This article is part of our educational series on staking. In this installment, we’ll dive into Liquid Staking, which is a fundamental aspect of DeFi. Staking is a process in which token holders can earn rewards by helping to secure a blockchain network. If you’re new to staking, we recommend reading our previous article, What is Staking? and checkout our staking series here.
Introduction to Liquid Staking
Liquid staking is an increasingly popular solution that allows users to stake their tokens while actively participating in securing proof-of-stake blockchains. It involves converting staked assets, like proof-of-stake cryptocurrencies, into liquid token forms. This allows cryptocurrency holders to stake their assets to help secure a blockchain network while retaining the ability to use the value of those staked assets for other purposes like lending and trading.
Unlike traditional staking, which often involves waiting periods of days to weeks to start earning rewards and to unstake, liquid staking provides stakers with increased liquidity and capital efficiency. For example, post-Ethereum’s Merge, validators had to wait for the Shapella upgrade to be able to withdraw their staked ETH. Currently, validators can opt for partial withdrawal or full withdrawal of their staked ETH.
When a liquidity provider stakes ETH, Liquid Staking Derivatives are created, representing the same value as the staked amount. Stakers can begin receiving rewards within 24 hours and can also use the liquid staking derivative tokens on other DeFi platforms to earn passive income.
What are some examples of liquid staking platforms?
Liquidity providers can add liquidity to ETH pools either through a decentralized liquid staking platform or through a centralized liquid staking platform. Decentralized liquid staking platforms for Ethereum include Lido and Rocket Pool. Coinbase and Binance are examples of centralized liquid staking platforms.
Lido and Rocket Pool offer Liquid Staking Tokens (LSTs) in lieu of staked ETH. According to DefiLama, the Total Value Locked (TVL) of Lido and Rocket Pool is $14.242B and $1.736B respectively. Whereas, the TVL of Wrapped ETH on Coinbase and Binance is $2.187B and $461.6M respectively.
When users stake their ETH holdings on Lido or Rocket Pool they receive the platform’s LST. Lido offers stETH — staked Ether and Rocket Pool offers rETH — Rocket Pool Ether. Similarly, Coinbase and Binance also issue a liquid stake token cETH — Coinbase Ether and WBETH — Wrapped Beacon Ether.
Besides earning staking rewards stakers can also earn passive yields by lending or trading LSTs on other platforms.
What does liquid staking mean for the crypto economy?
Staking in crypto existed even before Ethereum’s execution layer merged with the proof-of-stake Beacon chain. However, the emergence of liquid staking has extended an opportunity for users to secure Ethereum through liquid staking.
Before liquid staking services, ETH holders had limited means of earning passive yields like spot trading on crypto exchanges and providing liquidity on platforms like Uniswap. The introduction of liquid staking derivatives has made staking a more profitable option as liquid staking platforms mint representative tokens in exchange for ETH, which can be used in other DeFi instruments.
Liquid Staking Across Blockchains
Currently, the market cap of Liquid staking derivatives reached $16.6 Billion. Liquid staking is being incorporated by L1 and L2 chains including Ethereum, Polkadot, Binance Smart Chain, Polygon, and Solana.
However, liquid staking is more than just a DeFi tool. LSTs not only allow participants to earn passive income via staking but also extend an opportunity for holders to actively participate in on-chain governance. For example, when stakers lock a specific amount of ETH on Lido, they receive LDO, Lido’s governance token. This token grants them the ability to propose and vote on improvement proposals, shaping the future of the network.
The Future of Liquid Staking
Liquid staking protocols could help improve scalability and adoption for chains like Ethereum by bringing staked ETH into the DeFi ecosystem. With improved risk management covering slashing penalties and smart contract risks, liquid staking could enable wider DeFi adoption while also benefiting the security of underlying staking networks.
- How-To Guide: How to Stake and Unstake Validators with Validation Cloud: A Step-by-Step Guide
- Validation Cloud Docs
- Blockworks: Validation Cloud launches platform for institutional stakers
About Validation Cloud
Validation Cloud is a Web3 data streaming and infrastructure company that connects organizations into Web3 through a fast, scalable, and intelligent platform. Headquartered in Zug, Switzerland, Validation Cloud offers highly performant and customizable products in staking, node, and data-as-a-service. Learn more at validationcloud.io| LinkedIn | X | Medium