In this article, you will learn what is liquid staking. With Proof of Stake, a token holder can lock up tokens and use their weight to verify the authenticity of transactions. The owner of the tokens receives a return roughly similar to that of a bond. Unlike a bond, however, while the tokens are staked they cannot be transacted, traded, or used as collateral – they are illiquid.
What is Liquid Staking?
Liquid staking is the newest staking service. This staking option requires users to pledge their funds to secure the network, but it is liquid or fluid in the sense users can still access their funds.
Unlike the traditional PoS system, liquid staking involves the storage of funds in DeFi escrow accounts. This allows users to access their tokens whenever they want, as the funds are highly liquid.
With liquid staking, investors can generate multiple revenue streams from their crypto assets because they can lock their assets and still access them. They can use the liquid versions of their assets on other DeFi protocols and earn more on their initial deposits.
How Does Liquid Staking Work?
While liquid staking shares similarities with other staking options, the methods used for execution are quite different. A new generation of protocols, known as liquid staking protocols, has been developed to facilitate the liquid style of generating passive income.
These protocols allow users to stake any amount of an asset and unstake them without impacting the initial deposit. This way, deposits are locked on liquid staking platforms, and users are issued a tokenized version of their crypto assets. This derivative form carries the same value and operates one-to-one with the original asset. However, they are usually pegged with a different emblem in order to identify them.
For instance, if a staker deposits 1 ethereum/">ETH into one of such liquid staking services and requests a derivative, the user will receive one stETH, with the "st" representing staked ETH.
These new tokens can then be transferred out of the protocol, stored elsewhere, traded, or even spent without disrupting the initial deposit. The fluidity that liquid staking services offer is not the only thing that makes them unique. Users will earn staking rewards on their initial deposits and generate more funds from their derivative tokens simultaneously, making it a win-win situation.
If a staker wants to withdraw their initial deposit, they must return an equivalent deposit valuation to access their funds. Some liquid staking protocols charge a fee for using their platform, but the fees vary.
Bottom Line
Liquid staking brings stakers the benefits of immediate liquidity, composability of staked assets, and distribution of stake across multiple validators. This article is about what is liquid staking.
