Stader

Staking vs Liquid Staking: High Rewards, Low Risk & More!

Alok S K

Jan 19, 2023 • 8 min read

Staking vs Liquid Staking are two crucial concepts in the crypto world. Staking is a process in which a user locks their crypto assets in a smart-contract in order to support the blockchain’s operations and security.

Staking is only limited to a set of blockchains because staking can be done on blockchains with PoS (Proof of Stake) consensus mechanism like Ethereum, BNB chain, etc.

With the fast-phased growth of the Web3 space, there are many ways to stake your assets, out of which today we will be chipping into regular staking vs. liquid staking.

Also Read: Layer-2 blockchain

How Does Traditional Staking Work

In the realm of Staking vs Liquid Staking, traditional staking is only possible on PoS (Proof of Stake) chains like Ethereum, BNB chain, etc. Each PoS chain has its own rules, but the common thing is using their native coins for staking.

For example, you can only use ETH for staking in the Ethereum blockchain which is the native currency of the Ethereum blockchain network.

There are two ways a user can do traditional staking-

Setting a Validator-node
Delegating to a validator-node

1. Setting a Validator-node

Staking can be done by setting up a validator node where the node operators are verifying the transaction blocks.

Running a validator node is more of a technical task where the users need to have good hardware requirements and an uninterrupted internet connection. Also, there is a requirement for huge funds to setup a validator node.

For example, a user needs to have 10,000 BNB to run a BNB node and 32 ETH to run an Ethereum node.

Also Read: Proof Of Work Vs Proof Of Stake

2. Delegating to a validator-node

If you are not tech savvy or not interested in maintaining the hardware or you don’t have the minimum stake amount to run a validator node then the next best option is to delegate your assets to the existing validators.

Here you’re entrusting your assets to a third party validator who will then use these to validate the chain transactions. The rewards which you get for delegating your assets will be a bit lower than running a validator node since the validator will take some cutts from it.

Also Read: Total Value Locked

Benefits of Direct Staking

In the Staking vs Liquid Staking debate, direct staking comes with several benefits-

Self Custody: Here the asset ownership is within the user since there is no involvement of any other Dapps.
Supports the blockchain network: Locking the tokens for a fixed period of time helps the ecosystem to be more stable & secure.
Passive income/reward: Crypto investors can earn rewards without actually having to trade or manage their assets actively.

Challenges of Direct Staking

Slashing: Slashing occurs when a validator is not able validate a transaction. Under such circumstances, validators lose their rewards.
Requires a fixed amount of assets: To do direct staking, you need to at least have a minimum amount of crypto assets/ funds in the wallet.
Ill-Liquid: Once you stake your assets, those are ill-liquid assets since the funds are locked with the smart contract.
Hardware Requirements: In order to run a validator node, there is a requirement of high end hardwares and uninterrupted electricity & internet.
Validator Selection & lack of validator Diversification: You choose a single validator and have to stick with them. If the validator goes rogue, there is a risk of losing rewards and in some cases even the capital.
Rewards don’t auto compound: Staking rewards in simple staking don’t auto-compound.

Now, how can we define staking vs liquid staking? Here we go!

What is Liquid Staking?

As you have seen what normal staking does, it requires you to lock in your assets in the smart contract and it is illiquid. Whereas in liquid staking, when you stake your assets with a liquid staking protocol you will get a liquidity token which is pegged with the assets that you have staked and can easily be swapped in a DEX (Decentralized Exchange) for instant liquidity.

What Are Liquid Staking Derivatives?

Liquid Staking Derivatives (LSD) are innovative financial instruments in DeFi that offer users the ability to earn staking rewards on a proof-of-stake (PoS) blockchain without the need to lock up their assets in an illiquid state.

By staking their cryptocurrency, users receive a unique derivative token in return, which represents their staked assets along with the accumulating rewards.

These distinctive derivative tokens can be freely traded, employed in various DeFi applications, or utilized for additional yield-generating opportunities. This groundbreaking approach provides unparalleled liquidity and flexibility, surpassing the limitations of traditional staking. It empowers users to actively participate in network security and consensus while simultaneously retaining access to their funds for other purposes.

Also Read: Private Vs Public Key

How Does Liquid Staking Work?

Liquid staking protocols are different from other staking options. They let users stake any amount of an asset and unstake it without affecting the initial deposit. Instead, users receive a tokenized version of their crypto assets. These tokens have the same value as the original assets but may have a different emblem.

For example, if someone deposits 1 BNB into Stader, they will get one BNBx token representing their staked BNB. These tokens can be transferred, traded, or spent without affecting the initial deposit.

Users earn staking rewards on their deposits and generate more funds from their derivative tokens. If they want to withdraw their initial deposit, they must return an equivalent deposit valuation.

Liquid Crypto Staking Example

Using Stader Labs for liquid staking is a straightforward and effortless process. You can easily follow the steps below to get started:

Begin by visiting the official website of Stader Labs. Once there, you will need to connect your wallet to proceed further.
From the list of supported networks, choose the specific chain you wish to stake your tokens on. This ensures that your tokens are put to work on the network that aligns with your preferences.
After selecting the desired chain, enter the amount of tokens you intend to stake. Once you have confirmed the transaction, you can sit back and relax.
In just a matter of moments, you will find the liquid token conveniently appearing in your wallet. This instant availability allows you to make use of the token without delay.
Now comes the exciting part! Take pleasure in reaping the rewards from your staked tokens and utilize the liquid token on various DeFi activities including LP staking, lending & borrowing etc.

