Liquid Staking: Everything You Need To Know

If you have been involved in the cryptocurrency space then you have probably heard of staking. But have you heard about liquid staking? 

This novel technology has been making waves in the industry and rightfully so. That is why in this article I will be covering all aspects of liquid staking so that you can navigate the space with ease.

So without further ado, let’s jump right.

What is liquid staking?

Simply put, liquid staking is the process of locking up funds in exchange for rewards. Essentially, the locked funds are placed into escrow then a token is issued in return. This creates a derivative that can be traded on the open market. 

Moreover, this new token can be redeemed for the original funds at any time, there is no lockup period. This provides a more liquid solution when compared to traditional staking. 

Liquid staking benefits

Increased returns – the main benefit of liquid staking is that the issued token can be used for additional rewards. For instance, they can be lent out or used as collateral in decentralized finance platforms.

Ultimately, they provide an opportunity to increase the APR on your cryptocurrency while earning a yield on your staked asset.

More liquid- liquid staking allows users to quickly access their funds. In contrast to traditional staking, there is not a lengthy unlock period or penalties associated with early withdrawal.

This is extremely important in the cryptocurrency market with huge price swings. Users can withdraw at any time to combat market turbulence.

Enhanced network security – liquid staking incentivizes validators to secure the network. In essence, they are compensated for verifying transactions.

With the liquid staking process, you delegate your tokens to a chosen validator. Users can pick validators based on their efficiency and uptime while also boycotting bad actors.

Moreover, the cost of attacking the network is directly proportional to the number of tokens staked. Therefore, the more cryptocurrency locked in liquid staking contracts the more secure the network.

Liquid staking risks

Slashing – if the validators don’t perform the required tasks to secure the network then a portion of their staked funds are seized. This in turn affects liquid stakers who delegated their cryptocurrency to them.

Liquidation – liquid staking uses the locked funds as collateral. Therefore, there is an inherent risk in yield farming and lending. Ultimately, if the value of the issued tokens drops below the collateralization requirements you can get liquidated.

Hacks – this factor is no surprise. Hacks are rampant in the space. Smart contract platforms can be exploited if there are bugs in the code. Not to mention, liquid staking adds a layer of complexity that adds additional risk.

On a side note, that is why it is vital to use a hardware wallet. The one that I recommend is the Ledger Nano XClick here to check out my review.

Liquid staking vs staking

As mentioned previously, liquid staking allows users access to their funds while generating rewards. On the other hand, with staking the funds are locked in a smart contract. The lockup period can range anyone from a few days to a few months.

The benefit of illiquid staking is that you can validate transactions yourself or delegate directly to a chosen validator without a smart contract intermediary. Moreover, there is no added risk of the liquid staking contract.

Best liquid staking platforms

Lido – founded in 2020 this Ethereum-based platform is a juggernaut in the industry. With over $6 billion in total value locked up, this platform allows users to stake various cryptocurrencies without the dreaded lock-up period.

Users can stake their proof of stake assets and receive a 1:1 token in return. The user interface is intuitive and it has gone through multiple audits so you can be ensured that it has high security.

Additionally, this platform utilizes a DAO. Essentially, the decision-making and development of the project are determined by a decentralized network of individuals.

This has created a democratic platform without the use of intermediaries. Overall, Lido is a fantastic platform to stake your cryptocurrency.

Marinade Finance – this is a liquid staking platform for Solana. Like Lido, it is extremely popular with over $280 million in total value locked.

It utilizes the mSOL token that can be traded on the open market and used in various DeFi protocols for additional yield. Not only that, but the fees for using the platform are extremely low at just 2%.

Moreover, this platform provides the option to delegate Solana to over 300 different validators. Ultimately, this has contributed to the security and decentralization of the network.

If you are looking for the best liquid staking platform for Solana then Marinade Finance is your best bet.

If you want to view this article in a more visual format then please check out my video below:

Final thoughts

Overall, liquid staking provides a fantastic opportunity to earn a yield on your cryptocurrency assets. Moreover, it has the added benefit of being easily accessible while increasing the potential returns.

However, it is not without its risks. From hacks to slashing it is important to do your research. Although this technology is in its infancy it will only improve with time. This makes me optimistic about the future. I hope you found this article useful and thanks for reading it.

Want to learn about crypto bounties? Click here to read my previous article.