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- Staking locks up cryptocurrency tokens as collateral to secure a network or achieve a specific result.
- Liquid staking allows staked assets to be used as collateral across the DeFi ecosystem through tokenization.
Liquid Staking: Unlocking Liquidity for Staked Tokens
Liquid staking is a new concept that solves the liquidity problem of staked tokens. Staking locks up tokens, making them unable to be transacted or used as collateral to earn yield in DeFi. However, liquid staking service providers mint a new token that represents a claim on the staked asset, which can be traded or deposited in DeFi protocols. This tokenization unlocks liquidity for staked tokens and creates new opportunities for users.
Liquid staking protocols unlock the liquidity of tokens staked in a validator node by minting new liquid staking tokens (LSTs) representing a claim on the staked asset.
Discover how liquid staking works, the risks, benefits, and more👇https://t.co/YomRIwMJeD
— Chainlink (@chainlink) May 1, 2023
Traditional vs. Liquid Staking
Traditional staking provides cryptoeconomic security to a network, and stakers receive rewards for verifying transactions. However, staked tokens are locked and have no liquidity. Liquid staking provides the same security and rewards, with the added benefit of unlocking liquidity for staked assets. Liquid staking is available through a service provider, while traditional staking can be done individually, through staking as a service, pooled staking, or centralized exchanges.
Benefits of Liquid Staking
Liquid staking unlocks liquidity for staked tokens, allowing them to be used as collateral in DeFi protocols. This opens up new opportunities for yield and composability in DeFi. Liquid staking also allows anyone to share in the rewards of staking without having to maintain complex staking infrastructure, and it enables users to continue receiving rewards while also earning additional yield across various DeFi protocols.
Risks and Limitations of Liquid Staking
Liquid staking exposes users to the risk of having their funds slashed if the service provider acts maliciously or unreliably. Depositing tokens with a liquid staking service provider also places those funds at risk if there are any smart contract vulnerabilities that lead to an exploit. Additionally, the price of liquid staking tokens is not pegged to the underlying asset, which can result in secondary market volatility.
Liquid Staking Tokens and Protocols
Liquid staking protocols are the service providers that offer liquid staking, and liquid staking tokens (LSTs) represent a claim on the staked assets. Lido is the largest liquid staking protocol, with over $12.7B TVL as of 19 April 2023. 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.
Centralized vs. Decentralized Liquid Staking
Decentralized liquid staking protocols, such as Lido and Rocket Pool, are non-custodial and have smart contract vulnerabilities. On the other hand, centralized providers offer liquid staking services to their customers and are in full control of users’ staked assets. Each has its own risks and benefits.
Chainlink Price Feeds and LSTs
Chainlink Price Feeds publish accurate and reliable data for various LSTs, which enables DeFi protocols to accept them as collateral. This is critical for deepening the liquidity of LSTs and securing the protocols they’re traded on, making Chainlink a critical infrastructure for liquid staking throughout Web3.
