- Liquid staking follows a proof-of-stake consensus mechanism but it unlocks liquidity.
- It is comparatively better than traditional staking.
- The liquid staking tokens can be used on different platforms to earn more returns.
Liquid staking is the process of staking funds for some time to return rewards to investors, with the unique feature of unlocked liquidity. The investor can earn more profit by transferring liquid tokens to spend, trade, and store on other platforms. It has revolutionized the investment and crypto markets. It will diversify and grow the DeFi market in the future.
What Is Liquid Staking?
Liquid staking is very similar to traditional staking, which follows proof-of-stake consensus mechanism protocols. But the difference is that it does not lock the funds during staking, which makes it better than traditional staking. The user is not limited by the bonding period and receives a ‘receipt’ of staked funds in the form of a liquid staking token (LST).
The funds are accessible during the staking period, which makes the protocol fluid. These LSTs can be used for other purposes as well, such as being transferred out of the platform, stored in another place, spent, and traded without any impact on the initial deposit. The tokenized versions of the same value have to be exchanged back when the user wants to gain access to his original holding.
Some blockchains rely on third-party facilitation with liquid staking, such as SOL (Solna) and DOT (Polkadot). Examples of platforms that provide liquid staking services are Lido, OKTC, Liquid Pool, Hubble, etc.
The biggest benefit of liquid staking is that it provides additional reward opportunities to its users. LSTs can be applied to various protocols, such as prediction markets and mending pools, to diversify the yield of opportunities. Liquid tokens can be used as collateral and traded.
Pros And Cons Of Liquid Staking
The pros of liquid staking are yield farming (increases the chance of receiving more rewards), crypto-backed loans (users or investors can use crypto assets in exchange for a crypto-backed loan) and unlocked liquidity.
The cons are smart contract risks (risks of bugs or attacks), technical expertise and price depegging (LSTs can drop below the asset’s price due to unexpected market volatility).
Growth In Crypto Due To Liquid Staking
The crypto and investment markets have experienced growth due to liquid staking because participants who were not taking interest due to the illiquidity of staking are also showing interest. The influx of participation will drive further development and growth in the DeFi market. Liquid staking had a great influence on the DeFi space because it created more avenues for capital efficiency by breaking down barriers to entry and fostering greater inclusivity.
Conclusion
DeFi (Decentralized Finance) has been revolutionized because of the liquid staking services over the years. The liquid tokens in liquid staking can be used for different DeFi protocols. There are few benefits of liquid stacking over the traditional one, such as unlocked liquidity but it has risks of bugs or attacks as it relies on smart contract operability. But the bottom line is that it has increased the growth of the crypto market compared to traditional staking.
