Staking is a popular and user-friendly way to put your crypto to use and even gain some. However, some proof-of-stake networks require locking your stake and won’t let you withdraw — for example, Ethereum! An ingenious solution in the form of liquid staking solves it by letting you keep using an equivalent of your staked coins. Even with the Shanghai update in Ethereum on the horizon, liquid staking is still red-hot.
In this guide we will introduce you to this concept, explain its benefits and pitfalls, and list some popular examples of supported blockchains and DeFi products.
What is Liquid Staking?
In finance, liquid refers to the ability to be obtained or filled without significant difficulties. Staking is a process of dedicating a sum to the protocol to help maintain it and receive staking rewards. Therefore, liquid staking means the kind of staking that would let you keep using the staked funds.
Liquid staking is specifically useful for protocols that lock up the user’s stake. From a security standpoint, this is necessary to maintain some stability in the total value locked in a protocol. However, from the user’s perspective, lock-ups can be a nuisance, to say the least. By using these blockchain products, users can gain double the benefit of using the same funds.
Considering the processes involved, liquid staking requires some prior knowledge of crypto and DeFi. Of course, newcomers to crypto are free to give it a try, and the interfaces are generally not too hard to parse. The hard part comes after you receive the liquid staking tokens — how to earn and not lose.
Liquid Staking vs Staking
There is an obvious difference between the terms but which one should you go for? Some of the important points to remember before going for liquid staking are:
- Your assets will be contributed to the staking pool run by the protocol. Due diligence on the provider is advised;
- Not all proof-of-stake blockchains make your stake illiquid (i.e. Cardano);
- Token transfers and delegation transactions incur fees.
Staking is a long-term strategy, while DeFi protocols where you can use the “staked” tokens more often than not bring profit in the short term. Liquid staking lets you enjoy the best of both worlds at the cost of some extra effort.
The Benefits of Liquid Staking
The comparison above showed some upsides to going for liquid staking over the regular, but let’s recount them once again.
- Get to use your funds right away;
- Trade, lend, farm — do whatever with the freshly received liquid tokens;
- Extra options: earn or bear interest on the stake equivalent, compound etc.;
- Can stake less than required by the protocol;
- Healthy for network security for incentivizing staking.
Risks Involved in Liquid Staking
So far, everything sounds great, doesn’t it? But if you suspect it sounds a little too good to be true, you are right. There are risks inherent to staking and DeFi to consider before engaging in liquid staking.
Ironically, when liquid staking, you still need to consider liquidity. ETH is more or less ubiquitous in crypto but do you know how to use stETH or aETHb? Even when you do, swapping and cashing out might be a problem when there is high demand. It has happened before: when Celsius became insolvent, the stETH pools on Curve Finance were empty.
So far, we have been talking about how you can earn with the same funds. Bear in mind that you can lose funds as well. Be it an unreliable pool provider that gets your stake slashed, a bad trade with the liquidity token, or simply volatility and depreciation of the crypto market, this method is not guaranteed to bring you profits.
Last but not least, crypto market is not a stranger to volatility. Some protocols do not provide immediate unbonding, so get the full idea of terms and conditions of the platform of your choice before you start.
Liquid Staking Protocols
Ethereum’s Beacon Chain is notorious for its strict requirements for running a validator: a minimum of 32 ETH and no withdrawals until enabled by a hard fork. Almost as soon as the Beacon Chain hit the mainnet, Lido DAO started offering its liquid staking solution: deposit any amount of funds into a pool (you have the choice) and receive the derivatives that represent your staked ETH immediately. Due to how staking Ether works, withdrawing ETH from Lido is not available yet but stETH is pegged to ETH in a 1:1 ratio.
Lido is not limited to Ethereum, offering SOL, Polygon, Polkadot, and KSM derivatives as well. Across all these networks, Lido has verified 54 node operators. Note that there is a protocol fee collected by Lido DAO — 10% on rewards.