By following these steps, you can easily leverage the services provided by Stader Labs to engage in liquid staking and unlock a world of possibilities!

Benefits of Liquid Staking

Liquidity: The biggest advantage of liquid staking is liquidity, Compared to normal staking there is no locking up of assets here. You receive derivative tokens representing your staked assets with liquid staking, which you can trade or use elsewhere in the DeFi ecosystem.
Accessibility: For users who wish to participate in staking but need instant access to their assets, liquid staking lowers the barrier to entry. It makes staking easier and more adaptable.
Network Security and Decentralization: Liquid staking, by allowing more people to stake, has the potential to improve the security and decentralization of the blockchain network.
Increased Utility: Liquid staking derivative tokens can be utilized in a variety of DeFi applications, such as collateral for loans, yield farming, and liquidity provision in decentralized exchanges (DEXs). This increases the usefulness of staked assets.

Challenges of Liquid Staking

Deppeging risk: The price of the staked derivative/stake tokens may depeg from its original price. It might happen because of the lower market price of the new token.
Smart Contract Risk: Liquid staking protocols use smart contracts to deploy user funds into validators. Smart contracts are vulnerable to attacks. It would be a good practice to trust smart contracts that have been battle tested before deploying funds.
Centralization Risks: Some liquid staking systems may result in centralization, in which a few significant players control the staking landscape. This has the potential to undermine the decentralization ethos of blockchain networks.

Alos Read: EIP-1559

Liquid Staking vs Regular Staking

In the comparison of Staking vs Liquid Staking, liquid staking provides numerous advantages over regular staking. By adopting liquid staking, users can unlock the value of their staked assets and utilize them in various ways while still earning staking rewards. This increased flexibility enhances liquidity and enables investors to actively engage in other opportunities without forfeiting the benefits of staking.

Moreover, liquid staking eliminates the need for users to lock up their assets for an extended period, lowering the barriers to entry for staking. This accessibility attracts a wider range of participants, ultimately bolstering the security and decentralization of the network.

Overall, liquid staking presents a more versatile and inclusive approach to staking, empowering users with greater asset control and the potential to optimize their investments.

Should You Give Liquid Staking a try?

Liquid staking is a relatively new concept in the world of cryptocurrency and blockchain technology. It offers an innovative way to earn staking rewards while maintaining the flexibility to use your staked assets. Instead of locking up your tokens in a traditional staking contract, liquid staking allows you to receive a representation of your staked assets that can be freely traded or used in other DeFi protocols.

One of the main benefits of liquid staking is the ability to participate in staking rewards without sacrificing liquidity. This means that you can still access and use your staked assets for other purposes, such as trading or providing liquidity in decentralized exchanges. Liquid staking provides a flexible alternative to traditional staking, which typically requires a lock-up period.

In conclusion, if you are interested in earning staking rewards while maintaining flexibility and liquidity with your assets, liquid staking may be worth exploring.

Conclusion: Future of Liquid Staking

In conclusion, within the scope of Staking vs Liquid Staking, liquid staking is a promising innovation in the blockchain industry. It provides a way for token holders to participate in staking while still maintaining liquidity. As more projects adopt liquid staking and improve its efficiency and security, we can expect to see broader adoption and integration into the DeFi ecosystem.

Liquid staking has the potential to unlock new opportunities and reshape the staking landscape, offering greater flexibility and accessibility to token holders. The future of liquid staking is bright, and we are excited to witness its continued growth and evolution.

Also Read: Tradfi Vs Defi

FAQs on Staking vs Liquid Staking

Is liquid staking risky?

While liquid staking in Staking vs Liquid Staking mitigates certain risks associated with traditional staking, it introduces its own set of challenges. Users should be aware of potential smart contract vulnerabilities, regulatory considerations, and market fluctuations, which can impact the security and value of both staked and liquid tokens.

What is benefit of liquid staking?

In the comparison of Staking vs Liquid Staking, liquid staking offers several advantages compared to regular staking. The biggest advantage is liquidity, as there is no locking up of assets. With liquid staking, you receive derivative tokens representing your staked assets, which can be freely traded or used elsewhere in the DeFi ecosystem. Liquid staking also provides accessibility, network security and decentralization, and increased utility for staked assets.

What are the two types of staking?

The two types of staking are traditional staking and liquid staking. Traditional staking involves locking your assets in a smart contract, supporting the blockchain's operations, and earning staking rewards. On the other hand, liquid staking allows you to stake your assets with a liquid staking protocol and receive a liquidity token that represents your staked assets. This token can be easily traded or used for instant liquidity.

What is the downside of liquid staking?

While liquid staking offers advantages, there are some potential downsides to consider. One downside is the deppeging risk, where the price of the staked derivative tokens may depeg from their original price. Additionally, some liquid staking systems may result in centralization, where a few significant players control the staking landscape, potentially undermining the decentralization ethos of blockchain networks. It is important to weigh these factors when participating in liquid staking.