Welcome back to Lobster Academy! In today’s episode, we’re diving into a major topic in the crypto world — a sector involving billions in investments. Ever felt the frustration of locking up your crypto assets for staking, only to find them unavailable when you need them the most? Enter liquid staking! Let’s get into it!
Staking is a process where cryptocurrency holders lock up their tokens to support network operations in a proof-of-stake (PoS) blockchain. This includes crucial functions like transaction validation and maintaining network security. In return, stakers earn rewards, typically in the same cryptocurrency.
However, staked tokens are often locked up for a set period, rendering them unavailable for other uses. In a dynamic market, this lack of liquidity can pose significant challenges. That’s precisely where liquid staking comes into play.
Liquid staking is a solution that allows you to stake your cryptocurrencies through a service provider to earn yields, while simultaneously receiving a “staked token” in a 1:1 ratio.
This token serves as proof of your deposit on the protocol. Known as Liquid Staking Tokens (LST), these can be traded and used as collateral in various DeFi protocols.
Liquid staking makes network participation more accessible by eliminating the need for individual node infrastructure. Users can stake their tokens with a service provider who pools these resources to run nodes.
This broader participation strengthens network security, as more staked coins result in more node validators.
With liquid staking, your assets remain liquid, even while staked. Liquid Staking Tokens can be used across multiple protocols to generate additional yields.
LSTs can be used across many protocols offering new DeFi strategies, for example, leveraged staking. By staking your ETH with a protocol like Lido, you could earn an annual percentage rate (APR) of 3.1% and receive stETH as a liquid staking token. This stETH can then be lent on platforms like Aave to borrow more ETH, which can be staked again, increasing returns.
However, this strategy carries risks — any de-pegging of stETH from its 1:1 value ratio could lead to a liquidation of the user’s position on Aave. It’s crucial to approach such strategies with robust risk management.
Although liquid staking tokens facilitate instant swaps for their base assets on decentralized exchanges (DEX), significant drops in the total value locked (TVL) in these pools could destabilize the token’s value. This might lead to cascading liquidations.
Liquid staking depends on smart contracts to hold and mint tokens. If these contracts have vulnerabilities, it could lead to the loss of staked cryptocurrencies.
The reliance on third-party protocols can introduce centralization risks, in opposition to the decentralized ethos of Web3. For example, in October 2023, nearly 33% of all staked ETH was controlled by Lido ( https://blockworks.co/news/lido-centralization-debate-ethereum), though this figure has since decreased.
When you use a liquid staking provider, they are responsible for maintaining the infrastructure and selecting trustworthy validators. Poor choices can lead to slashed assets, where a portion of the staked cryptocurrency is penalized for validator failures.
As of now, Lido and Rocket Pool are leading providers in this space, with a Total Value Locked (TVL) figures of $27.95 billion and $3.606 billion, respectively. This indicates Lido’s significant leader’s position in the liquid staking market.
On Lobster, you can also generate additional yield on top of your crypto effortlessly, similar to staking, but with more juicy rewards! We simplify access to DeFi for cryptocurrency holders by providing automated DeFi strategies. Our algorithm handles all the complexity of liquidity-providing for you, including constant rebalancing and impermanent loss management.
All you have to do is connect your wallet, deposit a single token in one of our secure vaults that have been audited multiple times, and that’s it! Our algorithm will take over and make your investment grow! Simply go on your wallet from time to time to see how much you earned!
To know more about Lobster → Check out our Docs!
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