Cointime

Cointime

Download App
iOS & Android

What Is Liquid Staking?

Staking is a way to help secure proof-of-stake blockchain networks like Ethereum. Network participants can run a validator node by putting tokens “at stake,” which can then be “slashed” (taken away as a penalty) if the node commits any malicious actions or is unreliable. While there are many solo node operators, anyone can stake tokens through staking as a service (SaaS) provider—exposing them to the same risks and giving them the opportunity to share in rewards. However, staked tokens cannot be transacted or used as collateral to earn yield across the DeFi ecosystem.

Liquid staking service providers solve this liquidity problem by minting a new token—representing a claim on the underlying staked asset—which can then be traded or deposited in DeFi protocols. For example, a user could deposit ETH to the Lido staking pool and receive stETH (staked ETH) tokens in return, then deposit the stETH to Aave to earn yield. Essentially, liquid staking builds upon existing staking systems by unlocking liquidity for staked tokens.

In this post, we’ll explore exactly what liquid staking is, the opportunities and risks it brings, and how Chainlink underpins the use of liquid staking tokens throughout Web3.

What Is Staking?

Staking is the locking up of cryptocurrency tokens as collateral to help secure a network or smart contract, or to achieve a specific result.

Most broadly, staking is a cryptoeconomic model that incentivizes the correct behavior of network participants using penalties and rewards in order to strengthen its underlying security. It is used by a range of Web3 protocols, including proof-of-stake blockchain networks like Ethereum and individual DeFi applications like MakerDAO.

What Is Liquid Staking?

Liquid staking provides all of the benefits of traditional staking services while unlocking the value of staked assets for use as collateral across the DeFi ecosystem.

Liquid staking providers take user deposits, stake those tokens on behalf of users, and provide them with a receipt in the form of a new token, which is redeemable for the tokens they staked (plus/minus a share of rewards and penalties). This new token can also be traded or used as collateral in DeFi protocols, thereby unlocking the liquidity of the staked assets.

Traditional Staking vs. Liquid Staking

Benefits of Liquid Staking

Unlocked Liquidity

Tokens staked in a network such as Ethereum are locked and cannot be traded or used as collateral. Liquid staking tokens unlock the inherent value that staked tokens hold and enable them to be traded and used as collateral in DeFi protocols.

Composability in DeFi

By representing receipts for staked assets as tokens, they can be used across the DeFi ecosystem in a wide variety of protocols, such as lending pools and prediction markets.

Reward Opportunities

Traditional staking provides users with the opportunity to receive rewards for verifying transactions. Liquid staking enables users to continue receiving these rewards while also earning additional yield across various DeFi protocols.

Outsource Infrastructure Requirements

Liquid staking providers enable anyone to share in the rewards of staking without having to maintain complex staking infrastructure. For example, even if a user doesn’t have the minimum 32 ETH required to be a solo validator in the Ethereum network, liquid staking enables them to still share in block rewards.

Risks and Limitations of Liquid Staking

Slashing

Users of liquid staking services are essentially outsourcing the maintenance of running a validator node. This fully exposes them to having their funds slashed if the service provider acts maliciously or unreliably.

Exploits

Depositing tokens to a liquid staking service provider places those funds at risk if a node operator’s private keys are compromised or the protocol has any smart contract vulnerabilities that lead to an exploit.

Secondary Market Volatility

The price of liquid staking tokens is not pegged to the underlying asset they represent a claim on. While they may trade at the same price or at a very slight discount most of the time, they can drop below the price of the underlying asset during liquidity crunches or when unexpected events occur. Because the trading volume for staked tokens is generally lower than that of the underlying assets, market shocks can also have an outsized impact on the volatility of staked tokens.

Liquid Staking Tokens and Protocols

Overview of a liquid staking protocol that also shows how LSTs can be used in external DeFi projects.

Liquid staking protocols are the service providers and liquid staking tokens (LSTs) are the tokens that represent a claim on the staked assets.

Lido is currently the largest liquid staking protocol, with over $12.7B TVL as of 19 April 2023. Users can stake their tokens and receive daily rewards without having them locked or having to maintain their own infrastructure. It offers stETH (staked ETH) LSTs on Ethereum, stMATIC on Polygon, and stSOL on Solana.

Rocket Pool is another popular liquid staking protocol on Ethereum, with over $1.4B TVL. There is no minimum deposit requirement to access Rocket Pool’s rETH LSTs. However, to operate a minipool validator, users must deposit a minimum of 8 ETH plus 2.4 ETH worth of RPL.

Centralized vs. Decentralized Liquid Staking

Along with decentralized liquid staking protocols like Lido and Rocket Pool, centralized providers such as an exchange can also offer liquid staking services to their customers. The key difference is that decentralized services are non-custodial, while centralized services will be in full control of users’ staked assets. While decentralized services are vulnerable to smart contract exploits, centralized services come with their own risks.

