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- 1 Liquid staking enables the user to access liquidity while also staking their tokens.
- 2 Most of the profitable means that DeFi users consider are earning through stakes.
DeFi has transformed the crypto market and has made its way into the global economy. There are surplus ways to generate passive income. But, most of the DeFi users consider staking the most beneficial way to earn.
One can contribute to the Proof-of-Stake blockchain as with traditional staking. But, besides being limited by the bonding period, users receive a receipt of stacked funds in the form of a liquid staking token or LST.
This LST can be used in other DeFi systems to generate additional yield and reward opportunities. This type of staking involves storing funds in DeFi escrow accounts. Users can still access the account which makes the protocol liquid.
In traditional proof of stake protocol, liquid staking would be done by depositing the funds in the Defi escrow account which runs by a smart contract. The platform issues equivalent tokenized versions of staked funds in returns that are of the same values.
Users can still earn the rewards from the stake funds but in liquid staking, these funds can be used for other purposes. LST can be transferred out of the platform, stored in other places, traded, and spent without affecting the basic deposit. To gain access to the original holoding user needs to exchange back the tokenized version of the same value.
Difference Between Staking and Liquid Staking
There is a difference between staking and liquid staking. There is a locking period in staking. It may vary from days to months and the funds are not accessible. But, in staking, there is no locking period so users can access funds and accounts at any time. Due to no boundation on access to funds the rewards and market utility are greater.
Liquid staking has its opportunities. It gives users a chance to earn staking rewards without getting them locked. Users can earn additional rewards by increasing their yield chances through applying LST in various protocols such as lending pools and prediction markets. Also, users can un-stake it anytime.
Thus, the benefits of liquid staking can be summarized as unlocked liquidity, increased yield by applying many protocols, and investors using existing crypto assets in exchange for crypto-backed loans. This is done by locking the funds and receiving equivalent tokenized liquid versions of their assets.
Engaging with the DeFi platform needs expertise. The working of liquid staking depends on smart contracts but it has the risk of attacks. Hence, there is a risk of being scammed. Due to unexpected market volatility, the price can drop and the price of the LST is not pegged to the underlying asset they represent.
Summary
Liquid staking permits the user to access liquidity and also to stake their tokens with ease. This means that users can contribute to the proof of stake blockchain. It provides benefits like un-staking anytime, access to the funds, and no locking restrictions.
With a background in journalism, Ritika Sharma has worked with many reputed media firms focusing on general news such as politics and crime. She joined The Coin Republic as a reporter for crypto, and found a great passion for cryptocurrency, Web3, NFTs and other digital assets. She spends a lot of time researching and delving deeper into these concepts around the clock, and is a strong advocate for women in STEM.
