Liquid Staking 101
A step further than traditional Staking
It’s not juice, neither is it water. It’s the financial form of being ‘liquid’.
But before I dive right into what Liquid Staking is about, a quick refresher on what actual Staking means is an ideal way to go:
Basically, regular staking is like investing (locking up) money (crypto) so it can be used by the institution or bank (blockchain) to secure economic needs (via proof-of-stake) while the owner of the funds earns rewards on top of it at the end of the staking period.
Just as explained in the image above.
💧 Got it, now what’s Liquid Staking?
Liquid staking takes the traditional staking model a bit further by allowing token holders/stakers to extract utility from their staked crypto and enabling the use of these extracted utilities for other activities.
Walk with me 🚶♀
In regular staking, you’d have no access to your crypto because it’s locked up. The only time when you can get back your funds is when the lock-up period is over & you’ve earned your rewards or when you decide enough is enough & you pull your money out.
However, with liquid staking, even while your funds are locked up during the staking period, you’d receive a representation of your staked crypto, often called a “liquid token.”
This liquid token can then be traded or used in decentralized finance (DeFi) activities while still representing the staked funds.
It’s not real money, but with this liquid money, you can do some other things on certain platforms.
✅ How’s this beneficial?
In liquid staking where you are given a form of money after locking up the real one, you have the benefit of not only earning staking rewards but also having the flexibility to use these “liquid tokens” gotten in a broader crypto ecosystem.
This way you don’t just earn the extra rewards but you have something to use in engaging in other activities like trading or providing liquidity in DeFi protocols thereby earning even more money with it.
❎Drawbacks, what’s the catch
The catch is that not every platform that allows Staking allows liquid staking.
That’s because liquid staking involves extra layers of complexity and infrastructure.
After all, it typically requires the creation of synthetic or derivative tokens representing the staked assets. As a result, fewer platforms are offering liquid staking solutions compared to traditional staking.
The risks, however, remain the same as in regular staking:
🏛 Projects that support Liquid Staking
- Lido Finance (LIDO):
Lido Finance is a popular DeFi platform that provides liquid staking solutions. Here, users can stake Ethereum (ETH) and receive stETH (liquid staked ETH) in return. stETH is a representation of staked ETH (a liquid token) that can be traded or used in various DeFi apps.
Others include:
🥙 Wrapping things up
In summary, liquid staking is a way to make your staked crypto/money more flexible and tradable, allowing you benefit from earning rewards via staking while also having the option to engage in other cryptocurrency activities during the staking period 📌
Therefore even though your money is busy working somewhere, you’re liquid all through!
Thanks for reading :)
PS: I made similar articles into a Medium “playlist” called #Web3Wednesdays — a project designed to take you from a #Web3 noob to non-noob. Previous articles are neatly packed for you in a List.
PPS: feel free to clap more than once on this piece, drop a comment, anything.
Ciao 🚀
