Within just two years, Ethereum-based liquidity mining has become the largest asset category on the chain. Cryptocurrency researchers Samuel McCulloch, Philip Lewandowski, and DeFi Dave wrote an article starting with the basics of collateral and the reasons for creating LST. They also shared the recently released design information about frxETH V2, stating that it can achieve fully decentralized peer-to-peer lending.
Liquidity staking is when a user exchanges ETH for another ERC-20 token (LST) and captures a set of staking rewards generated by a group of node operators. In short, LST is a loan that ETH holders provide to node operators. In addition to the liquidity staking token mechanism, differences between protocols also include trust assumptions, bond requirements, and validator group security. For example, all validators in Lido are public and centralized, and using a loan analogy, Lido node operators can borrow ETH with zero collateral requirements. Rocket Pool, on the other hand, is a decentralized Ethereum staking pool with decentralized and anonymous node operators. Therefore, for security reasons, node operators must stake 8 or 16 ETH and purchase RPL tokens as collateral. In the event of a slash, RPL is sold to support the loan collateral. Additionally, Frax Finance’s core mission is to issue a decentralized stablecoin and incorporate sub-protocols to enhance its functionality. In the Frax mechanism, users lend assets to the Frax protocol and stake them in validator nodes currently managed by the core development team.
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frxETH V2 creates a decentralized and peer-to-peer ETH lending market for node operators. The best way is to allow node operators to borrow ETH at a dynamic interest rate in an isolated lending pool. Node operators do not charge any fees or commissions, and the only fee is the lending market fee. In Frax Finance’s current model, the Frax core team uses a 3/5 multisignature to fully control all validator nodes. Although this is necessary for initial development and launch, this control is dangerous and threatens the health of the entire protocol. After the launch of frxETH V2, any validator will be allowed to borrow ETH from the lending market. This will also make the frxETH system fully decentralized. In addition, any unused ETH on the frxETH V2 lending market will be sent directly to the Curve AMO contract. The frxETH V2 market operates similarly to the Fraxlend market, with interest rates determined by utilization.