What is Liquid Staking?
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#DeFi
#Basic Concepts
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1. What is Liquid Staking?
In traditional staking models, when holders stake their cryptocurrency, their assets are locked in the network to support its security and operation. This means that holders cannot immediately access or use these assets until they are unstaked.
Liquid staking is a process of tokenizing staked assets. By introducing new protocols, liquid staking allows holders of staked assets to participate in both staking and liquidity markets simultaneously. This liquidity can help stakers earn additional returns while maintaining their stake in the original network.
2. What are Liquid Staking Derivatives (LSD)?
Liquid Staking Derivatives (LSD) refer to the equivalent equity tokens received by users participating in liquid staking. These tokens represent the staked assets of the participants and can be used for trading, transferring, and other operations. LSD helps participants earn additional returns while enjoying staking rewards.
Similar to other ERC20 tokens, LSDs are fungible and tradable tokens. Typically, liquid staking derivatives are also referred to as Liquid Staking Tokens (LST), and the two terms represent the same concept.
3. Differences Between Liquid Staking and Re-staking
The liquid staking protocols, led by projects like Lido, have rapidly developed, with Lido's market share exceeding 75% at its peak, which raises potential centralization risks. To ensure the decentralization and security of blockchain networks, two main solutions have emerged, one of which is re-staking.
Re-staking refers to the practice of staking assets again after the initial staking. It provides stakers with an additional way to earn rewards while enhancing the network's security and stability. To address liquidity issues in re-staking, Liquid Restaked Tokens (LRT) have been introduced. If you want to learn more about re-staking, you can read "What is Liquid Re-staking" for further information.
4. How Liquid Staking Works
4.1 Choose an Asset and Platform: Participants select the platform and assets they wish to use for liquid staking.
4.2 Provide Liquidity: Participants stake their assets into the corresponding liquidity pool, usually requiring paired deposits to form a trading pair.
4.3 Earn Rewards: Participants earn staking rewards, which typically come from transaction fees, mining rewards, or other incentives designed by the protocol. Rewards are distributed based on the liquidity provided and staking duration.
4.4 Risk Management: Participants must manage market risks associated with their staked assets, such as price fluctuations and potential smart contract risks.
4.5 Withdraw Staking: Participants can choose to withdraw their liquid assets when needed.
5. Advantages and Disadvantages of Liquid Staking
5.1 Advantages
Enhanced Liquidity: Liquid staking provides more flexible and efficient liquidity, allowing participants to use LSD (Liquid Staking Derivatives) for investments in various DeFi protocols, thereby improving capital utilization.
Diversified Income: Users can redeploy LSD in DeFi protocols to generate additional income beyond staking rewards, diversifying and maximizing personal earnings.
Flexibility: Liquid staking typically offers greater flexibility, enabling stakers to withdraw assets or adjust staking strategies as needed to adapt to market changes and personal requirements.
5.2 Disadvantages
Higher Threshold: Liquid staking requires participants to have a certain level of experience and operational skills, which can be a learning curve for newcomers.
Contract Risk: Smart contracts may have vulnerabilities or be subject to attacks, potentially putting stakers' assets at risk.
Price Decoupling: The price of LST (Liquid Staking Tokens) may not be directly tied to the underlying asset, and unexpected market fluctuations could cause it to fall below the asset's value.
6. Representative Projects
Currently, the liquidity staking market share is mainly concentrated in the Ethereum and Solana networks. According to the latest DeFiLlama data, the top ten by TVL (Total Value Locked) are Lido, Rocket Pool, Binance, Jito, Mantle, Marinade, Coinbase, Sanctum, Frax Finance, and StakeStone.
6.1 Lido（LDO）
Lido is a liquid staking protocol that supports multiple PoS networks. It allows users to stake their tokens without locking up their assets or maintaining hardware or software infrastructure, while still participating in on-chain activities (such as lending, yield farming, etc.). Lido enables users to stake any amount of tokens and receive daily staking rewards.
As of now, Lido remains the DeFi protocol with the highest TVL.
6.2 Jito（JTO）
Jito is a liquid staking protocol launched by Jito Lab on the Solana network, currently the DeFi protocol with the highest TVL on Solana. Unlike other existing liquid staking protocols, Jito offers stakers not only staking rewards but also additional MEV (Maximum Extractable Value) rewards.
6.3 Babylon
The Babylon protocol is a Bitcoin staking protocol that allows users to lock BTC on the Bitcoin network to provide security for other PoS chains, while earning staking rewards. Babylon leverages Bitcoin's unique security and decentralization features to provide economic security for other PoS chains, facilitating the rapid launch of other projects.
The Babylon project is currently in the testing phase, and the mainnet has not yet been launched or issued tokens.
7. How to Participate in Liquid Staking
Liquid staking attracts users by allowing them to cancel staking at any time and earn multiple rewards. When participating in liquid staking on a project's website, users should be cautious of phishing sites to avoid asset theft and other issues. As the number of participants in liquid staking increases, the rewards tend to decrease, which can be disadvantageous for later participants.
For most users, holding a project's tokens and profiting from token price fluctuations is also a good option. MEXC offers a wide range of spot and futures tokens with over 2,500 trading pairs to meet your trading needs.
Here's how to buy LDO tokens as an example. Open and log in to the MEXC app, search for [LDO] in the homepage search bar, select [Spot] to enter the K-line page, then click [Buy] to access the trading page. Choose your order type, enter the amount, and click [Buy LDO] to complete the purchase.
Disclaimer: This information does not provide advice on investment, taxation, legal, financial, accounting, consultation, or any other related services, nor does it constitute advice to purchase, sell, or hold any assets. MEXC Learn provides information for reference purposes only and does not constitute investment advice. Please ensure you fully understand the risks involved and exercise caution when investing. The platform is not responsible for users' investment decisions.