Believers in Ethereum’s long-awaited proof-of-stake (PoS) network, Ethereum 2.0, face a conundrum: risk locking up their ETH for months or stay liquid and keep their options open.
To solve the problem, DARMA Capital is allocating $50 million in its own ETH holdings so that institutions and individuals can contribute to Ethereum 2.0 while staying liquid.
Ethereum 2.0, expected to launch on December 1, requires 524,288 ETH (currently worth approximately $242 million) from at least 16,384 validators before it can work. Moreover, users must stake at least 32 ETH ($14,768). The network, which promises much faster transactions than Ethereum’s current proof-of-work (PoW) blockchain, is already 10% of the way there, with around 53,000 ETH in the kitty.
There’s a big caveat, though: While the network may start validating blocks as soon as next month, that’s all it will do; stakers are essentially locking up their funds for months, maybe years, unable to pull them out or use the staked ETH elsewhere.
Though stakers are eventually rewarded for the ETH they put in, what happens when all that liquidity dries up, potentially seizing up the gears of Ethereum-based protocols?
“You want a lot of assets to be able to trade in the marketplace,” James Slazas, co-founder of LiquidStake and DARMA Capital, told Decrypt. “It benefits our fund. We want to be able to trade more.”
Thanks to the $50 million DARMA has allocated for staking, institutions and individual investors can participate in Ethereum’s future without pressing pause on other activities. Institutions can enter into a swap agreement with DARMA, while individuals stake via a lending facility called LiquidStake. LiquidStake sends the ETH—of any amount, below or above the previously mentioned 32 ETH—to the user’s choice of validator services: Bison Trails, ConsenSys Codefi, or Figment Networks.
Staking with LiquidStake means they’ve put forward collateral and can take out a loan in USDC stablecoin from LiquidStake. In return, they’ll be charged interest and some of the Ethereum rewards from staking.
According to Andrew Keys, co-founder and president of LiquidStake and DARMA Capital, up until now people have been mentally separating their ETH into two piles: the ETH they can’t stake and the ETH that they’re comfortable doing without for 18 or 36 months—or however long it takes before they can access it.
That jibes with what Ethereum Foundation researcher Danny Ryan, who has been testing Ethereum 2.0, sees. He told Decrypt, “I suspect there is a lot of ETH on the sidelines queued up for this particular task and that at least for a subset of the community, the initial lockup won’t be too much additional risk (e.g. for hodlers planning to hodl for many years regardless).”
But, Keys told Decrypt, “This solution enables one to earn their rewards while having access to US dollars—having your stake and eating it too.” And that unsettled timeline becomes much less relevant.
Other groups have noted that the rise in DeFi rewards, in the form of interest or governance tokens, could dissuade people from locking up their ETH altogether. One proposed solution was creating smart contracts with liquid tokens that represent 1 ETH, kind of like wrapped BTC.
“I think that concept is a little too cute for the finite timeline,” said Keys. “And I think that US dollars are the best form of liquidity for this temporary issue.”
Slazas agreed. “When you are collateralizing a loan you need liquidity.” You get a degradation of liquidity with a synthetic token.
Because DARMA is a long-term holder of ETH, both Slazas and Keys are excited about the transition to proof of stake. To them, this is a way of helping it succeed.
And Ryan suspects others are ready, too, to contribute in whatever way they can: “Money aside, there are a bunch of very supportive community members that just want to help kick this thing off and help secure the transition from pow to pos.”