Karura - understanding what LKSM is and how it works.

Karura - understanding what LKSM is and how it works.


This week Karura will start rolling out live functions on its apps, giving holders access to a range of DEFI products on Kusama, some of which are not entirely familiar to uses of other DAPPs.

The key underlying function of Karura is the ability to stake your tokens while keeping them liquid, so what does that actually mean and how will it work? To try to draw an analogy with traditional finances, Liquid KSM (LKSM) is effectively a promissory note, backed by the value of staked KSM, rather than vaults full of gold. Where it differs from commodity backed currencies is that rather than gold languishing in a vault, the KSM reserves are delegated on the Kusama Blockchain and are growing in value, which is in turn paid out in the form of more LKSM to the holder.

When the holder of KSM stakes their KSM on Karura, they receive LKSM at a set ratio, the LKSM is a title or receipt to be reimbursed, on demand, the staked KSM, but remains entirely liquid while held and can be sent, sold, staked or used as collateral. If the holder simply held their LKSM the LKSM would grow in quantity as the staked KSM they represent is gaining profits through delegation, this presents many opportunities to the holder not so easily available by bonding KSM directly on the Kusama chain. The pooling of resources also reduces the individual risk exposure from slashing, as the risk is spread across the entire pool of KSM staked on Karura.

When a holder transfers ownership of LKSM to another, by selling it or using it as payment, then the right to be reimbursed the underlying KSM, represented by that portion of LKSM transferred, is also passed to the new holder. In this way the LKSM, as a representation of the value of KSM, behaves as a promissory note and therefore much like paper money prior to the adoption of fiat, except with it is also transferred the future growth in value delivered through the delegation process the underlying KSM is continuing to accrue. In theory this structure could allow LKSM to deliver a significant increase in the percentage of bonded KSM, because the LKSM can be freely traded, sold or used as collateral with the actual KSM remaining permanently bonded on the Kusama Blockchain.

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CryptoPlankton
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