Introduction
This introduction aims to provide you with a comprehensive understanding of the concept of supplying liquidity through staking rewards, and explore the associated benefits and considerations.
Staking
Staking refers to the act of locking your tokens or cryptocurrencies in a designated wallet to support the security and operation of a decentralized network. You can find more information on what staking entails on Radix here. In our case, by staking your assets to our validator node, you (1) become an essential part of the Radix DLT ecosystem and (2) enable the issuance of lending products powered by our liquidity protocol.
Liquidity via Staking Rewards
Liquidity collection via staking rewards is a novel and powerful mechanism that allows suppliers to stake their assets (XRD) to Gable's validator node, and contributing the earned staking rewards to a liquidity pool.
One of the significant benefits of participating in liquidity collection via staking rewards is the opportunity to earn passive income twice (!), (1) on XRD that you stake, and subsequently (2) on the rewards earned from staking.
As a supplier, when you stake your assets to our validator node, you contribute to the consensus and validation process of the Radix network. In return for your contribution, you receive rewards in the form of additional tokens. These rewards can serve as a consistent income stream, allowing you to benefit from your involvement without actively participating in day-to-day trading or complex investment strategies.
The rewards that you have earned from staking are contributed to Gable's liquidity pool, from which lending products are offered. The issuance of these lending products generate interest income, that is distributed, equally, to the suppliers and Gable Liquidity Protocol.
Liquidity collection via staking rewards offers a unique opportunity for asset holders to leverage their holdings effectively. Instead of keeping your assets idle, staking them to our validator node allows you to put them to (extra) work by supporting the issuance of lending products. By doing so, you actively contribute to the liquidity and efficiency of the ecosystem while earning rewards in the process. This mechanism not only provides you with a potential source of income but also enables you to actively participate in the growth and development of the Radix DLT ecosystem.
However, it is essential to consider certain drawbacks and considerations associated with staking and liquidity collection via staking rewards:
While staking your assets can be rewarding, it's important to assess the risks involved, such as market volatility, potential slashing risks and falling out of the top validators entitled to rewards. Understanding these risks and developing a risk management strategy will help you make informed decisions and navigate the staking process more effectively
By staking your assets to our validator node, you commit to a certain lock-up period during which your assets will be inaccessible for other purposes. This lock-up period on Radix DLT is generally around 2016 epochs (approx. one week), but can vary depending on the protocol and network rules. It's crucial to assess your liquidity needs and ensure that you can afford to have your assets tied up for the specified duration.
Furthermore, staking rewards are gathered by the validator owner and subsequently deposited into the liquidity pool on behalf of the stakers. However, there is an additional waiting period of approximately four weeks that validator owners must endure. This results in a four-week delay between the issuance of staking rewards and their actual deposit into the liquidity pool. Once this initial four-week period is surpassed, rewards will be continuously added to the pool. This arrangement carries several implications:
Initially, during the first four weeks, no rewards will be available in the liquidity pool. This may impact early adopters. To address this, compensation will be provided to this group of users in the form of Gable token airdrops. After this initial period, rewards will be consistently accrued in the pool.
Structurally, as a stream of incoming rewards is established, new users will receive rewards that were issued four weeks prior to their onboarding. In essence, the rewards they collect will be offset by a four-week window. The significance of this offset depends on the fluctuations in two key factors: the annual percentage yield (APY) and the number of stakers participating at Gable within that four-week window. It's worth noting that rapid changes in both of these factors are unlikely in practice.
Traditionally, when staking your assets with a validator node, you have the opportunity to compound your rewards over time. This means that as you continue to earn staking rewards, those rewards are added to your staked assets. The compounding effect of this is balanced out as every staker enjoys the same relative benefit.
However, when you contribute your staking rewards to a liquidity pool, they are no longer actively staked with the validator node. Thus, you will lose the compounding effect. Whilst your stake remains the same, the stake of stakers at other validators increases due to compounding rewards. This can result in a slowly decreasing staking APY.
It's important to note that while you may lose compounding effect on staking rewards, you will gain compounding effect from the liquidity pool. Participants who contribute liquidity will receive a share of the interest earnings generated by the protocol's activities. These interest earnings can provide their own potential for compounding. The proposition of Gable is that the income from the liquidity pool should exceed the income from compounding rewards.
In conclusion, liquidity collection via staking rewards presents an exciting opportunity for participants in the Radix DLT ecosystem to contribute their assets, support the issuance of lending products, and earn rewards for their involvement. By staking your assets to our validator node, you actively contribute to the growth and sustainability of Gable liquidity protocol. While there are associated benefits and considerations to be mindful of, such as potential risks and lock-up periods, this mechanism allows you to participate in the evolving landscape of decentralized finance and leverage your assets effectively. We invite you to explore and engage in liquidity collection via staking rewards as we build a vibrant and thriving ecosystem on Radix DLT.
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