In a newly released report, Swiss cryptocurrency exchange ShapeShift explores the potential role of so-called “staking derivatives” in addressing some of the challenges posed by Proof-of-Stake, or PoS, protocols. 

Yield Unchained: Exploring Staking Derivatives shines the spotlight on existing challenges with POS protocols – namely, the opportunity cost that comes with locking up capital in a consensus mechanism. Staking derivatives, the report says, allows users to combine the benefits of staking returns and the ability to deploy their capital in DeFi and other protocols.

“Staking derivatives offer a tantalizing, best-of-both-worlds approach where users can enjoy both staking returns and the ability to leverage their capital in DeFi and other applications,” Kent Barton, ShapeShift’s head of research and development, said.

He continued:

“These derivatives can also eliminate barriers that would otherwise require a user to stake a certain amount of capital in order to participate or force them to wait weeks or (in the case of ETH 2.0) years to pull their capital out of the staking mechanism.”

The report groups staking derivatives into five categories, including native, exchange, custodial, collateralized tokens and lending.

Staking derivatives can also create new business models for providers, including charging an additional fee for the service, including it as a value-add or pooling users’ funds and taking a cut from the staking rewards.

However, staking derivatives aren’t without risk. For starters, the process requires that one give up custody of their staking tokens – a process that isn’t possible for many users. There’s also risk tied to the overall consensus when stakers have the ability to short their own tokens.

“[I]t’ll likely be a few years before the staking derivative market is large enough to pose any real consensus risk to the larger POS Chains,” Barton said.

ShapeShift has raised concerns about existing PoS frameworks, arguing that smart-contract networks like Polkadot, Cosmos and Near will be put to the test amid centralization concerns. In another report from Kent Barton, ShapeShift speculates that the perceived degree of centralization of these platforms will determine which one will thrive in the long term.