Staking
Staking is a method used to enhance the security of proof-of-stake blockchain networks such as Ethereum. Participants in the network can operate a validator node by putting tokens "at stake," which may be subject to being "slashed" (removed as a penalty) if the node engages in any malicious behavior or proves to be unreliable. While there are numerous individual node operators, anyone can stake tokens through a staking as a service (SaaS) provider, which exposes them to similar risks and allows them to partake in rewards. Nonetheless, staked tokens are not tradable or usable as collateral to generate yield within the DeFi ecosystem.
Liquid staking service providers address this issue of liquidity by creating a new token that represents a claim on the staked asset, enabling it to be traded or deposited in DeFi protocols. For instance, a user could deposit ETH into the Lido staking pool and receive stETH (staked ETH) tokens in exchange, then proceed to deposit the stETH into Aave to earn yield. Essentially, liquid staking expands upon existing staking systems by unlocking liquidity for staked tokens.
This article will delve into the concept of liquid staking, the opportunities and risks associated with it, and how Chainlink supports the utilization of liquid staking tokens across the Web3 ecosystem.
What is Liquid Staking?
Companies offering liquid staking services receive deposits from users, stake the tokens on behalf of the users, and provide a new token as evidence, which can be traded for the initial staked tokens (factoring in rewards and penalties). This fresh token is also tradeable and can function as collateral in decentralized finance (DeFi) platforms, enhancing the liquidity of the staked assets.
Benefits of Liquid Staking
Enhanced Liquidity Access
When tokens are staked within a network like Ethereum, they become inaccessible for trading or collateral use. Liquid staking tokens, however, unlock the inherent value of these staked tokens, allowing them to be traded and utilized as collateral within DeFi protocols.
Interoperability in DeFi
By converting receipts of staked assets into tokens, they become compatible with a wide range of protocols in the DeFi ecosystem, including lending pools and prediction markets.
Opportunities for Rewards
While traditional staking offers rewards for transaction verification, liquid staking goes a step further by enabling users to earn these rewards while also generating additional yield through various DeFi protocols.
Outsourcing Infrastructure Needs
Providers of liquid staking allow individuals to benefit from staking rewards without the complexity of maintaining staking infrastructure. For instance, even if a user lacks the minimum 32 ETH required to be a standalone validator on the Ethereum network, liquid staking allows them to still partake in block rewards.
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