What is Liquid Staking and Why is it Important?
Liquid staking is an evolving concept in the crypto staking space that provides stakers with the benefits of immediate liquidity, composability of staked assets, and distribution of stake across multiple validators.[0] Liquidity for liquid staking tokens in the market is limited, and depending on the provider chosen – whether centralized or decentralized – stakers take on either custody risk or smart contract risk.[1]
The Ethereum Shanghai upgrade has pushed the Ethereum Liquid Staking narrative considerably, and most of the platforms that offer services of the kind saw their native cryptocurrencies skyrocket since the beginning of 2023. Gaining traction rapidly, particularly with Ethereum’s staking unlocking, are platforms of this kind.[2] The Ethereum network is scheduled to undergo the Shanghai upgrade in March, which will unlock ETH that has been staked for more than two years on the Beacon Chain.
Liquid staking is not only a convenient option for crypto holders to maintain possession of their assets while they are in a locked state. Liquid staking provides higher yields than traditional staking, in a simpler way.[3] Additionally, by providing users with a more convenient way to stake, not only is blockchain adoption increasing, but networks are being strengthened as a result.[3]
The most popular liquid staking platform is Lido, a decentralized application (dapp) that offers the feature of liquid staking.[4] The total value locked (TVL) on the Lido platform is nearly $6 Billion, with more than 199,000 stakers ensuring the security of the protocol.[5] Audits from some of the most respected blockchain security firms, Quantstamp and Mixbytes, have been performed on Lido.[5]
Other platforms include Meta Pool, a NEAR-based liquid staking protocol that allows users to stake their NEAR tokens while remaining liquid, and Rocket Pool, a platform that enables users to run network nodes or just stake ETH for annual staking rewards.[6]
Although Ethereum staking infrastructure offers many advantages, such as the high annual percentage yields (APYs) that stakers can gain, there are limitations that validators must consider prior to staking their ETH.[7] The process of exchange staking is further hindered by the lack of transparency and decentralization.[7] Staking through an exchange carries a substantial risk of network centralization, as users must trust the centralized exchange that they are utilizing for staking.[7]
Is it safe to participate in liquid st[8] The risks and opportunities of this new form of staking must be weighed carefully.
0. “3 Pros and Cons of Liquid Staking – pSTAKE Blog” blog.pstake.finance, 19 Jan. 2023, https://blog.pstake.finance/2022/09/01/3-pros-and-cons-of-liquid-staking/
1. “What is liquid staking and how does it work? – Finoa” www.finoa.io, 19 Jan. 2023, https://www.finoa.io/blog/guide-liquid-staking/
2. “Lido (LDO) Leads Liquid Staking Derivatives Resurgence” beincrypto.com, 19 Jan. 2023, https://beincrypto.com/lido-ldo-leads-liquid-staking-derivatives-resurgence/
3. “Op-ed: Liquid staking benefits the crypto ecosystem overall” cryptoslate.com, 19 Jan. 2023, https://cryptoslate.com/op-ed-liquid-staking-benefits-the-crypto-ecosystem-overall-here-are-3-reasons-why/
4. “Krystal DeFi Introduces New Passive Income Opportunities By …” www.yahoo.com, 19 Jan. 2023, https://www.yahoo.com/now/krystal-defi-introduces-passive-income-130000511.html
5. “Everything You Need to Know about Liquid Staking – Lido …” www.analyticsvidhya.com, 19 Jan. 2023, https://www.analyticsvidhya.com/blog/2022/10/everything-you-need-to-know-about-liquid-staking-lido-finance/
6. “List of 11 Liquid Staking Platforms (2023) – Alchemy” www.alchemy.com, 19 Jan. 2023, https://www.alchemy.com/best/liquid-staking-platforms
7. “Liquid Staking and Its Benefits: A Deep Dive by Lido | Alexandria” coinmarketcap.com, 19 Jan. 2023, https://coinmarketcap.com/alexandria/article/liquid-staking-and-its-benefits-a-deep-dive-by-lido
8. “The Decentralization of Liquid Staking – Defi Pulse Blog” defipulse.com, 19 Jan. 2023, https://defipulse.com/blog/the-decentralization-of-liquid-staking/
