After DOT inflation is reduced, what other ways are there to obtain higher additional returns?
Written by: PolkaWorld
Polkadot's inflation mechanism has always been an important part of its network design, but with the changes in the market and the development of the ecosystem, the adjustment of the inflation rate has become the focus of community attention. Recently, the Polkadot community passed the WFC (Wish For Change) proposal #1139. After implementation, the inflation rate of DOT will be reduced from 10% to 8%, and will gradually decrease in the future. This change will not only optimize the network's economic model, but also bring new growth opportunities to the DeFi track.
This article will focus on the impact of this inflation adjustment on the Polkadot DeFi ecosystem, and analyze the services and benefits of the four major DeFi projects, Bifrost, Hydration, Stellaswap, and Acala, as well as their data growth after the proposal was passed.
Overview of Polkadot Inflation Mechanism Adjustment
Polkadot’s inflation mechanism has been designed to ensure the security of the network by incentivizing stakers and provide funding for the treasury. Previously, Polkadot’s inflation rate was 10%, most of which was used as rewards for stakers and validators, and the rest flowed into the treasury.
For more relevant content and analysis on the adjustment of Polkadot's inflation model, please see (DOT inflation rate dropped to 8% or even lower? Discussion on the adjustment of Polkadot's inflation mechanism and community perspective).
Proposal#1139proposes to reduce the inflation rate to 8% and gradually reduce it in the future to reduce the dilution effect of inflation on DOT holders while optimizing the economic model of the network. The reform also includes a fixed 15% inflation income flowing into the treasury to ensure a continuous source of funds for network development. The decline in inflation not only reduces the direct returns of stakers, but also forces holders to look for other high-yield opportunities, thus bringing new growth potential to the DeFi track.
The current proposal#1139has been passed (because it is a WFC intention proposal, it has not yet been implemented). Check out the full proposal content: https://polkadot.polkassembly.io/referenda/1139
The impact of reduced inflation on the Polkadot DeFi ecosystem
The reduction in inflation rate will drop from 10% to 8% and will gradually decrease in the future, which will have a profound impact on the staking income, treasury inflows and DeFi ecology of the entire Polkadot network, especially the LST (liquidity staking) track.
Currently, although the staking rate of Polkadot is high, the penetration rate of LST is relatively low. According to statistics, the total amount of Polkadot staked tokens is as high as 871 million, but Bifrost, the leading protocol in the LST track, accounts for less than 1.5% of it.
This means that as the inflation rate decreases, users may be more inclined to obtain additional income opportunities through LST products. Lowering the inflation rate will produce a "crowding out effect". In order to compensate for the reduction in staking rewards, users may turn to liquid staking protocols such as Bifrost to seek more diversified income scenarios.
At the same time, other DeFi projects in the Polkadot ecosystem are also expected to benefit from this adjustment. Through liquid pledge assets such as vDOT, users can cross-apply in multiple on-chain protocols to improve the liquidity and utilization efficiency of funds. In the future, as the penetration rate of LST increases, Polkadot's LSTFi track may usher in more innovation opportunities.
The following is a brief analysis of the services and revenue strategies of several major LST and DeFi projects in the Polkadot ecosystem, as well as their recent data growth:
Bifrost
Bifrost is the leading liquidity staking protocol in the Polkadot ecosystem, providing liquidity tokens such as vDOT. Users can obtain vDOT by staking DOT and participate in a variety of DeFi scenarios, including lending, trading, and leveraged staking, such as pledging vDOT on Interlay to borrow iBTC.
Bifrost unlocks the liquidity of staked assets, allowing users to earn staking rewards while leveraging these tokens in DeFi protocols. vDOT provides users with a basic staking income, and the current APR for vDOT is about 16.42%. In addition, Bifrost has introduced leveraged staking through the Loop Stake product, further amplifying users' potential returns. By combining staking rewards and DeFi participation opportunities, Bifrost has attracted a large number of users to use its services.
From a data perspective, since the inflation adjustment proposal was passed, the market demand for Bifrost's vDOT has increased to a certain extent. According to official platform data, vDOT's TVL (total locked volume) increased by about 12.5% after the proposal was passed, and the number of users also showed a significant increase. This data reflects the growing interest of users in liquidity staking products, especially in the context of declining staking returns, Bifrost's superimposed income model has attracted more users to participate.
