Regular Staking vs Liquid Staking: How are they different?
With the growing adoption of Proof of Stake (PoS) blockchains, we are beginning to see the growth of liquid staking protocols, as they enable access to the liquidity that is staked to verify the network. These liquid-staked derivatives can participate in DeFi and improve the capital efficiency of the DeFi ecosystem.
In this article, we will explore PoS blockchains, how regular staking is different from liquid staking, and the value that liquid staking protocols provide.
Proof of Stake
Proof of Stake is a blockchain consensus mechanism where validators are responsible for checking that new blocks propagated over the network are valid and occasionally creating and propagating new blocks themselves. Unlike Proof of Work (PoW), which requires miners to solve complex cryptographic puzzles to add new blocks to the blockchain, PoS removes the need for advanced processing units and requires validators to stake their own capital to add new blocks. To ensure that the blockchain is secure and running smoothly, this capital can even be lost if the validator acts dishonestly or does not provide the optimum service. In exchange for securing the network, validators are rewarded with token emissions.
Running a validator can sometimes be complex and require high amounts of capital, making it impractical for most people. Therefore, some blockchains have adopted a delegated proof of stake model, where capital can be delegated by multiple users to validators, who then stake the capital and run the validator. For this service, validators take a small fee from the staking rewards received. This creates a win-win situation where validators earn additional yield for providing staking-as-a-service while delegators earn staking yields without having to run the validator.
However, when a user stakes their capital in a PoS system, the capital is locked and therefore illiquid, as PoS delegation always has a delay for unbonding your stake from a validator. As a consequence, the users do not have access to this capital, rendering them unable to participate in DeFi for additional yield. This is where liquid staking comes into play!
Liquid Staking
Liquid staking, also known as soft staking, utilizes staking-as-a-service providers who stake your capital into the PoS system in exchange for a fee, similar to the delegated proof of stake model described above. However, these staking service providers take it a step further by making the staked assets liquid by creating liquidity pools. These pools feature a 1:1 exchange rate of the staked asset and liquid staked equivalent (ie. staked BNB and BNB would be set up in a 1:1 exchange rate liquidity pair).
By holding the liquid staked derivative, individuals will continue to earn the yield from staking but have the option to swap into the original token, which gives individuals access to yield and liquidity. These liquid staking derivatives also allow users to participate in DeFi and use these assets in money markets to collateralize and borrow against them while they continue to earn yield.
Regular Staking vs Liquid Staking: Which Is Better?
For many people, running a validator is not feasible and realistic due to computing, technical, and/or capital requirements. Even in Delegated Proof of Stake systems, the staked capital is illiquid and subject to unstaking cool down periods. Liquid staking allows individuals to access the liquidity of their staked capital, while still earning a staking yield without having to overcome some major barriers involved in running a validator.
Midas pools offer users a unique opportunity where they can deposit supported crypto assets, stablecoins, and LP tokens to borrow, lend, and collateralize their assets in isolated money markets. This gives users a chance to scale their earnings by adding the staking tokens to different strategies while their original capital is still staked and earning staking rewards.
As more blockchains adopt the Proof of Stake model, we anticipate that we’ll see more staking-as-a-service providers emerge as they offer many benefits to their users.
About Midas Capital
Midas Capital is bringing isolated and customizable money markets to EVM-compatible blockchains. Enabling users, DAOs, and protocols to create customized and isolated pools for lending and borrowing any asset, Midas is building a cross-chain ecosystem that democratizes money markets. Pool creators have the flexibility to modify pool parameters (interest rate curves, oracles, collateral factors, pool fee, etc.) according to their risk appetite. With isolated pools, Midas offers stellar features for large-scale institutions, protocols, and traditional investors.
