Liquid staking has gained popularity as a solution enabling users to stake their tokens while actively participating in securing proof-of-stake blockchains. This process entails converting staked assets, such as proof-of-stake cryptocurrencies, into liquid token forms. This allows cryptocurrency holders to contribute to the security of a blockchain network through staking while maintaining the flexibility to utilize the value of their staked assets for activities like lending and trading.
In contrast to traditional staking, which often involves waiting periods of days to weeks to start earning rewards and to unstake, liquid staking offers stakers increased liquidity and capital efficiency. For instance, after Ethereum's Merge, validators had to wait for the Shapella upgrade to withdraw their staked ETH, but currently, validators can choose partial or full withdrawal of their staked ETH.
When an individual stakes ETH as a liquidity provider, Liquid Staking Derivatives are generated, representing the equivalent value of the staked amount. Stakers can start receiving rewards within 24 hours and also have the option to use the liquid staking derivative tokens on other DeFi platforms to generate passive income.
While liquid staking bears resemblances to other staking options, its execution methods differ significantly. A new wave of protocols, referred to as liquid staking protocols, has emerged to empower traders in expanding their cryptocurrency holdings.
These protocols enable users to stake any quantity of an asset and subsequently unstake it without affecting the original deposit. In this process, deposits become locked on liquid staking platforms, and users receive a tokenized version of their crypto assets. This derivative form mirrors the original asset's value and maintains a one-to-one correlation. However, they often carry a distinct emblem for identification purposes.
For example, if a staker deposits 1 ETH into a liquid staking service and requests a derivative, they will receive one stETH, with the "st" denoting staked ETH.
These newly created tokens can be transferred out of the protocol, stored elsewhere, traded, or even spent, all without disrupting the initial deposit. The unique aspect of liquid staking services extends beyond their fluidity. Users not only earn staking rewards on their initial deposits but also generate additional funds from their derivative tokens concurrently, creating a mutually beneficial situation.
To retrieve their initial deposit, a staker must return an equivalent deposit valuation. Some liquid staking protocols impose fees for platform usage, though the fee structures can vary.
Certainly, liquid staking carries inherent risks. The tokenized version may undergo depegging from the original asset, potentially resulting in a loss of value. Additionally, users can only redeem their assets by returning the equivalent value of their initial deposit. Moreover, the security of liquid staking platforms is a concern, as inadequate security measures may render them susceptible to hacking.
The primary distinction lies in liquidity. Liquid staking provides users with a tokenized version of their deposited crypto assets, offering the flexibility to use them on other platforms. In contrast, traditional staking lacks this liquidity feature.
Liquid staking tokens represent tokenized versions of users' deposits. As the initial deposits remain locked, users are issued these liquid staking tokens, which can be freely transferred, traded, and utilized on other platforms.