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Liquid Staking

| June 17, 2024

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Key Takeaways

  • Liquid staking is a straightforward concept. It’s a rapidly emerging solution. It enables users to lock up their tokens while simultaneously enhancing the security of proof of stake blockchains.

What is liquid staking?

Liquid staking is an emerging solution rapidly gaining traction. It allows users to lock up their tokens while enhancing the security of proof of stake (PoS) blockchains. Liquid staking enables participants to stake directly on a PoS network without losing their ability to transfer ownership of their staked tokens. This is achieved through the creation of transferable liquid staking tokens (LSTs). It serves as proof of ownership of staked tokens and any associated network rewards.

By leveraging liquid staking, individuals benefit from increased liquidity and capital efficiency. This is in comparison with the conventional staking practices, which often include bonding and unbinding periods lasting from days to weeks. Token holders stake their assets and receive a corresponding receipt token. Thus providing tangible evidence of their staked token ownership. These receipt tokens can be freely transferred, stored, traded, and utilized within decentralized finance (DeFi) ecosystems or supported decentralized applications (dapps).

How Does Liquid Staking Work?

To engage in liquid staking, users initially secure their cryptocurrency tokens, such as ether or Solana, by locking them up within a supportive staking platform or smart contract. This action contributes to the blockchain network’s security and consensus mechanism. In return, users earn staking rewards in the form of additional tokens.

In exchange for staking their tokens through a liquid staking provider, users are granted a staked asset or staking derivative known as a liquid staking token (LST). These LSTs represent the staked tokens. They hold the capacity to serve as collateral within lending protocols or be traded on various DeFi platforms.

Example of Liquid Staking

An illustration of liquid staking can be observed through platforms like Lido Finance. Lido is a decentralized entity enabling users to stake their ether and receive staked assets named stETH, or staked ETH, in return. These stETH tokens symbolize users’ staked ETH holdings on the Ethereum network. Notably, these LSTs retain usability across diverse DeFi applications while users continue to accumulate staking rewards.

Lido Finance stands as a prominent protocol for liquid staking. This dapp has a substantial lead in total value locked.

Advantages of Liquid Staking

  1. Enhanced Liquidity: Unlike tokens staked in networks such as Ethereum, liquid staking tokens are not locked. Thus allowing them to be freely traded and utilized as collateral within DeFi protocols. Liquid staking helps unlock their inherent value.
  2. DeFi Composability: By representing staked assets as tokens, they become compatible with a wide array of protocols within the DeFi ecosystem. This includes lending pools and prediction markets. Thereby expanding their utility and potential use cases.
  3. Reward Opportunities: Liquid staking offers users the chance to earn rewards for verifying transactions, similar to traditional staking. They also provide additional yield opportunities across various DeFi protocols.
  4. Outsourced Infrastructure: Liquid staking providers enable individuals to partake in staking rewards without the need to manage complex staking infrastructure. This accessibility extends to users who may not possess the minimum required tokens, such as the 32 ETH threshold for solo Ethereum validators. Thus allowing them to still benefit from block rewards.

Comparing Centralized and Decentralized Liquid Staking

In the world of liquid staking, both decentralized protocols like Lido and Rocket Pool and centralized providers like exchanges extend liquid staking services to users. However, the primary distinction lies in custody arrangements. Decentralized services are non-custodial, whereas centralized services retain full control over users’ staked assets. While decentralized options may be susceptible to smart contract vulnerabilities, centralized services carry their own set of risks.