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DeFi Sunday: xDai – A functional scaling solution for Ethereum

One of the key issues in the crypto space is called the blockchain trilemma. It is a problem where it is not possible to create a blockchain that has three key properties. Speed, security, and decentralization. This affects virtually all blockchains. Bitcoin and Ethereum are decentralized, secure networks, but they are painfully slow. And that is what scaling channels aspire to solve. One of them being the xDai network, which aims to create essentially a second layer for Ethereum. Today we will look at how xDai works, why it looks promising, and what must happen for the xDai network to be one of the successful projects.

What is xDai?

It is a network of multiple layers. First, it is a DPoS blockchain. Which is an abbreviation for Delegated proof of stake. This means that the network has a limited number of validators and other network participants cooperate in its operation by delegating their coins to specific validators.

Secondly, it is a network compatible with Ethereum. This means that it supports the same programming language (Solidity), supports token standards, and is practically something like a sister blockchain to Ethereum, although the application differs.

Thirdly, xDai is the so-called 2nd layer of Ethereum. xDai is not supposed to be a blockchain on its own, but a blockchain that is supposed to lighten the primary chain, and the value of the xDai network (ie the value of the STAKE coin) ultimately derives from this.

Why is xDai necessary?

Charges on the Ethereum network rose to astronomical levels during the last hype. It was common to pay a transaction fee of five dollars. If you interacted with smart contracts (such as Uniswap), the fees climbed up to $ 30 per operation.

Therefore, scaling solutions are needed. And that is exactly xDai. The competition in this area is relatively high and is developing rapidly, which is a factor to consider when buying STAKE. There are many scaling solutions for Ethereum. These are various variations of rollups, second-layer networks such as Matic, Loopring, Celer, and others, Plasma (similar to the Lightning network), and finally the upcoming launch of ETH 2.0.

The basic value in this area will be user-friendliness and easy solution implementation for developers.

xDai coins: xDai and Stake

One of the confusing things about the xDai network is the unconventional architecture in relation to token / coin policy. The xDai network has practically two native coins.

XDai works as a network fuel . This is a stablecoin derived from the Dai token, which generates the MakerDAO protocol.

xDai is thus a converted version of stablecoin, which forms the native currency on the xDai network. The fuel for transactions is thus in the form of a stable token generated by another, decentralized service. If you want to work on the xDai network, you must have Dai coins on the ETH network and then convert them to xDai.

Advantages of xDai token Figure1: Main traits of xDai coin

The second coin that is the primary interest of this analysis is STAKE. STAKE is a coin of the xDai network, which ensures the operation of the network itself . This means that delegators and validators deal primarily with STAKE coins. If you want to participate in the operation of the network, you need STAKE.

By locking the STAKE coin, you can participate in the consensus of the network. In return, delegators, and validators are rewarded with newly issued STAKE coins.

Multichain staking on Stake token Figure 2: Multichain staking

However, also STAKE has added value. Due to the fact that from the design’s perspective it is a second-layer chain, the price proposition for holding STAKE must be stronger than, for example, for classic smart chains such as ETH, Polkadot, or Cosmos.

STAKE holders will thus be rewarded with intelligent network architecture. The xDai network is also connected to the defi Chai application, which basically offers interest for holding a DAI (interest is based on holding the stability of a DAI token).

The whole system works in such a way that the DAIs in the smart contract on the ETH side are automatically converted to CHAI (double lock) and then participate in maintaining a stable DAI exchange rate, for which they receive interest (or rather a stability fee). These rewards are then distributed to STAKE coin holders in the form of xDAI stablecoin.

Due to the nature of the DPoS network, network charges are rather insignificant. However, small fees are fees nevertheless and they will also go to STAKE owners, so this is another income that validators and delegators will have.

Understanding the Stake price development

STAKE has not been on the market for a long time. In its short existence, the price has created two accumulation zones. The first accumulation zone was between $ 3 and $ 5. If the market would fall radically, this price would again come into play. However, in the case of continued growth, we could count on the second accumulation zone, which is between $ 10 and $ 14.

STAKE price development Figure3: STAKE price analysis

As you can see in the chart, we are still correcting after the growth and the declining trend is not over yet, as the moving averages show. So far, it is not at all clear whether the decline will continue or whether the support will remain at ten dollars.

In the case of an ascending market, the rise of STAKE as one of the representatives of DEFI can also be expected.

Conclusion

The stake is a combination of several different products from the blockchain world. It is a scaling solution for Ethereum, which deeply integrates into itself individual services from decentralized finances.

The main goal is to become the Ethereum payment network. Low fees enable highly efficient network operation. The lack of decentralization (DPoS is a structurally worse option in this respect compared to PoS or PoW) does not matter so much, given that the network serves as a payment and application layer.

STAKE has one major problem to tackle down, and that is the complex access path. The user must convert DAI tokens to access xDAI in order to pay transaction fees on the other side. Although the bridge between xDai and ETH is trivial, for many users the current transition can be more complicated, and if individual applications and wallets integrated xDai with a single click, xDAI could become a high-value network.

It is also important to monitor the competition because the key is to find a scaling solution that is really being used. XDai has an advantage in this because the hardcore of the community around decentralized finances already knows about it.

While investing in STAKE is highly risky, it also makes sense in relation to the current state of the crypto space. STAKE is one of the few functional scaling solutions for ETH and that means something.

Jakub is a crypto trader and founder of Trader 2.0 project, which helps hundreds of traders from central Europe to understand cryptocurrency trading and its challenges. Jakub not o...

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