A Quick Recap
In my previous article, I explained how all holders of XTZ can earn staking rewards in the Tezos PoS model. You can read part one here, and part two here.
In short:
You can either run a node (install the Tezos protocol software on a computer and help decentralize and secure the blockchain network by producing and confirming the data blocks that form the blockchain). In Tezos’ terms, this would mean you are “baking”: you are a “baker”.
Or, if you don’t want to run a node, you can simply delegate your XTZ within minutes to a baker. Delegating means that your XTZ remains in your own wallet and can still only be controlled by your own keys, but you digitally “point them at” a baker, who can earn staking rewards for you.
If you haven’t read the first article and you’re still a bit fuzzy on the baking/ delegating details, I recommend you read that article first. It would be very helpful for you to understand these basics before diving into the concept of DAO Baker.
DeFi 2.0
In DeFi 2.0 we combine staking rewards with DeFi rewards. You can now have both: DAO Baker makes it possible to dive into DeFi without missing any of your XTZ staking rewards. DAO Baker accomplishes this, by tokenizing your XTZ. It creates an extra token called “dXTZ”, which is backed by your XTZ.
This allows you to keep your XTZ in your wallet and continue to collect staking rewards, while using the dXTZ token to put value into DeFi applications. For example lending and supplying value to DEX liquidity pools and other DeFi applications.
Additionally, Bakers will be able to tokenize their XTZ that is held as Bond. These tokens can be sold as equity shares.
DAO Baker
DAO Baker is a smartcontract set that Bakers can activate to become part of the DAO Baker ecosystem. Once activated, the Baker has become a DAO Baker.
Any XTZ that is delegated to this baker, will be automatically tokenized.
I want to emphasize this: you delegate your XTZ, so you do not transfer your XTZ. Your XTZ remains in your original Tezos address (Kt- or Tz address). This means that you keep your XTZ and additionally receive new tokens: for every XTZ you will receive one dXTZ. So if you delegate 100 XTZ to a DAO Baker, you will receive 100 dXTZ.
These dXTZ will be on your DAO address and will only be accessible with your original private key which controls your original Tezos address. DAO Baker is non-custodial: no-one but you has access to your keys. When you delegate your XTZ to the DAO Baker, it is signed with your original XTZ private key. As a result, your original XTZ keys now control both your XTZ and your dXTZ.
This means that your dXZT are equally protected as you have protected your original XTZ. For example: if you only work with a hardware wallet like Ledger, then your dXTZ is only accessible through that same ledger.
Very important to emphasize: the tokenized dXTZ does represent your XTZ. If you sell your dXTZ tokens, you sell the underlying XTZ. Later, more about that and how this works.
The DAO Baker Protocol Runs Parallel to Tezos LPoS
DAO Baker protocol itself does not interfere with any of the LPoS processes. The Bakers that sign up for DAO Baker do the actual baking. The DAO Baker protocol simply mirrors the XTZ as it is on the Tezos blockchain and tokenizes that XTZ into dXTZ by using a smart contract on Tezos.
DAO Baker Is A Decentralized Smart Contract
Once DAO Baker is launched, the contract form is final. It is a decentralized smart contract. This means that there is no admin key. The smart contract will be as it is from that point on forever and no one can change that. It simply lives on the Tezos blockchain and executes as programmed. It is truly trustless and immutable.
DAO Bakers Has No Baking Fees And Payouts Are Automated
This is a big difference with the current LPoS system. The DAO Baker system pays staking rewards automatically and charges no fees. This means that DAO Bakers do not earn extra staking rewards through fees they charge delegators and delegators get the full staking rewards.
The revenue model for bakers, lays in the fact that they will receive sXTZ tokens, which can be upgraded to SLOT tokens. These are different from dXTZ tokens. dXTZ tokens are tokenized XTZ that is delegated. While sXTZ is XTZ that is put up as bond in Tezos’ Proof of Stake protocol by Bakers. In Tezos PoS protocol, XTZ that is put up as bond, is fixated for about 39 days. This XTZ is what’s “at stake”.
These tokens are called sXZT. These tokens are transformed into SLOT tokens once the roll is filled (So once 800 sXTZ tokens and 7,200 dXTZ tokens form a full Roll and start earning staking rewards). SLOT tokens will be named after the baker that creates them. If a baker calls himself P2P, then the SLOT tokens will be named sP2P tokens. The token’s value mirrors the network share of the underlying baker in the Tezos blockchain.
This data is trackable at any time with on-chain tamper-proof historical data. This way Bakers create their own brand: different SLOT tokens can be valued differently due to the baker’s performance.
This way, SLOT tokens are expected to have higher value: SLOT tokens can be traded as derivatives. Derivatives are financial products that derive their value from the performance of an underlying entity or asset.
We expect a lot of derivative exchanges will take the lead on listing SLOT. In particular, for Perpetuals, CFD for the Tezos Staking returns of a particular tokenized validator or for an index of selected bakers.
This is an interesting use-case for crypto native derivatives that have no price feed dependency. Crypto derivatives markets have a daily volume of $20 billion and growing exponentially every day records more than $710 billion in August alone. – Scott Trowbridge, co-founder of Block Swap
Additionally, Bakers in the DAO Baker ecosystem are expected to provide other fee-based validation services (credit underwriting, non-collateralized loans, etc). Depending on the Baker, being an sXTZ owner may also entitle you a portion of the fees collected for these services.
sXTZ tokens also carry voting rights in the Tezos on-chain governance mechanism.
These three factors indicate that sXTZ tokens could very well be expected to exceed the price of the underlying XTZ.
In the end, the market will decide. Some of the main DeFi protocols and DEXs are showing readiness to list dXTZ- and SLOT (sXTZ) tokens. The BlockSwap Network team is already working with several DEXes to integrate trading possibilities of these tokens:
“SLOT (sXTZ) tokens and dXTZ tokens will be on decentralized exchanges, there are already some possible candidates.” – Scott Trowbridge, co-founder of Block Swap
Automated Payouts Of Staking Rewards And Over Delegation
Cardano also has incorporated automated payouts in their PoS system. This causes new issues in the case of over delegation though. In the case of, for example, an over delegation of 110%, the full 110% of people that delegated to this validator, get a cut of the 100% rewards. This means the rewards percentage that you should get, goes down.
In DAO Baker this issue is solved. To prevent over delegation, an overdraft mechanism can be activated. This would refill a baker’s bond, so another roll can be filled and over delegation is canceled out. This mechanism is a DeFi application called “DAO Baker Refills”. More about that later in the series.
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