Chainlink Price Feeds Enable Secure DeFi Markets Around LSTs

Chainlink Price Feeds publish highly accurate and reliable data for various LSTs, which enables DeFi protocols to accept them as collateral. For example, there are various stETH/USD and stETH/ETH Price Feeds across Arbitrum, Ethereum, and Optimism. Ultimately this is critical for deepening the liquidity of LSTs and helping secure the protocols they’re traded on, which makes Chainlink critical infrastructure for liquid staking throughout Web3.

Disclaimer: This post is for informational purposes only and contains a general overview of staking and liquid staking protocols within Web3. There may be other risks not covered in this article, and any use of liquid staking should be done at your own discretion.

Read more: https://blog.chain.link/liquid-staking/

DeFi Staking
Comments

All Comments

Recommended for you

  • U.S. July Nonfarm Payrolls Fall by 23,000, Missing Market Expectations

    On August 7, U.S. nonfarm payrolls decreased by 23,000 in July, compared with market expectations of an increase of 80,000, and the previous value was an increase of 57,000.

  • US May and June Nonfarm Payroll Additions Revised Down by 103,000 Combined

    On August 7, the US Bureau of Labor Statistics: May nonfarm payroll additions were revised down from 129,000 to 63,000; June nonfarm payroll additions were revised down from 57,000 to 20,000. After the revisions, the combined additions for May and June were 103,000 lower than previously reported.

  • U.S. Rate Futures Market Sees Lower Odds of Fed September Hike

    On August 7, the probability of a Fed rate hike in September as priced by U.S. interest rate futures declined.

  • New York Gold Futures Top $4,400 per Ounce

    New York gold futures topped $4,400 per ounce, up 2.36% on the day.

  • Japan Finance Minister: FX Market Affected by Moves Not Driven by Actual Demand

    Japanese Finance Minister Satsuki Katayama said she and U.S. Treasury Secretary Bessent agreed that the foreign exchange market has been affected by moves not driven by actual demand.

  • BTC Breaks Through $65,000

    Market data shows BTC has broken through $65,000, currently reported at $65,007.44, with a 24-hour increase of 0.6%. The market is highly volatile, please exercise risk control.

  • Brent Crude Drops 2.00% Intraday to $81.07/Barrel

    Brent crude oil fell 2.00% during the day, now at $81.07 per barrel. (Jin Shi)

  • Trump: Data Centers May Be More Important Than Oil

    August 7 news, U.S. President Trump said in an interview with Punchbowl News, "I saw the other day that Texas seems to be opposed to building data centers. I think that's a mistake. I'm not taking a position—I just think it's a mistake, because there are other communities that want to build data centers. When a community is willing to accept data centers, it means a lot of money will flow into that community. I don't think they're ugly. Some of the data centers I've seen are the most incredible buildings I've ever seen. They are very important to the economy. If Texas says no to data centers, that's a mistake, because data centers may be more important than oil."

  • Trump to Meet with Mining Executives

    On August 7, according to CCTV International News, US President Trump will convene executives from some of the world's largest mining companies at the US State Department on August 7 local time, in an effort to take action to 'secure critical mineral supplies for the US and its allies.' Reuters reported that the US urgently needs critical minerals to replenish weapons inventories depleted during the war against Iran. During the more than five-month war with Iran, the US military expended large quantities of precision-guided missiles and air defense interceptors. US defense officials and lawmakers have warned that given existing production capacity constraints, replenishing some stockpiles could take years—although the Trump administration has denied reports of a so-called 'severe shortage of ammunition stockpiles.' According to Pentagon officials and defense companies, supplies of minerals such as rare earths, tungsten, germanium, and scandium are essential for manufacturing precision-guided missiles, fighter jets, armored vehicles, infrared sensors, and other advanced weapons systems. Expected attendees include industry giants such as global mining giant Rio Tinto Group, Australia's BHP, US Freeport-McMoRan, US Mountain Pass Materials, US Rare Earths, US Energy Fuels, and Canada's Metals Company. According to sources, the Trump administration plans to announce multiple deals and memorandums of understanding.

  • US Regulators Systematically Review Chinese AI Firms' Third-Country Computing Power Leasing

    August 7 news, according to Bloomberg, people familiar with the matter revealed that the U.S. government department responsible for investigating chip export control violations is reviewing Chinese AI companies' leasing of computing power in third countries to obtain Nvidia advanced chips.

Daily Must-Read

Popular Activities

RaveDAO at Terra Solis by Tomorrowland: A Female-Led Techno Night Where Web3 Culture Converges

RaveDAO at Terra Solis by Tomorrowland: A Female-Led Techno Night Where Web3 Culture Converges

April 30 - April 30
Dubai

Popular Tags

Cointime
News
Contents
RSS
Company