Liquid staking, which allows cryptocurrency users to stake any amount of Ethereum without locking up their stake and to effectively unstake their ETH without the requirement of transactions being enabled, has been gaining popularity among investors in recent days.
Considered a ‘breakthrough crypto technology,” liquid staking combines the benefits of staking and DeFi (decentralized finance,” according to Polkadotters | Kusama & Polkadot validators.
Tokenized stakes, also known as staking derivatives, can be traded freely among users, locations, and even blockchains.
They can be traded for multiple different tokens on a decentralized exchange (DEX) like Uniswap, Raydium, and Curve, but users will need to return the received amount of stake tokens to retrieve their original token deposit once they are done.
Proof-of-stake (PoS) has become a popular standard for securing decentralized networks. PoS has many advantages over proof-of-work (PoW), including faster block times, lower operating costs, and lower ecological impact.
In liquid staking, the tokens still remain in escrow, but the opportunity costs are reduced. The advantage? The owners of the assets still own the governance rights to those assets and can simultaneously use their assets and earn staking rewards as well.
Liquid staking manages to seamlessly balance risk, reward, and convenience, allowing users to trade staked tokens without the firm requirements that prohibit stakers on the Ethereum network.
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Liquid staking can use staked assets as collateral in other financial applications. This open up possibilities in the design space.
Instead of having lock-staked assets on a blockchain, tokenized staking positions could be integrated in other protocols that enable stakers to manage their risk exposure and to earn additional returns on their staked assets.
Marinade and Lido are examples of liquid staking services used by investors. Lido is useful for all types of ETH holders. Small wallets can stake any amount of Ethereum they wish, with the ability to unstake at any time.
Large crypto holders can use liquid staking services to hedge their funds against ETH volatility. Basically, liquid staking allows for all parties to stake without the requirement of maintaining complex staking infrastructure.
With Marinade, investors can avoid the unstaking period and keep their investment liquid. Marinade uses the algorithmic strategy which delegates to hundreds of validators to make the Solana blockchain more robust, secure, and decentralized.
“Liquid staking solutions like Marinade help increase decentralization while creating new opportunities for users through staking derivatives,” said Anatoly Yakovenko, CEO of Solana Labs.
Investors should however take note of risks that are associated with liquid staking, including market risk, liquidity risk, lockup periods, rewards duration, flash loan attacks, validator risk, validator costs, DeFi rug pulls and impermanent loss or theft.