Bull markets are the ideal environment for opportunists. It’s the period in the cycle where bad ideas can get funding and live longer than they should. Once that influx of capital comes into Bitcoin as the great repricing begins, it raises all ships and dead wood surrounding those ships.
As part of that deadwood are a plethora of failed projects that just seem to chug along because no one is brave enough to short this garbage to zero. In contrast, the future deadwood starts to leave the harbour as a shiny new ship ready for its maiden voyage, with claims that this is the unsinkable ship coin.
If you’ve spent more than a cycle in the crypto space, you’ll find yourself having that Groundhog Day experience. When enough time passes, someone will come along and claim they’ve invented something revolutionary that has yet to be tried, and they can’t believe no one has thought of this concept and tried to build something around it.
This process of repeating the same mistakes is just a failure to read history and pay attention to the deadwood of the past, and so here we are, back at it again, Daniel.
According to the latest press release from crypto media sites, Binance-backed pSTAKE Finance recently launched a liquid staking solution for Bitcoin. The project claims to be part of a wider movement known as Bitcoin DeFi (BTCFi), which aims to bring DeFi capabilities to the world’s first blockchain network.
Yes, it’s a bunch of fancy buzzwords that mean nothing, but hey, there’s a token you can buy and speculate on, so at least they have that going for them, which is nice.
Personally, I thought we’d moved on to saying the quiet part out loud, and degens would just hop from memecoin to memecoin, but here we are still pretending tokens are needed to access a service.
2017 called; they want their Ponzi back.
Anyway, enough rambling. Let’s look at this pie in the sky and explain why you should avoid it like the Binancian plague.
Liquid Staking: Earning While You Hodl or so you’re being sold
For some reason, the altcoiner mind cannot grasp the idea of digital scarcity and asset appreciation. They need, no, they want, no, they thrive on figuring out ways to dilute themselves but generate cash flow for a select few.
Essentially, they wanted to replicate the fiat system, so they created a modern version of it, calling it proof of stake.
Traditionally, staking cryptocurrencies involves locking them up for a period to support the network and earn rewards. But altcoins thought this didn’t make sense; why should I commit capital to something to earn a return?
Why can’t I double-spend it?
They got their wish with liquid staking changes, allowing holders to lock up their initial token and receive a derivative token to claim the underlying staked downs.
Liquid staking has become rather popular in the Ethereum world, with LIDO’s stETH being secured by 9,357,783 ETH or 7.5% of the total supply of ETH.
With pSTAKE’s solution (built on Babylon’s protocol), users can stake their Bitcoin and receive synthetic tokens representing their staked assets. These tokens can then be used in DeFi applications for additional yield generation. Essentially, you earn staking rewards while keeping your Bitcoin “liquid” for further DeFi activities.
What is a piss take? I mean, pSTAKE?
pSTAKE Finance is a multichain liquid staking protocol that lets users securely stake the biggest crypto assets and receive liquid staked tokens (LSTs) called stkTokens. Once you have these stkTokens, you can pool them into different automatic market makers, liquidity pools or borrow against them.
By allowing Bitcoin staking and offering additional yield-generation opportunities for Bitcoin holders, the protocol will seek to attract some of the liquid Bitcoin on exchanges into its ecosystem with compensation for inadequately priced risk.
The protocol developers decided to build Bitcoin-based staking solutions based on a fundamental belief in the world’s oldest cryptocurrency, which has the most liquidity, demand and users, thinking it can bootstrap their ecosystem.
This is definitely not the first of its kind; we’ve already seen proposals for liquid staking on top of Lightning nodes, which will likely end up flopping like a Magikarp.
These projects feel that bringing in Bitcoin as part of their treasury and acting as the base will save them from the fundamentally broken business model, an assumption that has proven false in the past.
Does anyone remember TerraUST and LUNA? They also had a large Bitcoin treasury, which they eventually had to sell off to protect their ecosystem.
Once they drained their Bitcoin reserves, they still went belly up.
How pSTAKE works?
Users who stake their PoS tokens with pSTAKE receive staked representative tokens (stkASSETs). These tokens can be used in DeFi to generate additional yield on top of staking rewards. The process is straightforward:
- Staking PoS Tokens: Users deposit their PoS tokens into pSTAKE and receive ERC-20 tokens (pTOKENs) in return at a 1:1 ratio.
- Using pTOKENs: These pTOKENs can then be used in various DeFi activities on Ethereum to earn additional profits.
- Receiving stkASSETs: Users also receive stkASSETs representing their staked position and maintaining liquidity. These stkASSETs can be used in DeFi applications to generate further yield.
The shadow side of liquidity
Chasing a return on your Bitcoin sounds like an attractive proposal. I mean, it’s just sitting there collecting dust in cold storage. Why not throw some of those chips on the table and get a bigger stack, right?
Wrong!
Liquid staking isn’t without risks:
- Complexity: These solutions often involve multiple layers of protocols, increasing the potential for technical glitches or exploits.
- Counterparty Risk: You’re trusting pSTAKE, the multi-sig, the oracle, and the underlying protocol to manage your underlying Bitcoin securely.
- Impermanent Loss: The value of your synthetic tokens may fluctuate relative to Bitcoin, leading to potential losses if you unwind your position at an inopportune moment.
- Depegging: If the oracle managing the 1-1 conversion is compromised, if the custodian sweeps the multi-sig or the keys are lost, or if the smart contracts have an exploit in them, the assets could depeg.
Yield chasing and the lessons of the past
The idea of generating a yield on Bitcoin is particularly risky. Bitcoin itself doesn’t offer native staking capabilities. pSTAKE’s solution relies on Babylon’s protocol, which interacts with Proof-of-Stake blockchains to generate returns.
Here’s the concern: Celsius and BlockFi’s recent failures, both of which offered high-yield crypto products, highlight the inherent risks of chasing returns in this space. While pSTAKE operates on-chain, the underlying assumptions on how to generate reliable income remain the same as those of failed lenders, underscoring such models’ volatility and potential instability.
The argument that “on-chain” solutions like pSTAKE are inherently safer than centralized platforms like BlockFi is debatable. The underlying risks associated with complex DeFi protocols and counterparty trust still exist.
The dogecoin and Ponzi show
pSTAKE’s Bitcoin liquid staking solution presents an intriguing new chapter in the DeFi Ponzinomics ecosystem. Will it prove to be an attractive pitch this time? Have people not learned their lesson about leveraging their Bitcoin to earn 5% and end up losing 100%?
Probably not.
Remember, the allure of high yields means you’re taking on increasingly high risk, and often, that risk is mispriced. What you generate in these schemes should be balanced with the importance of understanding that these financial instruments have a short life span, and if you get out before the music stops, you’ll end up penniless.
When these protocols unravel, they leave behind a mess, and no bankruptcy court or liquidator can recover assets from a failed tech startup once those on-chain funds are lost.
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