LIQUID STAKING- A beginner’s Guide.

 

To stake one’s coin means to lock it away with a delegator (to secure the chain in the case of proof of stake chains) or with an exchange (as liquidity provision). Staked coins/tokens earn rewards:

In the case of delegating, these rewards come from on-chain processing fees.

In the case of exchanges, the rewards come from fees from users of the exchange. Locking up coins/tokens mostly means they become inaccessible to the user since most staking pools have a minimum lock-up period (a period after which staked coins are withdrawable), and penalties for early withdrawal (in some cases one would lose the entire rewards earned during the short period the assets were staked, and might also risk leaving the staking pool with less than was staked in the first place). This experience can be unpleasant as the opportunity costs to staking could be huge (particularly during bull periods with hundreds of 100x projects popping up almost every day).

Enter the Solution: LIQUID STAKING.

WHAT IS LIQUID STAKING?

Liquid staking provides users with the opportunity of using and earn returns on staked assets (whilst still locked up).

How is this possible?

Most liquid staking platforms issue derivatives of the token staked. (Lido issues sETH when one stakes Eth). These derivatives are tradable and are pegged 1:1 with the original asset. They serve a dual function. They are;

  1. Receipt/evidence or proof of a person’s stake.
  2. They are also tradeable 1:1 derivatives.

The user can do with the derivative as they please. He/she could take a loan out with it, or deploy the asset to further yield-generating activities. (Provided the loans and yield platforms support the derivative token). This particular function of liquid staked tokens reduces the opportunity costs to staking and allows for greater capital efficiency.

One of the very first liquid staking protocols to launch is the Lido protocol. With TVL currently standing at $5,571,408,559, a market cap of $5,745,423,644 and a staking APR of 6.22%, lido is the largest validator on the Ethereum proof of stake chain, and the largest liquid staking protocol across all chains. It’s deriv token (for the ethereum blockchain) is referred to as staked Eth (or simply sETH). The protocol was first introduced in the year 2020. Since then, it has gone on to offer liquid staking services on Solana, Polkadot, Kusama, and polygon blockchains.

The second largest staking protocol by market cap is the Marinade finance protocol built on Solana.

Concluding thoughts:

Liquid staking protocols offer Web3 greater capital efficiency; with the advent of liquid staking protocols, stakers have little reasons to pull out capital since the deriv of the staked asset is just as good as the asset itself, and can earn users yield on other yield bearing protocols. One should note however that liquid staking derivative tokens are not without risks. As evidenced in the Celsius debacle earlier this year, a loss of investor confidence and a race to exit could cause the deriv tokens to depeg. (Just like sETH did against ETH).

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Written by: Ebe Henry

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