The DAO Baker Series. Chapter 4: Tokenized XTZ Explained
A Quick Recap — DAO Baker is a smart contract on Tezos, that tokenizes your XTZ.
This way, you stay in full possession of your XTZ and you can continue to earn staking rewards, while at the same time, you have tokenized XTZ called dXTZ tokens. These tokens have the same value as XTZ, and give you the opportunity to use your XTZ value in DeFi applications without missing out on your staking rewards.
dXTZ Tokens Are Not Toy Tokens
If you delegate your XTZ to a DAO Baker, you receive an extra token: dXTZ. Fantastic, but you have to realize the following: your dXTZ tokens are your XTZ tokens. This is a hard rule in the smart contract.
Your dXTZ tokens are tied to the XTZ tokens that you delegated to your DAO Baker. So, after you delegated and received your dXTZ tokens, you can not move your XTZ from your address, unless you undelegate and burn your dXTZ tokens.
Even though only you own the keys that control your address, you allow the smart contract to enforce certain hardcoded rules over the XTZ on that address. One of the rules is the fact that your XTZ is fixated and you can only move your dXTZ tokens until you burn your dXTZ to free your XTZ. This is necessary to ensure that dXTZ has a value (1:1 with XTZ) and does not become an empty token.
So, your original XTZ tokens are fixed to your address until you burn your dXTZ tokens. Not a big deal, undelegating and burning your dXTZ is done in a few clicks and there is no fixed waiting period, but it’s an important detail to understand.
This is especially true if you are entering DeFi applications where your dXTZ is also fixed for a certain amount of time, because you won’t be able to burn your dXTZ for that same period and you won’t be able to move your XTZ. dXTZ tokens are not toy tokens, they represent your XTZ!
Redelegating Within The DAO Baker Ecosystem Is Possible
Here is an important and very convenient detail: you can redelegate your XTZ to another DAO Baker without burning your dXTZ. This is possible because you won’t have to move your XTZ to a different address to redelegate. This is the same as in the current system.
The fact that you can redelegate, is obviously important if you consider fixing your dXTZ in some DeFi application. There is no risk to lose rewards if a certain DAO Baker stops while your dXTZ is fixed: you can simply redelegate to another DAO Baker. (Every baker that joins DAO Baker becomes a DAO Baker).
Yields Generated In DAO Baker DeFi Applications Are Paid In dXTZ
DeFi yields are paid in dXTZ and deposited on your DAO Baker address. Once burned you get access to the underlying XTZ. You can also decide to convert them to sXTZ tokens or stable coins through DEXes that support dXTZ tokens, or through other DAO Baker DeFi dApps.
Baking rewards are paid in XTZ, which will be tokenized by the DAO Baker protocol once you receive them at your address. So your dXTZ amount grows 1:1 with your XTZ amount.
dXTZ tokens are compatible with any ERC20 application
dXTZ and SLOT Tokens are FA1.2 standard tokens that live on the Tezos Blockchain. FA1.2 tokens have the advantage, that they can be integrated easily on wallets or exchanges that use ERC20, because FA1.2 is a direct implementation of ERC20 as a TZIP.
This quality expands the use of dXTZ and sXTZ tokens and makes it very simple for Ethereum DeFi applications to implement and support dXTZ and sXTZ tokens. It opens a huge opportunity for existing DeFi to integrate Tokenized Staked assets as collateral.
DAO Baker Is Non-Custodial: But If You Sell Your dXTZ, You Also Lose Custody Over Your XTZ
you also transfer ownership of your XTZ. (Without directly transferring your XTZ.) This is possible due to the fact that you agreed on the rules of the smart contract by signing that agreement with your private key.
This happens automatically when you delegate to a DAO Baker and your dXTZ tokens are created. Part of that agreement is that your dXTZ is tied to your XTZ. And once you transfer ownership of your dXTZ, you simultaneously transfer ownership of your XTZ.
“Like other DeFi DApps, you are granting a contract permission to your account. The same applies. You are granting the DAO Baker contract permission to your account.” – Scott Trowbridge, co-founder of Block Swap
Now don’t freak out after reading the part: “you are granting a contract permission to your account”. The contract can only follow the hardcoded rules it is designed to live by. And since the contract is decentralized without the existence of an admin key, no one can change the rules.
So even though the contract has “access to your account”, it can not break its own rules. So, only if you transfer ownership of your dXTZ, can the contract grant the new owner access to that specific XTZ that is tied to the transferred dXTZ.
You can safely lend the dXTZ out to someone through DeFi applications without the borrower being able to touch your XTZ. You can safely supply your dXTZ to liquidity pools, or other DeFi applications without anyone being able to touch your XTZ.
DeFi applications cannot touch your XTZ unless you transfer ownership in that DeFi application. This is the case if you buy stable coins with your dXTZ: you exchange your dXTZ for USDtz, or ETHtz.
You also exchange ownership if you pay the interest for loans with your dXTZ.
So, all the time you use your dXTZ without transferring ownership, you continue to earn staking rewards with your underlying XTZ.
You both earn liquidity fees and staking rewards, both interest on loans and staking rewards, anything that makes you money in Tezos DeFi, will simultaneously allow you to continue to earn staking rewards with dXTZ.
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