Leveraged Staking: redefining passive income
With the rise of Proof-of-Stake assets, staking has almost entirely become the norm for generating passive income. Considering the amount of staking opportunities and various earn products, this is of course unsurprising.
Staking as a tool is by now well known, but what about the model behind it? Not so much. To get where we’re headed, at the very least a brief explanation is needed. If you know what PoS is and how it works, you can scroll down to the good stuff.
Staking is possible with cryptocurrencies that employ the Proof-of-Stake mechanism. Ethereum 1.0 used, and Bitcoin still uses, the Proof-of-Work mechanism, which uses the so-called mining process to verify transactions on the blockchain and keep the network secure. Mining relies on processing power to solve complicated mathematical problems, thus securing the network, but also uses a lot of energy and can cause bottlenecks when the network is under heavy load.
Benefits of PoS
- Proof-of-Stake is more scalable
- It uses less energy
- The fees tend to be lower
- Transaction times benefit greatly from Proof-of-Stake mechanisms — i.e. all operations are much faster.
Instead of using processing power to secure the network, the PoS mechanism uses stakers’ tokens to do that.
This is staking — the process where holders of a Proof-of-Stake cryptocurrency decides to “lock” a part of their tokens in a staking pool, where they will be put to work by the network, securing it and validating transactions.
While the tokens are locked, stakers earn rewards in the form of interest, because the network actively uses them and draws benefits from them.
Staking is thus mutually beneficial to both parties — the blockchain, and the staker who provides the funds. The users secure the network (and in many cases also get voting rights on network-related decisions, actively participating in its governance), while the network rewards them with passive income.
Most PoS assets reward their holders on a monthly, quarterly, or even daily basis, with APRs in the 10–20% range, but some go much higher than that.
🔥 And now, onto the good part — what if there was a way to increase your staking reward yield? What if you could use leverage to boost your holdings and your APR by 2x? Leverage is seen by many in trading as a very risky move, which holds a flimsy promise of high rewards in return — should it work. But “Leverage” and “Staking” have hardly made it into the same sentence until now, and things cannot be more different when compared to risky leveraged trading.
The Good Stuff: Leveraged Staking for 2x APR
Changex is one of the first projects designing a Leveraged Staking mechanism, while making it accessible to the mainstream user. Margin positions will be specially designed to leverage the base staked asset, which will in turn be used as collateral, while keeping it staked uninterruptedly.
In order to really grasp the Leveraged Staking system, we need to bring another element of the Changex ecosystem into the picture — the stablecoin lending feature.
The Changex app will allow users to lend their stablecoins for an APR of anything between ~5-9.5%. When a staker decides to use Leveraged Staking, he taps into this stablecoin pool, borrowing funds to buy more of his staked asset and increase his holdings, say by a factor of 2x.
Let’s break it down by taking a HYDRA staking position (~45% APR) as an example:
- Lenders lend USDT for an interest rate of 5-9.5% in the Changex app;
- Staker holds $10,000 worth of HYDRA and borrows $10,000 equivalent of USDC for 9.5% interest, using his initial HYDRA amount as collateral;
- The borrowed USDT is used to buy $10,000 more worth of HYDRA through high-liquidity DEX pools;
- The newly acquired HYDRA is placed into a Leveraged Staking pool, earning its standard interest rate of ~45%;
- The staker repays the 5-9.5% interest to the stablecoin lender, while everything else is benefited as passive income;
- The final APR on the staked HYDRA amounts to 45% + 35.5% = 80.5% (in case the stablecoin APY is 9.5%)
All this will be possible with just a few clicks, while Changex handles all the heavy lifting through smart contracts in the background.
As with all leveraged positions, there is risk involved. Depending on the chosen margin factor, if the staked asset — in this case HYDRA — falls substantially in relation to the staker’s entry point, a liquidation event would occur, essentially closing the position and repaying the loaned stablecoin amount. In order to protect yourself from liquidation, you need to monitor your loan-to-value ratio and provide additional collateral for the loan, whenever needed.
The best thing about Changex’s Leveraged Staking product is that it will work with any integrated PoS asset.
As such, the team will work to include new high APR economies into the app, and in the process will also onboard their respective communities, which will immensely benefit the entire ecosystem not only in terms of value, but also in terms of exposure.
This DeFi model enables an intricate network of cooperation and synergy between the involved parties and offers a massive boost to the income generated through staking, while always leaving the door open for additional onboardings and new opportunities.
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Don’t have a Changex wallet yet? CHANGE APY sits at ~47%, and you can also stake your HYDRA for the best reward yield.
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💖 Thanks for reading,
The Changex team