DeFi 101 Liquid Staking
DeFi 101 Liquid Staking
- The consensus algorithm Proof of Stake (POS) is becoming more popular in the last months and years. The biggest smart contract platform Ethereum is moving from Proof of Work to Proof of Stake. The Proof of Stake technology has a more environment-friendly approach but there are still some challenges. The next evolution of Proof of Stake is Liquid Staking as it solves some of the POS challenges.
What is Liquid Staking?
- Liquid Staking is the next step in the evolution of the Proof of Stake market. Users can earn passive income by staking their tokens.
The returns can be higher than in the traditional financial system depending on the staking protocol and the current market situation. We have seen yields up to 20% in the year 2021.
The current Proof of Stake restrictions
- – locked-up funds
– different locked-up periods
– minimum amount to take part in the proof of stake mechanism
- In times of higher volatility, this can occur into a loss as you cannot move the funds due to the lacking access to the tokens. This means the tokens are illiquide.
- By the change towards Ethereum 2.0 and a staking of your ETH, you have to deal with these challenges.
How does Liquid Staking work?
- Liquid Staking brings flexibility and liquidity to the staked tokens.
- First you deposit your Ether via a third-party application into a Ethereum smart contract (also called deposit contract).
Second you will receive in return an issued tokenized version of your tokens – a sort of derivative (also called wrapped token).
Third, this wrapped token represents your ETH, and it can be transferred, stored, spent, or traded as any liquid token.
Find an overview about all important DeFi Applications here and DeFi Dashboards here.
- You can also use this wrapped token for DeFi applications as collateral, to lend, borrow or to provide liquidity. Everything is possible while you are still earning your Ethereum staking rewards. That means you can earn staking rewards and DeFi rewards on top. You can unstake your derivative token at any time through the use of stETH-ETH liquidity pools.
Liquid Staking is the next evolution in the Proof of Stake ecosystem!
Liquid Staking and Lido Finance
- The Lido DAO is a Liquid Staking provider and a Decentralized Autonomous Organization. Lido DAO governs and enables liquid staking solutions for different blockchains such as:
- – Ethereum
- More blockchains are coming soon.
- We recommend testing liquid Staking at the beginning with a small amount of your tokens. It is important that you understand the process and the risks behing liquid staking.
Get more important links about Liquid Staking and Lido Finance:
- Liquid Staking Report by Chorus One
- Liquid Staking by Staking-Academy.com
- Ethereum Liquid Staking
- Lido Finance
- New Lido Referral Program
Conclusion – DeFi 101 Liquid Staking:
- Receiving passive income via normal staking is very attractive and has a lot of advantages. But there are downsides like illiquidity and locked up periods of assets that can scare away users.
- Liquid Staking is the next evolution in the staking market. It allows investors to get a lot of benefits from staking and limits most of its restrictions. Furthermore, by creating a derivative token, users can now stay liquid at any time and use these wrapped tokens (e.g., stETH) to earn DeFi rewards on top. We believe that Liquid Staking will be the next evolution of POS and there will arise a lot of Liquidity Staking Providers in the next months.
We hope you will enjoy your DeFi journey with DezentralizedFinance.com!
- Find more valuable information about DeFi Apps, DeFi Dashboards or Defi Insights at DezentralizedFinance.com.
- RISK DISCLAIMER: All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article’s content solely reflects the opinion of the writer, who is not a financial advisor. Do your own research before you purchase cryptocurrencies. Any cryptocurrency can go down in value. Holding cryptocurrencies is risky.