Intermediate
With the rise in popularity of blockchains, staking has become an essential way for users to earn passive income while strengthening network security. However, staking requires locking up tokens for extended periods, rendering assets unavailable during the staking . This is where liquid staking comes in, offering a solution that allows users to stake their assets without sacrificing liquidity.
Table of Contents
What is Liquid Staking ?
Liquid staking allows users to stake their assets, such as Ethereum Ethereum other Proof of Stake (PoS) tokens, while retaining the ability to use them. Unlike staking , where assets are locked and illiquid, liquid staking issues liquid staking (LSTs) staking rewards .
How does Liquid Staking work?
When users participate in liquid staking :
- They lock their assets in a protocol (e.g., Ethereum Ethereum Lido ) .
- In return, the protocol issues a corresponding LST, such as stETH for Ethereum .
- This LST can then be traded or used in various DeFi protocols while generating rewards.
The process is fully automated by smart contract contracts , ensuring that LSTs reflect the value and return of staked assets.
Its Advantages
- Liquidity : Users can access their funds without unlocking them.
- Flexibility : LSTs can be integrated into DeFi to generate additional yields.
- Capital Efficiency : By releasing capital, liquid staking maximizes return potential.
For example, a user who owns Ethereum Ethereum stake it, receive stETH, and then use that stETH on a platform like Aave to earn additional yield.
Comparison between Liquid Staking and Traditional Staking
| Traditional Staking | Liquid Staking |
|---|---|
| Frozen assets | Liquid assets |
| No additional use | Using staked tokens in DeFi |
| Limited capital efficiency | Increased capital efficiency |
| Rewards without flexibility | Rewards with LST flexibility |
Why Liquid Staking Is Gaining Popularity in DeFi
Liquid staking perfectly complements decentralized finance by offering greater composability , allowing users to integrate LSTs into multiple protocols. This ability to use LSTs on platforms like Compound or Aave staking use cases .
The Most Popular Protocols
Lido : Currently the undisputed leader in liquid staking diverse liquid staking Ethereum with its stETH . This protocol also supports other Proof of Stake (PoS) blockchains, such as Solana (with the stSOL ) and Polygon stMATIC token ). Thanks to this multi-blockchain compatibility, Lido allows users to stake their assets on different platforms while maintaining high liquidity.
Rocket Pool : This community-driven, decentralized protocol focuses primarily on Ethereum staking service for ETH 2.0. While its reach is more limited compared to Lido, Rocket Pool distinguishes itself through its decentralized approach. Rocket Pool allows any user to become a node operator with a minimum of 16 ETH (compared to the 32 ETH required to stake directly on Ethereum ).
Ankr Staking : Ankr offers a wide range of liquid staking across multiple blockchains , providing liquid tokens other than Ethereum Ethereum For example, it offers staking for Binance Smart Chain (with the BNB ) , Avalanche (AVAX) , and Polkadot (DOT) . Ankr focuses on interoperability and allows users to benefit from staking without locking up their assets.
Although Lido dominates the market and tends towards more decentralized governance, Rocket Pool, by design, is structurally more decentralized. It allows a larger number of users to actively participate in securing the network as node operators, thus limiting the concentration of funds under the control of a small number of entities.
Associated Risks
Despite its advantages, liquid staking carries certain risks:
- Market Volatility : The value of LSTs can vary depending on market conditions.
- Smart Contract Risks : Users depend on the security of the protocol's smart contract
- Dependence on Platform Stability : Technical problems with a platform can affect the staking .
How to Get Started with Liquid Staking
Step-by-Step Guide:
- Choosing a Platform : Select a reliable platform (e.g., Lido, Rocket Pool).
- Deposit Assets : Deposit the chosen cryptocurrency.
- Receiving LSTs : The protocol issues LSTs, representing your staked assets.
- Using LST in DeFi : Explore lending, borrowing and trading options for your LST.
How to Choose a Platform
When choosing a platform, consider the following:
- Security : Check the platform's history and audits.
- Fees staking and transaction fees
- DeFi Integrations : Look for platforms with broad DeFi support for greater utility.
Liquid Staking Tokens (LST): What They Are and How to Use Them
LSTs, such as stETH or rETH, represent staked assets and can be used in DeFi protocols. Holders can:
- Generating Additional Yield : Using LSTs in lending and liquidity protocols.
- Trading LSTs : Profiting from price fluctuations on secondary markets.
LSTs allow for additional earning opportunities, making them very versatile.
The Future of Liquid Staking in the DeFi Ecosystem
As DeFi evolves, liquid staking is expected to grow, with opportunities for cross-chain staking and increased interoperability. The rise of platforms supporting multiple blockchains could make liquid staking a fundamental component of DeFi.
Conclusion
Liquid staking bridges the gap between staking and liquidity, making it a transformative tool for DeFi. For investors seeking flexibility and capital efficiency, liquid staking offers a robust alternative to traditional staking , fostering innovation in decentralized finance.
FAQ Section
-
What is liquid staking ?
- Liquid staking allows assets to be staked while keeping them accessible for trading and use in DeFi.
-
How does it differ from traditional staking ?
- Traditional staking locks up assets, while liquid staking issues representative tokens that remain liquid.
-
Are LST tokens safe?
- The security of tokens depends on the protocol used. Choose well-audited and reputable platforms.
Further Reading: By clicking on the words in bold, discover our articles on DeFi protocols , staking , and the comparison between Proof of Work and Proof of Stake to deepen your knowledge of the world of decentralized finance.
Cryptocurrency investments are risky. Crypternon cannot be held liable, directly or indirectly, for any damage or loss resulting from the use of any product or service mentioned in this article. Cryptocurrency investments are inherently risky; readers should conduct their own research before taking any action and only invest within their financial means. This article does not constitute investment advice.
Some links in this article are affiliate links, which means that if you purchase a product or sign up through these links, we will receive a commission from our partner. These commissions do not incur any additional cost to you as a user, and some even allow you to take advantage of promotions.
AMF Recommendations. There is no guaranteed high return; a product with high potential returns implies high risk. This risk must be commensurate with your investment goals, your investment horizon, and your ability to lose some of your savings. Do not invest if you are not prepared to lose all or part of your capital .
To learn more, read our Legal Notices , Privacy Policy and Terms of Use .
Yoann
Trained as an engineer, I quickly became interested in the field of finance. Convinced that decentralized finance has a bright future, I am participating in its democratization by developing Crypternon.