StakeFi Internet Bonds Explained
This article was first posted on this site.
Proof-of-stake is one of the two major blockchain consensus mechanisms that require users to stake tokens to become a validator. Examples of the biggest PoS networks include Binance Smart Chain, Polkadot, Cardano, and EOS, and industry-dominant Ethereum is currently also transitioning to PoS-based Ethereum 2.0.
What are Internet Bonds?
Le’s start with a definition: An Internet Bond is a Digital Work Agreement between a Proof-of-Stake (PoS) network (bond issuer) and a capital provider/staker (bond holder) where the bond holder is required to stake collateral to secure the network and obtain the right to support consensus operations on the blockchain in exchange of staking rewards.
The bond holder has the option to validate the transactions on the network by running a node or delegate the task of validating the transactions on the network to a validator in exchange for a fixed cost or percentage of staking rewards.
The bond holder is obliged to adhere to the network’s rules, which is to behave honestly and guarantee continued operations. The network participants who do not meet their operative requirements risk penalties, confiscation of stake, and/or lose the right to participate.
Contrary to most traditional bonds (e.g. Corporate Bonds), Internet Bonds have the following characteristics:
- No fixed maturity (e.g. perpetual bonds)
- Equity feature as Internet Bond holders are co-owner of the PoS network
- Staking rewards based on the in-built inflation rate of the Proof-of-Stake protocol instead of being based on debt like traditional bonds
- Depending on the PoS protocol, Internet Bonds can have an elastic supply as several tokens can be unstaked, which is not the case for ETH until phase 1.5 of ETH 2.0.
In summary, the holders of Internet bonds are the lenders of capital, laborers, and also the owners of the network, making it a new type of incentivized digital work agreement that in a mature state can be best described as a hybrid-perpetual bond with debt and equity-like characteristics.
At the moment, there are two types of Internet Bonds in DeFi:
- interest-bearing tokens like aETH
- Interest-earning tokens like fETH
Interest-bearing tokens (aETH) do not distribute staking rewards, which are accrued within the price of both. As such, the redeemable value of aETH, if ETH could be unstaked today, would be worth 1.035 ETH for 1 aETH.
Interest earning tokens (fETH) distribute periodically staking rewards through rebase, meaning that the balance of fETH holders’ balance increases periodically (fETH are minted and distributed to each token holder proportionally). As such, the fair price of an interest-earning token such as fETH should be 1 ETH after each reward distribution.
Internet Bonds are also sometimes referred to as synthetic staked tokens, staking derivatives, or liquid staking.
What is the difference between staking and holding an Internet Bond?
It is important to differentiate staking from holding Internet Bonds. As both stakers and Internet Bond holders want to generate passive income, stakers are usually limited to the price upside potential of the staked token and the received staking rewards, while Internet Bond holders can connect their staking rewards to DeFi and get instant liquidity on their staked tokens.
Connecting staking rewards to DeFi enables earning additional passive income on staked tokens by providing liquidity, receiving farming rewards, supply lending liquidity, or even combine several stacks of passive income into one single automated strategy, which are more commonly called “vaults”.
What is StakeFi?
StakeFi is the Internet Bond launchpad powered by Ankr’s staking infrastructure, which supports 50+ PoS staking nodes. The goal of StakeFi is to unlock the staked (illiquid) value of PoS tokens and connect those staking rewards to Defi.
According to stakingrewards.com, the current staking MarketCap ($633.56bn) is 40% higher than the ETH MarketCap ($453.51bn). Also, only 3.66% of ETH MarketCap is being staked. Therefore, we believe that StakeFi has a tremendous opportunity to capture this “dormant” staked market, connect it to DeFi, and by doing so, make staked PoS tokens accessible on Ethereum network to DeFi participants.
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