In a recent report, the Swiss cryptocurrency exchange ShapeShift explores the potential role of so-called “betting derivatives” in solving some of the problems associated with Proof-of-Stake or PoS protocols.

Unlimited income: Research on input derivatives highlights the current problems with POS protocols, ie the possibility of securing capital in the consensus mechanism. The report says that cumulative derivatives allow users to combine the benefits of dividends and the ability to distribute capital over DeFi and other protocols.

“Derivatives staking offers an evasive approach and the best of both worlds, where users can enjoy both accumulated profits and the opportunity to capitalize on DeFi and other applications,” said Kent Barton, head of research and development at ShapeShift.

He continued:

“These derivatives may also remove barriers that would otherwise require the user to share 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 withdraw the capital from the gaming mechanism.”
The report categorizes gaming derivatives into five categories, including parental benefits, exchanges, custody, collateral and lending.

Derivative splitting can also create new business models for service providers, including the collection of additional service fees, including added value or mergers of user funds, and deductions from effort rewards.

Staking, however, carries certain risks. First, the process requires someone to give up storing tokens for staking – a process that is impossible for many users. There is also risk associated with a general consensus where stakeholders are able to sell tokens.

“It will probably be several years before the market for betting derivatives is large enough to create real consensus risk for large POS networks,” said Barton.

ShapeShift raised concerns about existing PoS platforms and argued that smart contract networks such as Polkadot, Cosmos and Near will be tested among concerns about decentralization. In another report by Kent Barton, ShapeShift suggests that the perceived degree of centralization of these platforms will determine which one will grow in the long run.