Liquid staking allows users to stake tokens and simultaneously use them in the DeFi ecosystem.
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What Is Liquid Staking?
Liquid staking allows users to stake tokens and simultaneously use them in the DeFi ecosystem. This is made possible by wrapping the staked tokens and providing users with a wrapped token that is a claim on the underlying collateral. The wrapped tokens can be transferred and generate yield.
Liquid staking permits users to stake and unstake their coins without being beholden to a lock-up period. It thus enables greater capital efficiency and increased liquidity on proof-of-stake blockchains, allowing users to maximize the benefits of staking and DeFi simultaneously. Furthermore, liquid staking enhances network security on PoS chains.
Benefits of Liquid Staking
Liquid staking should not be confused with regular staking. It offers various unique benefits.
Liquid staking allows DeFi protocols and blockchains to do more with the same amount of capital. With regular staking, each dollar staked is one dollar that cannot be used in a DeFi protocol, thus reducing its liquidity and utility. With liquid staking, blockchain ecosystems can grow at a faster pace with the same amount of capital invested.
Chance to Earn Yield
Liquid staking is a great way to earn an additional yield on otherwise idle capital. For instance, if a blockchain pays X% staking yield, liquid staking investors can add Y% yield by using the wrapped staked tokens as yield-bearing assets. This is beneficial for both stakers and blockchains.
A great downside of staking is not being able to access your funds. Considering the volatility of cryptocurrencies, this can leave investors worse off even after earning a staking yield in some cases. With liquid staking, investors can access their capital without delay, which can prove vital in times of heightened market volatility.
Drawbacks of Liquid Staking?
One disadvantage liquid staking has over normal staking is smart contract risk. The wrapping of the staked token means an additional layer of smart contract interaction, which can potentially be exploited.
Another potential risk is a divergence between the collateral value and the value of the wrapped token. This happened when stETH traded at a significant discount to ETH. However, such diversions are only temporary and the market returns to the equilibrium price after volatility subsides.
Where Can You Liquid Stake?
Liquid staking is available on several blockchains:
Liquid Staking on Ethereum
Users can liquid stake on Ethereum by depositing into a third-party application, which deposits ETH to the Ethereum staking contract and returns a derivative. This wrapped token can then be used across the DeFi landscape. The two main liquid staking providers on Ethereum are Lido and Rocket Pool.
Lido has no upper limit for staking ETH and issues stETH in return, which can be used for lending, collateral and other DeFi purposes. The staked ETH generates rewards, which are updated daily. Users can receive native ETH for their stETH from the stETH-ETH liquidity pool on Curve Finance.
Rocket Pool functions like Lido. The platform issues Rocket Pool ETH (RETH), which can be used across the DeFi ecosystem. The RETH-ETH liquidity pool allows users to unstake their ETH permissionlessly. Both stETH and RETH can be used in the Ethereum ecosystem.
Liquid Staking on BNB Chain
BNB Chain offers liquid staking through three different web3 protocols: Ankr, Stader and pStake. Just like on other liquid staking platforms, staked BNB is represented by wrapped tokens, which are fully transferrable and can be unwrapped to reclaim the collateral. The staked tokens are aBNBc (Ankr), BNBx (Stader) and stkBNB (pStake) and are usable throughout the BNB Chain ecosystem. The staking process is equivalent to other liquid staking platforms.
Liquid Staking on Solana
The leading liquid staking protocol on Solana is Marinade (MNDE). For staking SOL, users receive Marinade staked SOL (MSOL), which can be used across the Solana ecosystem. The Marinade smart contract has been audited three times. Since MSOL trades at a slight premium to SOL, the staked MSOL is gradually increasing in value with every epoch. Thus, after a while, users can unstake more SOL than they originally deposited. Other liquid staking options on Solana are Socean (SCNSOL) and Raydium.
Liquid Staking on Fantom
Fantom (FTM) utilizes proof of liquid staking (PoLS), allowing a single validator to stake tokens on behalf of multiple delegators. This means that even wallets with small balances can choose a delegator and participate in staking. PoLS is thus a form of delegated proof-of-stake.
Delegators lock their FTM in an Ethereum smart contract and provide liquidity for the Fantom blockchain. They are paid rewards (L-reward) proportional to their contribution to the network’s liquidity. Validator pools stake these liquid tokens and collect Staking Rewards (S-Reward). The S-Reward is determined by consensus rules and dependent on total stake size and validator performance. The S-Reward is paid in proportion to their contribution toward network security.
You can liquid stake on Fantom natively and receive sFTM for your staked FTM. sFTM can be used freely across the Fantom ecosystem. It can also be used to mint synthetic assets in the Fantom DeFi Suite. Another option is to mint Fantom USD (FUSD) and use it either as collateral or to trade synthetic assets. However, FUSD, although nominally a stablecoin, mostly trades at a steep discount to other stablecoins.
The last option is to stake Fantom on liquid staking platforms like Stader (stFTMX) and Ankr (aFTMb). The process is the same as for liquid staking other cryptocurrencies.
Liquid Staking on Cosmos
Cosmos is enabling native liquid staking with its upgrade to Cosmos 2.0. Previously, it was possible to liquid-stake ATOM through providers like pStake (stkATOM) and Osmosis. The Cosmos 2.0 upgrade will allow stakers on Cosmos to earn yield natively and engage in the Cosmos ecosystem.