Liquid staking differs from normal staking methods. It lets you tokenize assets you have staked.
This provides more utility and liquidity compared to conventional staking processes. It solves the traditional staking’s liquidity problem and gives customers more freedom to employ their staked assets in other DeFi applications.
The utility and value of tokens can be increased through liquid staking, which also promotes the creation of new apps and the uptake of cryptocurrencies.
Users can increase the usefulness of the digital assets they stake using the unique idea of liquid staking.
An overview of liquid staking’s principles, execution, importance, advantages, disadvantages and its differences from other staking methods is provided in this brief article.
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What is Liquid Staking and How Does it Work?
Tokenizing staked assets is the process of liquid staking. It can be viewed as an improved form of conventional staking.
By locking assets on a Proof of Stake (PoS) blockchain, users can earn rewards and strengthen network security through conventional staking. Staked assets are normally illiquid (locked) throughout the staking period, hence there is usually a trade-off associated with this practice.
By establishing a system where users obtain liquid staking tokens (LSTs) in return for their staked assets, liquid staking solves this liquidity problem.
For instance, you will earn stETH tokens in exchange for staking ETH on a platform such as Lido. Because users can profit from staking rewards without sacrificing liquidity, this increases the utility of staked tokens.
Liquid Staking vs. Liquid Restaking
By tokenizing staked assets, as we have learnt that liquid staking allows for flexibility and liquidity without having to wait for the staking period to expire. The concept of liquid restaking has been further improved upon by EigenLayer.
Liquid restaking can increase security to oracles, rollups and other “external” modules and systems, whereas liquid staking is related to staked assets which help in securing a PoS blockchain. Projects like Lido, Binance ETH (BETH) and Rocket Pool (RETH) are examples of liquid staking projects. Puffer, Kelp DAO and ether.fi are a few examples of liquid restaking projects.
Why Does Liquid Staking Matter?
Liquid staking gives customers more accessibility and flexibility to their staked assets while solving the liquidity problem that comes with traditional staking.
Through platforms like Lido, users can have the option to tokenize their staked assets into LSTs, which can then be exchanged freely, applied to DeFi apps, or used as collateral without having to wait for the end of the staking period.
Liquid staking also encourages more active participation from users who might have been afraid to lock up their assets for extended periods of time, which helps to further the growth and adoption of blockchain networks.
Pros and Cons of Liquid Staking
Pros
- Improved utility: Without giving up on staking benefits, users can use their staked assets in various DeFi applications.
- Lower opportunity cost: By utilizing liquidity that would be inaccessible through conventional staking techniques, liquid staking enables users to benefit from potential trading and investment possibilities.
- Adoption of cryptocurrency: By increasing the utility and value of tokens, liquid staking can promote the creation of new applications and accelerate the uptake of cryptocurrency.
Cons
- Slashing risk: In addition to being kicked off the network, dishonest validators may have some of their staked tokens “slashed” (taken away). Should their selected validators be fined, users might also be at risk slashing.
- Centralization issues: If most tokens are invested in a single protocol that has its own group of validators, decentralization may suffer. In order to reduce the risk of centralization, it is better to have a diverse network of liquid staking protocols.
- Uncertainty over regulations: laws regarding cryptocurrency and blockchain technology are constantly changing and might differ greatly between regions. Before using DeFi platforms and liquid staking, it is important to confirm the local laws.
Wrap-Up About Liquid Staking
Users can participate in staking ecosystems in a more dynamic and adaptable way through liquid staking. Liquid staking opens up new opportunities for digital assets by tokenizing staked assets and enhancing liquidity.