It is worth noting that vDOT also inherits the governance rights of DOT, allowing users to directly use vDOT to participate in Polkadot OpenGov governance. For more information about vDOT’s innovations and benefits, please see (In the difficult time for the elephant to turn around, can Polkadot use Bifrost to revitalize the LST track?).
Visit the official website to learn more and participate: https://app.bifrost.io
Hydration
Hydration provides intelligent staking management services, aiming to help users optimize DOT staking strategies through automated tools. It allows users to manage DOT staking portfolios across DeFi protocols, and can help users automatically allocate staking rewards to other ecological assets through the DCA (fixed investment) function to improve revenue efficiency.
Hydration’s smart management tools help users increase long-term returns without increasing risk by optimizing staking yields. Its services also support regular conversion of staking rewards into other assets, further increasing users’ overall yields.
In terms of data, after the proposal to reduce the inflation rate was passed, Hydration's TVL increased by nearly 20% to $47.75 million. Through this platform, users can not only obtain more efficient Farm income, but also reduce the time and complexity of manually managing pledges.
Visit the official website to learn more and participate: https://app.hydration.net
StellaSwap
StellaSwap is a DEX on the Moonbeam parachain of the Polkadot ecosystem, providing a variety of DeFi products such as liquidity mining, yield farming, LST, etc. Users can trade DOT and other assets on the platform, earn transaction fees and rewards by providing liquidity, and stake DOT to obtain income, etc.
The main benefits of participating in StellaSwap come from liquidity mining and yield farming. Users can provide liquidity and receive transaction fees and liquidity rewards. After DOT's liquidity staking tokens (such as vDOT, LDOT, etc.) enter the DeFi ecosystem, users' profit opportunities are further enhanced. In addition, StellaSwap has also launched its own LST product, allowing users to stake DOT to obtain stDOT, and use stDOT to unlock more diverse profit scenarios.
At the data level, there are currently 1.05 million DOTs locked in stDOT, with a TVL of approximately $5.4 million. In the past month, StellaSwap's TVL has increased by 3 times, of which the TVL of the DOT/stDOT pool is approximately $1.36 million, with an APR of 23.12%.
Visit the official website to learn more and participate: https://app.stellaswap.com
Acala
Acala is Polkadot's DeFi financial center, providing a variety of financial services including decentralized stablecoins (aSEED), lending, staking, etc. Acala allows users to stake DOT to obtain LDOT or tDOT and participate in DeFi income products such as liquidity mining.
The Acala platform provides users with returns through various methods such as staking, lending, and liquidity mining. Users can participate in liquidity pools and earn compound returns by staking LSTs such as LDOT or tDOT. The use cases of these LSTs expand the financial flexibility of DOT holders and help them earn more returns in multiple DeFi scenarios.
In addition, Acala has also launched an innovative product, Euphrates extended cross-chain LST, which is currently available on JitoSOL Pool, offering an APR of 40.33% and a TVL of approximately US$1.2 million.
In terms of data, as of now, a total of 5.35 million DOTs have participated in Acala's liquidity staking, with a TVL of US$24 million, and the total TVL of the protocol is as high as US$81.75 million, further promoting the application and revenue generation of DOT in the DeFi ecosystem.
Visit the official website to learn more and participate: https://apps.acala.network
summary
The reduction in Polkadot's inflation rate directly reduces the staking income of native staking in the short term, but it also drives more users to turn to DeFi protocols to seek higher returns. Protocols such as Bifrost, Hydration, Stellaswap, and Acala provide users with more flexible income opportunities through a variety of services, promoting the popularization and application of Liquidity Staking (LST).
Overall, with the reduction of inflation, Polkadot's DeFi ecosystem shows a trend of capital inflow and user growth. The popularity of LST has brought new vitality to the DeFi protocol. More funds are effectively allocated to different DeFi scenarios through these protocols, improving users' profit experience.
In the future, as inflation continues to decline, Polkadot's DeFi ecosystem is expected to usher in greater room for development, pushing the entire network towards a more diverse and prosperous future.
