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

  • SEC and CFTC Update Crypto FAQs: Token Buybacks and Network Upgrades Not Necessarily Securities, CFTC Allows On-Chain Record Keeping

    On September 26, the U.S. Securities and Exchange Commission's Division of Corporation Finance released an updated FAQ on September 25, clarifying that token buybacks, network upgrades, and marketing statements do not automatically make crypto assets securities. SEC staff noted that announcing a buyback plan for an operational crypto network does not, by itself, make the associated tokens investment contracts; however, if the network is not operational and the issuer promotes the buyback as a source of returns for holders, it may be a different case. The FAQ also clarified that services provided once a crypto system is operational, aimed at securing, maintaining, improving, or enhancing the system or its functions, or promoting network effects, do not constitute managerial efforts under the Howey test. Marketing existing uses of the network typically does not create profit expectations, and statements about future functionalities do not either, provided there is no promotion of profit potential. This update reiterates that conclusions will still heavily depend on specific cases and are based on the SEC's interpretative release regarding the applicability of securities laws to crypto assets issued in March this year. On the same day, the Commodity Futures Trading Commission updated its crypto FAQ, allowing futures firms and clearinghouses to invest customer funds in tokenized versions of previously permitted assets, provided they meet investment and custody requirements. CFTC staff also indicated that regulated companies may use blockchain for record keeping but must still be able to provide records if the blockchain or its block explorer is non-operational. These updates come as the CLARITY Act failed to advance in the Senate, with regulators continuing to push forward with the crypto regulatory framework based on existing laws.

  • BTC Surpasses $84,000

    Market data shows that BTC has surpassed $84,000, currently priced at $84,004, with a 24-hour decline of 0.25%. The market is experiencing significant volatility, so please ensure proper risk management.

  • BTC Falls Below $84,000

    Market data shows that BTC has fallen below $84,000, currently priced at $83,988.06, with a 24-hour increase of 0.52%. The market is experiencing significant volatility, so please ensure proper risk management.

  • ETH Falls Below $2700

    Market data shows that ETH has fallen below $2700, currently priced at $2699.7, with a 24-hour increase of 1.95%. The market is experiencing significant volatility, so please ensure proper risk management.

  • BTC Surpasses $85,000

    Market data shows that BTC has surpassed $85,000, currently priced at $85,000.02, with a 24-hour increase of 1.72%. The market is highly volatile, so please ensure proper risk management.

  • ETH Surpasses $2700

    Market data shows that ETH has surpassed $2700, currently priced at $2700.14, with a 24-hour increase of 1.23%. The market is experiencing significant fluctuations, so please ensure proper risk management.

  • Yushu Technology's Wang Xingxing: Key to Breakthrough in Embodied Intelligence Lies in Solving Millimeter-Level Error Issues

    On September 25, the 5th Global Digital Trade Expo was held in Hangzhou, where Wang Xingxing, founder of Yushu Technology, delivered a keynote speech titled "From Machinery to Intelligence - The Evolutionary Theory of Embodied Future." Wang stated that the embodied intelligence industry may soon experience a critical breakthrough similar to that of ChatGPT. He believes that when robots can complete approximately 80% of tasks through voice interaction and embodied intelligence capabilities in about 80% of unfamiliar environments, the industry will enter a critical phase of large-scale application. He pointed out that the ability for robots to understand and execute specific tasks based on voice commands has already made breakthroughs last year, but the industry still faces a core technological bottleneck, namely the precise matching issue between artificial intelligence models and the real physical world. Wang noted that currently, robots still have a few millimeters of error during actual operations, which limits their stability and reliability in complex environments. "In the future, whoever can solve this problem will fundamentally resolve the issues with robots."

  • Swissquote Analyst Warns AI Narrative is a Core Pillar of US Stocks, Potential Break Could Trigger Significant Correction

    On September 25, Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, stated that broad market indices and retirement funds are now deeply tied to the AI wave, with technology stocks accounting for about 40% of the S&P 500 index. She pointed out that the market capitalization weight of just three chip manufacturers makes up over 25% of the MSCI Emerging Markets Index. Ozkardeskaya indicated that AI has become the 'core pillar' of the market, and this pillar 'must not show any cracks.' She believes that, in the short term, the US stock market will continue to be supported by seasonal factors, and the current market uptrend may extend until the end of the year. However, she also warned that the worst-case scenario would be a shake in the investment logic surrounding AI, which could undermine market confidence in the AI narrative, potentially triggering a significant market correction.

  • U.S. Stock Index Futures Turn Positive; Chip Stocks Rally in After-Hours Trading

    On September 25, U.S. stock index futures rose into positive territory, with Nasdaq futures up 0.36%. In after-hours trading, storage and semiconductor stocks saw widespread gains, with AMD, Intel, and SanDisk all rising by 2%.

  • NEAR Partners with Ondo to Launch 20 Tokenized US Stocks and ETFs

    On September 25, according to Cryptonews, NEAR Protocol and Ondo Finance have launched trading for tokenized US stocks and ETFs on near.com, with an initial offering of 20 assets including Nvidia, Tesla, Apple, Microsoft, Amazon, as well as SPY and QQQ. Eligible users can deposit using over 30 supported stablecoins or other crypto assets, with NEAR Intents serving as the cross-chain distribution layer, allowing similar assets to be routed to connected wallets and DeFi protocols in the future. Purchases are settled in USDon, which is backed 1:1 by US dollars in brokerage accounts, and completed via atomic swaps. This product is not available to US persons; the overall Ondo platform has launched over 100 assets, with NEAR initially offering only one-fifth of that.

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