Ankr’s general mission is to build web3 infrastructure network but its products each serve its own purpose. Ankr Staking, previously known as Ankr Earn, is a suite of DeFi products, which includes liquid staking among other things. Ankr Staking supports Ethereum, Avalanche, Fantom, Polygon, Polkadot, Kusama, and BNB Chain. To start using it, head to the Staking app main page, connect your wallet, choose an asset, the amount of it, and then the liquid derivative. Ankr will provide you with two options: reward earning (its amount grows) or bearing (redemption rate grows).
Frax Finance is a fractional-algorithmic stablecoin protocol. Its flagship product is the FRAX stablecoin but it has a wrapped version of ETH, too. According to the documentation, frxETH is a stablecoin loosely pegged to ETH, with the target 1:1 ratio. frxETH can be deposited to the vault in exchange for sfrxETH, another token that accrues vault yield. Both frxETH and sfrxETH can be used in the Frax ecosystem: for instance, Fraxswap or Fraxlend.
Cross-chain staking solution pSTAKE is live on BNB Chain, Ethereum, and Cosmos. This protocol offers auto-compounding on its liquid staking derivatives. pSTAKE uses 10 verified staking pools to distribute the staked assets. It also has a native token PSTAKE for governance and incentivizing security.
Liquid staking is instant but completing unstaking takes up to 15 days. If you don’t want to wait, swap the tokens back for the ones you staked on a DEX.
This platform offers more or less the same benefits as the competitors (i.e. compounding, multiple pools) but across even more chains. In addition to Ethereum, BNB Chain, Polygon and Fantom, it is also available on Near, Hedera, and Terra, with even more coming in the future. Another advantage of Stader’s is that they track validator performance instead of users.
One of Stader’s revenue streams is commisions on staking rewards, up to 10%. It also does not let you choose the kind of reward accrual: its liquid staking tokens are reward-bearing by default.
How To Use Liquid Staking Tokens Next?
Let’s suppose you availed services of liquid staking protocols, now what? You are already earning daily staking rewards but there are a few options in DeFi to boost it:
- Provide liquidity for a DEX. This will let you earn a share of trading fees for the pair;
- Trade liquid tokens for other assets on a DEX. Even the underlying assets are fair game;
- Lend them in a lending protocol or use as collateral for borrowing;
- Leverage your stake by swapping liquidity tokens for the original ones and staking them again.
These are only a few scenarios of using the derivative tokens. Be mindful of the risks these strategies have: a bad leveraged trade of loaned funds can lead to a liquidation, for instance. Get to know the strategies better and once confident and ready, godspeed!
All in all, liquid staking is a solution that solves a purely crypto-native issue. We hope you walk away from the article with a better understanding what liquid staking is, and maybe even continue with your own research.
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Frequently Asked Questions
Is liquid staking risky?
The act of liquid staking — depositing funds to a third-party protocol — is not significantly riskier than self-staking. Awareness about the risks would be more appropriate for the subsequent use of the liquid staking tokens.
What are the advantages of liquid staking tokens?
There are multi-faceted advantages to liquid staking protocols. On a network level, they help distribute staked assets between a larger variety of validators. To a user, liquid staking services provide an opportunity to utilize the same funds they dedicated to a proof-of-stake protocol.
What are liquid staking tokens?
Liquid staking tokens are derivatives minted by these smart contract platforms. These derivatives are accepted in some DeFi products as an equivalent of the original tokens staked. As a result, liquid staking tokens can be used for liquidity mining, yield aggregation, lending and more.
What are the disadvantages of liquid staking?
There are a number of risks associated with liquid staking, so this method is recommended to experienced users. When liquid staking tokens act as leverage, chances of liquidation increase. The more protocols you use with these tokens, the more smart contract risk and fees you accumulate. Checking the conditions of a chosen protocol is also advised: some take a commission on yields, and some will not let you unbond immediately.