How exchanges can offer staking to their customers?

Created by Muskan Bhandari, Modified on Thu, 4 Jan at 12:07 PM by Muskan Bhandari

Introduction

Liminal, a self-custody digital asset wallet, offers its users the ability to stake their assets through a partnership with Figment, a renowned staking provider.

While Liminal's staking services are primarily designed for direct user interaction via its UI, exchanges can still leverage this feature to offer staking services to their end-users.

Guide Overview

This guide provides an approach using which businesses using Liminal Staking can offer staking services to their end customers.

Here the business is responsible for implementing staking locks/ unlocks and reward calculation within their system for it's end users, and then use Liminal to rebalance the stakes as needed.

This guide is merely one approach and there can be several other approaches they may work for you.

1. Staking Process for Exchange Customers

1.1. Customer Staking on the Exchange App

Step 1: Allow customers to choose the amount they wish to stake on the exchange app.
Step 2: Display the potential rewards and terms associated with staking.
Step 3: Once the customer confirms, lock the specified amount in the exchange's staking pool.

1.2. Aggregating Customer Stakes

Step 4: The exchange's finance team should periodically (e.g., every 24 hours) aggregate the total amount staked by all customers.
Step 5: Access the Liminal platform and manually stake the aggregated amount on behalf of the customers.

2. Rebalancing Process

2.1. Calculating the Differential

Step 6: Every 24 hours, calculate the difference between the total amount staked by customers on the exchange app and the actual amount staked on Liminal.

2.2. Adjusting the Stakes

Step 7: If the customer-staked amount is greater than the amount staked on Liminal, stake the differential on Liminal.
Step 8: If the customer-staked amount is less than the amount staked on Liminal, unstake the differential from Liminal and return it to the exchange's liquidity pool.

3. Rewards Calculation Process

3.1. Setting Rewards

Step 9: Set rewards rate for your end customer, typically keep a buffer amount. eg: If on chain rewards are 23%, you can offer your customer 20%. The 3% is your fee, that you take for providing staking services and also absorbing risks like slashing.

3.2. Distributing Rewards

Step 10: Calculate each customer's proportionate share of the rewards based on their staked amount.
Step 11: Distribute the rewards to customers' accounts on the exchange.

3.3. Informing Customers

Step 12: Notify customers of their earned rewards, either through email, app notifications, or other preferred communication methods.

3.3. Reconcile Rewards

Step 12: As a best practice, regularly reconcile between the rewards you have earned as an exchange with the rewards you are distributing to the end customers.

Key Parameters to Consider:

Unbonding Period: This is the duration it takes for staked assets to become liquid after they've been unstaked. It's a crucial parameter as it affects liquidity.
Activation Period: Some chains like Solana also have an activation period.
Staking Rewards Rate: The rate at which rewards are distributed for staked assets. This will determine the returns for the customers.
Staking Slashing Conditions: Conditions under which a portion of the staked assets might be forfeited. This is especially important in Proof-of-Stake (PoS) networks.
Minimum Staking Amount: The least amount of assets that can be staked at a time.
Maximum Staking Amount: The maximum amount of assets that can be staked, if any.
Staking Fees: Any fees associated with staking or unstaking operations.

Protective Measures for the Exchange:

Setup transition times: Setup times from when the tokens would move from activating to earning stage. For eg: 00:00 every day. So any tokens that have completed activation period before the next cycle, will start earning rewards from 00:00. Similarly have these setup for unstake.
Buffer Unbonding Period: Introduce a buffer period between when a customer requests to unstake and when the assets are actually unstaked. This can help in managing the unbonding and ensuring there's enough liquidity. Typically, if you are rebalancing every 24 hrs, the unbonding period for your end customers can be +1 day of the actual unbonding period.
Buffer Activation Period: Introduce a buffer period for activation. For tokens that start earning rewards immediately, user's can be eligible for rewards once the next transition cycle has passed. For some chains like solana where activation period is 2 days, it can be 2+ 1 day for the users.
Rewards Buffer: Maintain a buffer of the rewards that you distribute to your customers vs the rewards earned by you on chain. This will help against events when rewards earned are low due to some chain events or slashing events.
Liquidity Reserve: Maintain a reserve of liquid assets to handle immediate withdrawal requests. This can be useful if there's a sudden surge in unstaking requests and the assets in the unbonding period aren't immediately available.
Clear Communication: Clearly communicate the unbonding period and other staking terms to customers. This ensures they're aware of the wait times associated with unstaking.
Limit Unstaking: Implement a daily or weekly limit on the amount a customer can unstake. This can prevent massive simultaneous withdrawals that could strain the exchange's liquidity.
Staking Agreement: Have customers agree to a staking contract or terms of service that clearly outline the conditions, including the unbonding period and any penalties or fees.

Conclusion

By following this guide, exchanges can seamlessly offer staking services to their customers using Liminal's manual staking flow. It's essential to ensure accuracy in calculations and timely execution of the rebalancing and rewards distribution processes to maintain trust and provide optimal returns to the customers.