assets. In part this is through a synthetic pegged token on their underlying staked collateral. And this is also done by sharing the DAO's profit with delegators.
How Stake Capital DAO Works
Stake Capital DAO is mediated by 2 tokens – Stake Capital Tokens (SCTs) and Liquid Tokens (LTokens).
Stake Capital Tokens (SCTs)
SCTs are ERC-20 tokens are the medium through which you actually earn a return. They mediate the transfer of value between the organisation and the individual staker.
Here's how they work—
- Delegators delegate their tokens to networks which Stake Capital is validating on. These include Tezos, Loom, Livepeer, Cosmos etc. For example, they delegate Cosmos ATOMs.
- Delegators receive network rewards and SCT tokens. Continuing with the example above, they would receive ATOMs and SCT tokens.
- Delegators then stake their SCT tokens to the DAO. As the DAO makes money, it is shared with people who have staked their SCT.
The supply of SCT is fixed. Distribution is fast at the beginning but diminishes over time. This incentivises early participation.
In addition to getting access to the DAO's revenue, SCT holders also get governance rights. They can vote to change details about how the DAO functions, like which "DeFi services" it supports. Admittedly, I'm not sure what they mean by DeFi services here – maybe new networks that they validate for?
Stake Capital DAO seems to hope the combination of this supply model, revenue sharing and governance rights will lead to more collective long-term thinking. This seems reasonable to me.
Liquid Tokens (LTokens)
As mentioned earlier, Proof of Stake networks suffer from trapped value. When you stake an asset, you can no longer use that asset in the rest of the economy.
LTokens are a solution to this. Here's how they work.
When you stake an asset through the DAO, you can mint a corresponding LToken in a 1:1 peg. For example, if you stake 1 ATOM you'll get a LATOM in return.
You can use that LATOM for whatever you want. As collateral on another protocol for example. You could also sell it.
Each LToken has an expiry. Expiry durations are specific to the staked asset – LATOMs will have a different expiration to LETH. When the LToken expires, whoever holds it gets access to—
- the principal collateral – e.g. 1 ATOM
- the staking rewards earned on that collateral – e.g. x ATOMs
- some number of SCT tokens
My Take
I recently heard about Stake Capital DAO on the Chorus One podcast. I'm really excited, so I wanted to do a quick first look and share what I've found. This post
Practically speaking, I'm excited because I think it feels like an opportunity to increase the profit on the staking I'm already doing. In reality, I'm going to be staking on Ethereum, Cosmos and Polkadot at a minimum. If there's a way to multiply my returns on those assets, why not?
Also, I feel like several of these staking providers – including Chorus One, Stake Capital, Staked – are run by really bright people and this represents a way to get an index of what they're investing their resources in.
I'm also very excited because this is one of the first DAOs I've seen which is actually a legitimate DAO. I feel that at this stage there are a lot of groups of people who have created a Telegram group and spun up a token and are calling themselves a DAO. This might confer some decentralisation benefits. But they're almost all lacking the other critical piece – autonomy. To be autonomy is about having the organisation on software-based rails. Key activities are regulated by software. Stake Capital DAO has this.
If there's demand (let us know on Twitter) and we can do a deeper dive.
