Liquid staking

A liquid staking protocol is a decentralized platform that allows users to stake their cryptocurrency assets while maintaining liquidity and helps to secure PoS blockchains.

TL;DR

Liquid staking protocols are decentralized platforms that allows users to stake their cryptocurrency assets while maintaining liquidity. When users stake their assets, they receive derivative tokens that represent their staked amount. These tokens can be traded or used in other DeFi applications, enabling users to earn staking rewards without locking up their funds. Liquid staking protocols thus combine the benefits of staking with the flexibility of liquidity, allowing users to optimize their asset utilization in the DeFi ecosystem.

The problem of staking?

Before delving into liquid staking, let’s first understand staking. In the context of Proof of Stake (PoS) blockchains, staking involves locking up a certain amount of cryptocurrency to participate in network activities, such as validating transactions and securing the network. In return for this commitment, stakers earn rewards, typically in the form of additional tokens.

However, traditional staking comes with a significant trade-off: once you stake your assets, they are locked for a certain period, meaning you cannot use them for other investments or transactions. This lack of liquidity can be a deterrent for many investors.

The liquid staking solution

Liquid staking addresses this liquidity issue by allowing users to stake their assets while still maintaining access to their value. This is achieved through a two-part mechanism:

Staking assets - When users stake their assets through a liquid staking protocol, they receive a derivative token that represents their staked assets. This derivative token can be freely traded or used in other DeFi applications.
Maintaining Liquidity - While the original assets are locked and earning staking rewards, the derivative tokens can be utilized across various platforms. This means users can still participate in the DeFi ecosystem, earning yield from multiple sources while their assets are staked.

The benefit of liquid staking

Increased Liquidity - Liquid staking eliminates the dilemma of locking up assets for extended periods. Users can access their funds and invest in other opportunities without sacrificing staking rewards.
Maximized Yield - With liquid staking, users can simultaneously earn staking rewards from their staked assets and yield from other DeFi protocols using their derivative tokens.
Flexibility - Liquid staking protocols allow users to exit their positions more easily. If market conditions change, users can sell their derivative tokens rather than waiting for a staking period to end.

How it works

Choose a protocol: Users select a liquid staking protocol, such as Lido or Rocket Pool, to stake their assets.
Deposit and receive derivative tokens: Upon staking, users deposit their assets and receive an equivalent amount of derivative tokens. For instance, if you stake 1 ETH, you might receive 1 stETH, which represents your staked ETH.
Use derivative tokens: Users can now use their derivative tokens in various DeFi applications. For example, they can provide liquidity on decentralized exchanges, lend them for interest, or participate in yield farming.
Earn rewards: While the original assets are staked, users earn staking rewards, which accumulate over time.
Redeem or withdraw: When users wish to exit their staking position, they can exchange their derivative tokens back for the original assets, plus any earned rewards, depending on the protocol's terms.

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Last updated 3 months ago

TL;DR

The problem of staking?

The liquid staking solution

Liquid staking addresses this liquidity issue by allowing users to stake their assets while still maintaining access to their value. This is achieved through a two-part mechanism:

Staking assets - When users stake their assets through a liquid staking protocol, they receive a derivative token that represents their staked assets. This derivative token can be freely traded or used in other DeFi applications.

Maintaining Liquidity - While the original assets are locked and earning staking rewards, the derivative tokens can be utilized across various platforms. This means users can still participate in the DeFi ecosystem, earning yield from multiple sources while their assets are staked.

The benefit of liquid staking

Increased Liquidity - Liquid staking eliminates the dilemma of locking up assets for extended periods. Users can access their funds and invest in other opportunities without sacrificing staking rewards.

Maximized Yield - With liquid staking, users can simultaneously earn staking rewards from their staked assets and yield from other DeFi protocols using their derivative tokens.

Flexibility - Liquid staking protocols allow users to exit their positions more easily. If market conditions change, users can sell their derivative tokens rather than waiting for a staking period to end.

How it works

Choose a protocol: Users select a liquid staking protocol, such as Lido or Rocket Pool, to stake their assets.

Deposit and receive derivative tokens: Upon staking, users deposit their assets and receive an equivalent amount of derivative tokens. For instance, if you stake 1 ETH, you might receive 1 stETH, which represents your staked ETH.

Use derivative tokens: Users can now use their derivative tokens in various DeFi applications. For example, they can provide liquidity on decentralized exchanges, lend them for interest, or participate in yield farming.

Earn rewards: While the original assets are staked, users earn staking rewards, which accumulate over time.

Redeem or withdraw: When users wish to exit their staking position, they can exchange their derivative tokens back for the original assets, plus any earned rewards, depending on the protocol's terms.