Ahead of Eth2 launch, a new lending initiative allows validators to borrow against their staked ETH

Ethereum • November 11, 2020, 11:00AM EST
UPDATED: November 11, 2020, 11:02AM EST
The Block

Ethereum is set to undergo the initial phase of a lengthy migration to a new, proof-of-stake blockchain network in the coming weeks.

And one investment firm that's active in the ecosystem has created a new product that it believes will help holders of ether — Ethereum's native cryptocurrency — navigate that process. 

In order to become an Eth2 validator, prospective participants must stake 32 ETH in the contract deposit address, which went live earlier this month. That deposit address sets the stage for the launch of Eth2's so-called Phase 0, which will see the initiation of the network's beacon chain, a kind of backbone infrastructure by which the network will function. 

Yet the need to stake creates a kind of liquidity problem for users — once staked, the ETH can't be accessed or leveraged as capital. 

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In an effort to solve this problem, LiquidStake has launched a new initiative, supported by DARMA Capital, that will allow users to borrow against the ETH they've staked ahead of the completion of the migration. Loans will be denominated in USDC. 

"Those who stake through LiquidStake will be able to take out a USDC loan against these assets while earning staking rewards from the new network," the group said in a press statement. "LiquidStake supports Ethereum's transition to a Proof of Stake architecture by providing the liquidity that allows participants to trade, hold, or otherwise use their crypto assets on the current Ethereum network while earning rewards on Eth2."

Andrew Keys and James Slazas of DARMA Capital will allocate more than $50 million worth of ETH to the contract deposit address for staking. As for those who decide to stake through LiquidStake, their ETH can be staked through a number of validators, including Bison Trails and ConsenSys Codefi. For institutional investors, firms would be able to enter into a swap agreement with DARMA Capital.

"If you enter into a swap you have clarity on the regulatory and tax treatment," Keys in a phone interview, adding: "It allows users to have their stake and eat it too," he added. 

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