Single sided staking (SST) makes it possible to earn yield by contributing only one type of digital asset to a liquidity pool.
SST pools that support only stablecoins may also serve to defend the system's solvency. The stable assets that they accumulate can be used to repay debts in case the pool gets liquidated.
How does single sided staking work in general and why is it so important for the DeFi ecosystem? Read on to find out.
In the crypto industry, liquidity pools are smart contracts that accumulate large amounts of digital assets that traders can use to perform transactions. They may support their native tokens as well as any other popular cryptocurrencies such as ETH.
Combined with blockchain transparency and immutability, these contracts resolve the largest pain of the DeFi markets, i.e. the lack of liquidity. At this, they are beneficial to all participants of the process:
The advantages of liquidity pools are indisputable. Yet, there is a certain fly in the ointment.
Crypto trading is a risky business without a doubt, and traders are well aware of this fact.
Liquidity provisioning may seem less risky at first glance. Yet, liquidity providers are exposed to losing money just the same.
Aside from hacks of smart contracts or counterparty risks inherent to centralized platforms, there is also a risk of impermanent loss. This type of risk occurs when the market price of one asset decreases with respect to the other.
Those who provide liquidity for highly-volatile assets are particularly vulnerable as the prices of these assets may drop in value at any time.
This is exactly where single sided staking can be useful.
Single sided staking is a mechanism that enables cryptocurrency holders to earn yield by staking only one token. At this, it stands in contrast to commonly used pair-based staking that automated market makers (AMMs) usually rely on.
In order to earn yield by staking in a traditional way, AMMs usually have to submit two different assets to a pool with their value standing at a 1:1 ratio.
This doubles their capital requirements as they have to obtain two different tokens for a single task. Besides, it doubles their risk in the case of volatile tokens. At this, the impermanent losses may be really high when both of these assets decrease in price.
Single sided staking reduces these risks as it is designed for concentrating liquidity of a single asset.
Moreover, those SST pools that support only stablecoins totally eliminate the risk of impermanent loss.
The next logical question that one may ask is how do such pools work at all? Where do they take the pricing data of the supported asses and how do they manage to balance it?
The answer is not that complicated.
Single sided staking pools rely on algorithms that calculate the value of a single asset and pair it with other assets in the pool.
To achieve that, they connect with oracles or automated market makers that determine the prices of the assets with respect to external data. After that, the algorithms calculate the values of all the assets in the pool.
The process of single sided liquidity provision is basically the same as the one that traditional staking relies on. In general, users have to follow just a few simple steps:
To get a higher yield, pay attention to the trading volume of the selected pool. The higher the number of transactions, the higher rewards you may get.
Just like any other phenomenon, single sided staking, also called “Single Sided Liquidity Pool”, has both upsides and downsides.
At this, automated market makers can enjoy the following benefits:
Not everything is perfect, though. There are a few disadvantages as well:
Yet, despite all these negative aspects, this type of earning passive income has proved to be the most reliable in the conditions of a highly volatile cryptocurrency market.
The cryptocurrency market offers many options to choose from.
If you’ve selected single sided staking as a means of making passive income, make sure that the tools you consider are truly decentralized.
At this, the liquidity pool you choose should support non-custodial wallets. Beware of centralized solutions that handle end-users’ private keys as such tools are prone to counterparty risks.
PulseChain is devoid of such risks as it represents a fully decentralized blockchain running on the Ethereum network. Here are two options for single sided staking that you may check right now.
The launch of both of these tools is to be announced soon.
While single-sided staking remains a relatively new solution, it gains more traction thanks to the benefits it offers.
Stability pools, in particular, represent a much more profitable means of stable income in comparison with anything that TradFi may offer. At the same time, unlike banks and other financial institutions, such tools enable investors to maintain full control over their funds.
At this, they represent a good solution for those who are yet not eager to invest heavily in volatile assets but still want to diversify their portfolios with secure yet profitable items.
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Disclaimer:Please note that nothing on this website constitutes financial advice. Whilst every effort has been made to ensure that the information provided on this website is accurate, individuals must not rely on this information to make a financial or investment decision. Before making any decision, we strongly recommend you consult a qualified professional who should take into account your specific investment objectives, financial situation and individual needs.
Kate is a blockchain specialist, enthusiast, and adopter, who loves writing about complex technologies and explaining them in simple words. Kate features regularly for Liquid Loans, plus Cointelegraph, Nomics, Cryptopay, ByBit and more.
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