Liquid Staking 101

Since its inception, blockchain technology has relied on the Proof-of-Work [PoW] validation. But this process seems to be unsustainable as it consumes high energy. Not just this, the need for fast, powerful hardware to keep it running created high barriers to entry.

That’s the primary reason blockchains have moved to adopt “Proof-of-Stake [PoS].” Over here, those who wish to earn rewards do not have to compete against other miners in the ecosystem; all they can do is stake their part of crypto funds and wait to be chosen as a validator to reap the returns of their staking.

So, now the question arises: must anyone who owns cryptocurrency on the PoS blockchains want to take advantage of staking? But the truth is, there is some hesitation among the HODLers regarding their assets getting “locked up” in the process of staking.

This is where “liquid staking” comes into play and offers the best of both worlds. On the one hand, it allows the investors to stake their crypto, while on the other hand, it also allows them to use those staked funds in the other projects.

What is Liquid Staking?
It must be known that liquid staking protocols are at the forefront of the cryptocurrency staking economy. It has been revolutionizing liquidity access in the DeFi sector.

One of the significant benefits of liquid staking is to use your funds to invest in other projects while earning rewards or yields. Hence, it proves to be a solid foundation for activities like lending protocols and yield farming activities. Now, users can interact with multiple DeFi platforms and earn multiple rewards from one pool of crypto funds.

Why do we need Liquid Staking?
Liquid staking is also referred to as “soft staking.” As known above, it is a process of locking up your crypto funds to earn rewards while still having access to the funds you staked. It is a profitable way to put your idle crypto assets to work and earn a passive income.

Suppose your crypto is “locked” in the staking process, then you cannot do any of these — transfer, sell or use it in any way you want until a defined staking period ends. These periods depend on the coin you are staking and your chosen platform. Typically, the timeline for the staking period is somewhere from days to weeks or even months.

Also, you might have to pay the penalty for pulling off your funds from the staking process early, also known as “unstaking.” It usually takes weeks for your funds to be available when you unstake them. Hence, this is where liquid staking serves as a great alternative.

Yes, the funds remain in “escrow,” but it is not locked and remains inaccessible as in the case of plain staking or PoS staking. So, here you receive a tokenized version of staked funds where you are free to buy, sell, trade, or use them in the same way as your original funds.

Liquid staking does not have any lengthy unstaking process like the PoS staking. Hence, making the entire process much more convenient and fast. In simple terms, liquid staking offers you the best of both worlds — a passive income and access to your staked funds.

Benefits of Liquid Staking
Now that we have understood liquid staking let us explore its benefits one by one.

Yield Farming
The fundamental cornerstone of liquid staking is yield farming. It is when the trader locks up funds in one protocol and receives a wrapped or tokenized version of these funds.

And then, the trader would put the tokenized funds into another liquid staking protocol and, in return, receives a tokenized version of the funds staked. It is up to the trader to put the tokenized funds into another liquid staking protocol or not. Hence, you can yield on numerous assets by locking up assets simultaneously.

Crypto backed loans
Sometimes, it happens so that you being a crypto holder, might need access to extra fiat currency, and that too on a priority basis. Though, most investors are reluctant to sell off their assets.

So, what comes as a great alternative to them here? Yes, they use their existing crypto assets to get a crypto-backed loan by using the liquid staking protocol. With the help of tokenized versions of their assets, investors can easily convert them into fiat currency.

Quick access to crypto funds
This is another highlighting benefit of liquid staking against the PoS protocols. You will gain access to your funds quickly without much of a waiting period, lengthy unstaking process, or penalty on the same.

What’s next for Liquid Staking in the future?
Liquid staking solves the problem for most crypto enthusiasts who wish to stake by issuing tokens. Hence, this makes the blockchain ecosystem more secure, stable & easy to maintain. This will also enable stakers to become a good and innovative way for blockchains to achieve consensus.

Also, it is wise to say; that Liquid Staking enables the pure ethos of DeFi that empowers users with necessary financial tools and helps them build a better financial future.