How Staking Works in Papaya v2

Staking sBTC

When users stake their sBTC, they’re given an equal amount of stBTC tokens. This sBTC represents liquid staking for sBTC deposits, which contributes to protocol managed liquidity within the PMM. This liquidity will be used to dynamically rebalance the pools with the goal of achieving the highest degree of capital efficiency. In addition to staking sBTC, users have to the ability to provide liquidity to the PMM in the traditional way that users have always been able to provide liquidity to decentralized exchanges (DEX).

Trades conducted on the PMM generates fees, and in Papaya’s case, it is a yield generated by the protocol managed liquidity provision. This yield is converted to STX (when necessary), and automatically pooled and stacked by the Papaya protocol. The staked sBTC (stBTC) holders receive a share of these stacked STX tokens, distributed as stSTX rewards.

To further elucidate the concept of auto-staking in the case of sBTC: When users stake their sBTC with Papaya, they’re participating in a more hands-off form of liquidity provision. The protocol itself manages the liquidity, optimizing for capital efficiency and price stability. This allows users to earn yield in the form of STX, which are then automatically re-stacked, creating a cycle of compounded returns.

This managed approach enhances the pool's stability and reduces associated trading risks such as impermanent loss and high slippage. Furthermore, these earned rewards can be used to attract additional liquidity, potentially by forming partnerships with users willing to take the opposite side of trading positions.

It is important to note that holding stBTC and stSTX have different risk profiles, and while the goal of protocol managed liquidity is reduced LP risk and increased capital efficiency, it does not completely mitigate these risks.