Thank you to Stader Labs for generating this wonderful blog that explains how Isolated Markets will unlock the next phase of growth in liquid staking.
Before we dive deeper into the impact of Venus’s upcoming Isolated Markets product on the BNB liquid staking ecosystem, we should understand what Isolate Markets are.
The Venus collateral pool is currently structured as a common pool, which means all the assets can be freely borrowed by providing any acceptable asset as collateral.This is good for capital efficiency but requires every project to follow a high standard of security and risk management as the whole pool is only as secure as its weakest participant. A fact, those familiar with the BNB liquid staking ecosystem, know all too well through security exploits. This often leads to a very conservative risk profile of chosen assets, which is not ideal for growth because many of these DeFi assets need lending use cases to expand their product base.
Enter Isolated Markets, a way to offer ring fence lending against a particular asset, without exposing all other assets to the same risk. With collateral separated into independent lending environments, lenders and traders can choose to participate based on their personal risk assessment. This will expand the asset selection on Venus considerably while still controlling for risk to the platform.
The BNB chain liquid staking ecosystem is still quite nascent and small, relative to the size of the BNB market. The introduction of Isolated Markets , will help supercharge the growth of this ecosystem by opening up a new class of DeFi trading strategies, increasing adoption of liquid staking and thereby securing the network in a capital efficient manner. Let us look at the example of Leveraged Staking.
Leveraged staking is a very popular strategy deployed across all major PoS networks where both lending and liquid staking ecosystems are sufficiently large. To execute this strategy, a BNB holder can liquid stake with Stader to get BNBx and then deposit the BNBx on Venus to borrow BNB. The borrowed BNB can be staked again to get more BNBx and the process can be repeated till it is viable to do so. This is a relatively low risk leverage strategy because your collateral (BNBx) is linked directly to the price of your borrowed asset (BNB) which considerably reduces the risk of liquidation.
Other use cases include a long term BNB staker posting BNBx as collateral and borrowing stable coins to participate in an ICO or execute an arbitrage opportunity (or any short term trade). With Venus Isolated Markets they will be able to do these things, without having to wait for the unstake period or incurring the slippage or fee that comes through using a DEX to swap out and back in.
In general we can imagine a leverage version of many currently used DeFi trading strategies in addition to new strategies (like the ones mentioned above) increasing the choices for BNB liquid staking users.
It would be impossible for us list down all the use cases that Isolated Markets would open up for BNB liquid staked tokens and we are sure that users will surprise us with new and innovative methods to use this integration. However, it is clear that having a robust lending-borrowing market is one of the essential pillars (right up there with DEX liquidity) needed for the BNB liquid staking ecosystem to grow rapidly and we believe that the launch of Venus Isolate Markets will provide that.
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