Nowadays, the crypto market allows you to perform various operations with cryptocurrency as long as it brings profit. Staking is one of the most common ways to earn passive income from cryptocurrency. Due to its popularity among crypto enthusiasts, this form of alternative to traditional mining has begun to modernize and take different forms. So, liquid staking has emerged, which has brought many new opportunities for cryptocurrency development. What is liquid crypto staking and what are the benefits and problems of liquid staking?
What is liquid staking in cryptocurrency?
Liquid staking is the issuance of a 'derivative' token backed by cryptocurrency locked during staking. In simpler terms, it is a process that allows users to stake their crypto assets while maintaining flexibility in using them for other purposes. Liquid crypto staking works by converting delivered tokens into a more liquid form that can often be sold or used in decentralized cryptocurrency applications.
In the case of liquid staking versus regular staking, liquid staking reveals the intrinsic value of delivered tokens, allowing them to be traded and used as collateral in specific DeFi protocols. This also represents a low-risk, high-reward opportunity as users can delegate their tokens to a third-party service that stakes on their behalf without losing access to their funds. Regular staking, as we know it, cannot provide such advantages.
How does Liquid Staking Work in Cryptocurrency?
How does the entire process of liquid staking work? The working mechanism of liquid crypto staking is based on certain components called protocols.
Liquid staking protocols are software solutions that allow users to stake their tokens in Proof-of-Stake networks. Most often, they operate on the Ethereum network. Users utilize liquid staking protocols, receiving crypto liquid staking tokens in return, which can be exchanged back for the original tokens they staked at any time.
Liquid staking tokens are derivative tokens issued by a protocol on a DeFi platform each time a user stakes an underlying asset. These tokens provide access to liquidity while the underlying asset remains locked in smart contracts.
So, what is the main difference in principle of operation if you're interested in comparing staking with liquid staking? Regular staking is when your assets are just 'dead weight' hanging in smart contracts. In turn, liquid staking provides the issuance of a wrapped token that allows investors to reuse these assets.
One of the most well-known examples of top liquidity staking protocols is Lido Finance. This protocol allows users to send various cryptocurrencies for staking and receive an equal amount of liquid derivative assets in return. Thus, the user earns staking income but can also manage the received funds. At the same time, Lido receives 10% of the staking reward.
Types of liquid tokens for staking
It is no secret that most decentralized platforms use the Ethereum blockchain network for liquid staking. Using the liquid staking protocol ETH or Lido Finance, as mentioned earlier, you can send coins and receive wrapped stETH tokens in return. Additionally, the available supply of stETH for the user varies depending on the ETH rewards they have accrued.
However, currently among crypto enthusiasts, staking is popular not only for Ethereum liquid on Lido. Here are some of the most popular cryptocurrencies that are supported for liquidity staking on various other services:
If we talk in more detail about the protocols that provide users with derivative tokens, there are also several types that help the staking process function better. Let's take a look at the most widely used liquid staking protocols for ETH.
Lido (stETH)
Ankr (aETH)
Rocket Pool (rETH)
StaFi (rToken)
Understanding these liquidity staking tools is crucial if you want to make this process efficient and easy for yourself. We have prepared a brief overview that combines all the aforementioned services.
Lido, as well as Ankr, Rocket Pool, and StaFi allow users to stake their ETH tokens and receive certain staking tokens in return. The exact token you receive directly depends on the network in which you provide liquidity. These could be #stETH , #aETH , #rETH or others that can be used in DeFi applications and traded on exchanges.
Advantages of liquid staking
Liquid staking is an innovative concept in the field of #defi . As a key component of the DeFi ecosystem and a guarantee of blockchain technology, liquid staking platforms are becoming increasingly important. Here are some vital advantages of liquid staking that you should pay attention to.
Additional earning opportunities and reward options;
Mobility and liquidity that allow users to effectively withdraw digital assets without having to wait if necessary;
Flexible risk management due to the ability to withdraw funds;
The ability to efficiently and securely distribute among multiple validators enhances the security and decentralization of the network.
Challenges of liquid staking
For more practical use, it is also important to know the potential issues that this type of staking and its users may face.
Loss of delivered assets is one of the main potential risks associated with staking liquid assets. This can occur through a process known as 'liquidation', where a percentage of the provided assets is deducted due to the actions of an improper validator.
Liquid staking definitely requires a certain level of technical knowledge to manage the staking process effectively. This can be a challenge for those unfamiliar with the world of cryptocurrency or lacking a deep understanding of blockchain technology.
Like all cryptocurrency investments, liquid staking is subject to high volatility in the crypto market. Such volatility can lead to significant losses, especially for those who stake their assets for a longer period.
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