Staking is gaining a lot of traction as a way to earn passive income and grow your crypto asset portfolio.
Crypto staking is a process by which investors can earn rewards for holding onto their digital assets for a set period of time. Staking helps a PoS network validate transactions in a blockchain and assists with maintaining the security of the relevant networks.
This process allows investors to lock up their assets and earn a return on their investment without having to sell their assets.
But this involves risks in the form of a “vesting” period, meaning you can’t transfer your crypto for a certain period of time. Once funds are locked up on the staking protocol, it is impossible to trade, sell, or move any assets. In addition to lock-up periods, there is market risk and liquidity risk.
Liquid staking is the solution to this!
What is Liquid Staking?
Liquid staking is a new way to earn rewards on your favourite cryptocurrency without having to lock up your funds for a lengthy period of time. Simply put, you can earn rewards with liquid staking by holding your coins in a participating wallet.
It is an especially powerful tool as it unlocks the capital currently staked across the entire shared infrastructure and allows users to pursue other opportunities without jeopardising the network’s security.
Large holders may utilise liquid staking services to hedge their funds against market volatility.
Projects like Lido, which is a multi-chain staking provider for some of the largest blockchains, have figured out a way for users to delegate to their validator nodes, earning stake rewards. If a user stakes ETH, for example they get another token in exchange. In this case, they will be provided with liquid staking tokens like stETH and stSOL.
What happens here is you give your crypto assets to these liquid service providers, who issue a separate token to you representing the investor’s claims to their staked assets, as well as any rewards that have accrued. These tokens can then be used on other platforms in DeFi.
In liquid staking, you basically get to earn rewards without having to sacrifice your liquidity.
Benefits of Liquid Staking
Liquid staking is a new way to earn rewards on your favourite cryptocurrency platforms. With liquid staking, you can earn rewards without having to lock up your tokens for a set period of time. This means you can trade or use your tokens as you please while still earning rewards.
It allows owners to continue using their locked assets to invest and earn returns on other activities. This means those who have staked their crypto can still use them in other activities, such as DeFi, to earn returns.
Usually, when staking their crypto assets, users need a specific account of tokens in order to be able to make the staking; these tokens are locked up for a specific amount of time and are not tradable. Therefore, after locking the funds and receiving the liquidised version of the assets in the form of tokens, investors are also able to then convert them to fiat currencies.
Liquid staking also offers other benefits, such as increased security and flexibility. With liquid staking, your tokens are always accessible to you and are not subject to the same risks as they would be if they were locked up. This means you can always sell or trade your tokens if you need to without worrying about losing out on rewards.
Overall, liquid staking is a great way to earn rewards on your crypto assets without sacrificing flexibility or security.
Continue to Earn Yield Without Freezing Assets
The ability to stake one’s assets and earn a yield without having to freeze them in a liquid staking solution is a powerful tool that allows crypto investors to continue to earn a return on their investment while still being able to access and use their assets.
Besides earning staking returns, users are also able to receive further returns using these liquid tokens. Solutions like Lido, Ankr, Liquidstake, pStake, Rocketpool, Stafi, Stakewise, and others offer liquidity staking services.
For instance, when it comes to ETH when staking your coins through these services, you get the representative ETH token which enables users to keep their ETH liquid, allowing them to move their ETH anywhere they want – all while earning the ETH stake rewards.
Users who have staked their ETH on an Ethereum Deposit Contract in order to provide security for the network meanwhile cannot unstake its ETH until enabled by the network.
This way, liquid staking solutions provide the best of both worlds by allowing investors to earn a yield on their assets while still remaining liquid.
This type of solution is especially useful for those who want to stake their assets for long-term investment but don’t want to miss out on opportunities that may arise in the meantime.
Compound Your Yield
Liquid staking offers benefits to stakeholders in terms of instant liquidity, the composability of the staked assets, and distributing stakes among several validators. It is a great way to increase your yield on your investment. By staking your coins in a pool, you can receive rewards based on the amount of coins you have staked. The more coins you stake, the higher the rewards you can earn.
This makes liquid staking an attractive option to compound your yield. By reinvesting your rewards back into the pool, you can earn even more rewards. This can help you earn a higher return on your investment over time.
For instance: With pSTAKE, you can safely stake your Proof-of-Stake (PoS) assets, participate in protocol improvements and security measures to earn stake rewards, and earn the tokens that are the base for the staking stakes (stkASSETs), which you can use to research further earning opportunities in the entire DeFi.
These representative tokens can then be used across the DeFi ecosystem to earn DeFi yields, for example, in DEXs and on loan-and-borrow protocols, with underlying assets being staking for network security and earning stake rewards. This means that the $stkATOM tokens can be floating in DeFi protocols on Ethereum while the underlying $ATOM token is being staked and securing the network.
Risks of Liquid Staking
Liquid staking has a lot of potential. However, there are also some risks associated with it. One of the biggest risks is that it is still relatively new and largely untested. There have been some issues with liquid staking platforms in the past, and more issues could arise in the future.
Additionally, liquid staking still involves cryptocurrency, which is itself a volatile and risky asset. If the price of the cryptocurrency falls, the value of the stake will also fall.
Not to mention, the risk commonly associated with staking applies here, too, which is that tokens may be taken away from the blockchain (slashed) if the individual validator has faulty hardware configurations or a substantial downtime.
Finally, liquid staking can be complex and confusing for some users. If users don’t understand how it works, they could lose their stake or not get the full return on their investment.
As we stated above, staking is an excellent option if you are looking for a way to earn passive income. It is also a great way to get started in the world of cryptocurrency if you are new to the space.
Liquid staking here allows the ability to put tokens with the liquid staking provider, earning an APR for the delegator, as well as being able to use the liquid staking tokens that you get in order to get extra returns. It also has broader implications, like drawing in other prospective stakeholders to join the network.
But, it is not without its issues either — from smart contract risk and theft to rewards duration and market volatility.
Overall, if you are looking for a way to maximise your earnings, liquid staking is an excellent option. By staking your coins and reinvesting your rewards, you can earn a higher return on your investment.