Staking helps secure proof-of-stake blockchains like Ethereum. Users can run a validator node by putting tokens at stake. If the node behaves badly, the tokens can be slashed as a penalty. People can stake tokens themselves or use a staking service provider to share risks and rewards. However, staked tokens can not be used in DeFi. Liquid staking services fix this by creating a new token representing the staked asset. This token can be traded or used in DeFi. For example, someone could deposit ETH into the Lido staking pool and get stETH tokens in return. Then, they could deposit stETH into Aave to earn a yield. It adds liquidity to staked tokens, making them more useful in DeFi.
Highlights:
- Liquid staking combines staking benefits with liquidity access, opening new possibilities for crypto holders.
- It offers flexibility and reduces opportunity costs, potentially boosting cryptocurrency adoption.
- It offers flexibility and reduces opportunity costs, potentially boosting cryptocurrency adoption.
Understanding Liquid Staking
Liquid staking lets users maintain the liquidity of their tokens by using a substitute token to earn an extra yield through DeFi. Before exploring, it is essential to grasp the concept of staking and its challenges. Staking involves locking up cryptocurrency in a blockchain to support it and earn a profit, but staked assets typically become illiquid during this period.
Liquid staking lets crypto holders participate in staking without losing control of their assets, changing how users view staking. Projects like Lido introduced it, offering tokenized versions of staked assets. This allows users to enjoy the benefits of staking while retaining the freedom to trade or use these tokens in DeFi applications.
The Way it Works
Users start by locking their cryptocurrency tokens, like ether or Solana, in a smart contract or platform that allows staking. This helps secure the blockchain network and earns them additional tokens as rewards. When users stake tokens with a liquid staking provider, they get a staked asset or liquid staking token (LST) in return. LSTs represent staked tokens and can be used as collateral in lending protocols or traded on DeFi platforms.
Why is Liquid Staking Necessary?
It offers traders more flexibility, allowing them to use their staked assets for other financial activities without unstaking. This flexibility helps allocate capital more efficiently and enhances the utility of staked assets. It can also reduce the opportunity cost of staking. Unlike traditional staking, where tokens are locked up for a set period, liquid staking may allow token holders to access value from their staked assets while still potentially earning rewards. This feature makes staking more appealing to those who need flexibility and liquidity.
Moreover, it may boost the growth and adoption of cryptocurrencies. Enabling token holders to use staked assets as collateral increases the utility and value of cryptocurrencies, attracts more participants to the ecosystem and enhances liquidity, thus contributing to overall market growth.
Delegated staking and liquid staking: A Comparison
In delegated proof-of-stake, network users exercise their voting rights to elect delegates who will represent them in the process of block validation. These elected delegates, often referred to as “witnesses” or “block producers,” play a crucial role in ensuring the integrity and security of the network. They are responsible for validating transactions, creating new blocks, and maintaining the overall functionality of the blockchain.
One of the primary objectives of liquid staking is to overcome certain limitations associated with traditional staking mechanisms. It is particularly important to meet a minimum staking threshold and lock up tokens for a specified period. Traditional staking protocols, such as those used in proof-of-stake systems like Ethereum, often necessitate users to stake a minimum amount of cryptocurrency to participate in block validation and earn staking rewards. Moreover, once tokens are staked, they are typically locked up for a predetermined period. This restricts users from accessing or utilizing them for other purposes during this time.
Contrary to traditional staking models, delegated proof-of-stake allows network users to pool their tokens into a staking pool. Thus, it is collectively leveraging their combined voting power to elect delegates of their choice. These delegates then represent the interests of the stakers in the block validation process, helping to maintain network security and consensus.
However, liquid staking introduces a new approach that aims to enhance accessibility and flexibility for token holders. By allowing stakers to circumvent the constraints of minimum staking thresholds and locked tokens, it opens up new opportunities for participation in staking activities. For example, individuals who may not possess the requisite amount of tokens to meet the minimum staking requirement can still engage in staking by utilizing services.
In the context of platforms like Ethereum, which mandates a minimum stake of 32 Ether (ETH) for setting up a validator node, liquid staking provides an alternative avenue for participation. Rather than having to commit a significant amount of capital upfront to meet the staking threshold, users can opt for staking solutions that enable them to stake their tokens without locking them up, thus maintaining liquidity and flexibility in their investment strategies.
Protocols And Tokens
Liquid staking protocols provide services, and liquid staking tokens (LSTs) represent claims on staked assets. Lido is the largest protocol. Users can stake tokens and earn daily rewards without locking them or managing their own infrastructure. Lido offers stETH (staked ETH) LSTs on Ethereum, stMATIC on Polygon, and stSOL on Solana. On the other hand, Rocket Pool is another popular protocol on Ethereum, with over $1.4 billion TVL. There’s no minimum deposit requirement to access Rocket Pool’s rETH LSTs. However, to operate a minipool validator, users must deposit a minimum of 8 ETH plus 2.4 ETH worth of RPL.
Decentralized vs. centralized Liquid Staking
Decentralized liquid staking protocols like Lido and Rocket Pool exist alongside centralised providers, such as exchanges, offering similar services. The main distinction lies in custody: decentralised services are non-custodial, while centralised ones hold users’ staked assets. While decentralised services may be susceptible to smart contract vulnerabilities, centralised services carry their own risks.
Therefore, it merges the advantages of staking with the flexibility of accessing liquidity. Therefore, it offers new opportunities for crypto holders. This ability to unlock extra utility from staked assets enhances flexibility and might lower opportunity costs.
Disclaimer: We are obsessed with cryptocurrency and love to write articles to express our thoughts. This article is for informational purposes and contains the writer’s personal opinion. Don’t consider it financial advice from the author or the CoinzBTC team. Do your research and think twice before making any investment decisions. CoinzBTC does not take responsibility for any financial losses.
