A guide to liquid staking

The issue with illiquidity is resolved by liquid staking. A supplier of liquid staking accepts token deposits, stakes the tokens, and issues a receipt to the depositor that may be redeemed for the staked tokens. The staked tokens are represented by the receipt, which can be exchanged or used as collateral elsewhere. Because of this, liquid staking tokens are also known as liquid staking derivatives. DefiLlama estimates that there are around $8.5 billion worth of liquid staking methods spread across numerous blockchains. A partial list of some of the most well-liked liquid staking tokens is provided below:

  • Ethereum
  • Polygon
  • Solana
  • Binance Smart Chain
  • Avalanche
  • Fantom
  • Polkadot
  • Acala
  • NEAR
  • Hedera

Lido Finance accounts for more than 75% of the liquid staking industry with $6.5 billion in Total Value Locked (TVL), almost all of which originates from their Ethereum pool. To create liquid staking infrastructure on Ethereum and Gnosis, Stakewise, the seventh-largest stake provider, has partnered with Finoa.

The most valuable blockchain for both staking and liquid staking is Ethereum. The majority of the liquid staking for Ethereum is made up of Lido Finance. The quantity of Ethereum staked to the different liquid staking providers is displayed in the chart below. The particular limitations in Ethereum’s staking capabilities are a major factor in the growth of liquid staking. ETH can only be staked in 32ETH increments, and it cannot be unstaked until the Shanghai upgrade, which might not be ready until Q3 or Q4 of 2023, implements that feature. The inability of ETH stakers to ‘delegate’ to a validator is another restriction; in order to stake their assets, they must either run their own validator or relinquish their custody to a validator. These restrictions impose high entry barriers to Ethereum staking, which liquid staking pools remove. According to the graph, slightly over 10% of the 123 million ETH available today is staked, with liquid staking companies taking on a bigger and bigger role. While Ethereum stakers benefited the most from liquid staking, the benefits are equally applicable to users of other blockchains. Despite the continued focus on Ethereum, liquid staking pools are gradually spreading to other chains as well.

Users using liquid staking should think about whether to stake with a centralized or decentralized provider in addition to issues with liquidity. While a decentralized service like Lido does not require custody but rather that tokens be deposited into a smart contract, a centralized provider like an exchange maintains custody of the assets. The danger here is that the liquid staking token’s “backing” could be taken by hacking or otherwise abusing the smart contract. Yet, as the chart illustrates, processes like Lido are among the most rigorously reviewed in the field and have sustained billions of dollars for many months. Finally, users of liquid staking protocols should think about whether their decision to stake using a well-known protocol like Lido or a sizable centralized exchange adds to the centralization of the blockchain, reducing its value in the long run.

The quick liquidity of liquid staking is its most evident benefit. Depending on the blockchain and liquid staking token in question, the size of the advantage varies. The “composability” of the yield techniques it makes possible is another benefit of liquid staking. There are benefits to liquid staking at a technical level as well. When staking the traditional way, a token holder would delegate their stake to a single validator, who keeps a share of the reward in exchange for managing the necessary infrastructure. Liquid staking tokens can be used as collateral on centralized or decentralized exchanges or lending pools.