A Sneak Peek To Get Started With Liquid Staking

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Over the last few years, several new financial models emerged, some riskier than others. Traditionally, people who wish to maximize their returns on investment turn to leverage trading—a practice that is very notorious for the extremely high-risk factors.

For blockchain exclusively, there are other options such as mining cryptocurrencies on a Proof of Work (PoW) consensus chain like Bitcoin. However, PoW blockchains are very limiting in terms of scalability, and mining PoW tokens requires an extremely large amount of power.

But with the rise of the Proof of Stake (PoS) consensus model in ecosystems like Cosmos, a new way to earn rewards in the form of native tokens emerged. Validators can stake their tokens to secure the blockchain and earn rewards for their contribution.

The wave of staking has taken over so much that over 60% of the circulating supply of $ATOM is currently locked in staking pools, according to Statista. Other PoS blockchains also show similar numbers with about 75% of $SOL and 52% of $DOT being staked. However, staking, in its conventional form, has its fair share of cons.

The Problem with Staking

One of the many reasons why people adopt cryptocurrencies is because of their sovereign nature. They put the power and ownership of capital right back into the hands of the masses. Further, cryptography and distributed ledger technology allow these assets to be liquid unlike any other.

Nevertheless, staking cryptocurrency to secure a chain or for any other purpose renders the tokens “useless” in the sense that they become illiquid for a predefined period. This inhibits the user to perform other actions like exiting the market before an expected bearish downturn.

Hence, lock-up periods can result in heavy impermanent losses for the everyday investor. Additionally, staking with shady validations can also expose the assets to scams and fraudulent hacks!

Alternatively, however, cryptocurrency holders may choose to set up validation nodes individually. But this too has its share of cons such as the cost of infrastructure and penalties from unexpected validation errors.

To overcome these hurdles and more, DeFi is now looking forward to the success of a new and innovative approach, namely Liquid Staking.

Liquid Staking: Locking Crypto, Unlocking Capital Flow

The provenance of liquid staking stems from the need to make funds accessible to users at all times regardless of where, when, and how. To tackle the challenge of illiquidity from conventional staking solutions, liquid staking brings forth a novel solution.

Simply put, when users participate in a liquid staking solution, they receive alternate tokens that represent their staked tokens. They can then use these tokens in the broader DeFi ecosystem, while their current tokens remain locked in the staking pool. Liquid Staking even allows users to stake representative tokens on other protocols, maximizing the overall return.

Cosmos is presently the leading ecosystem for liquid staking, with over $30 billion locked in staking protocols as of April 2022. Its robust and open-source framework is among the leading incentives for liquid staking protocols like pSTAKE. The Tendermint Core Byzantine Fault Tolerance (BFT) consensus engine and the Cosmos SDK allow developers to set up their blockchains, incorporating radical protocols and economies.

Moreover, the fast finality and non-probabilistic nature of transactions, particularly on Delegated Proof of Stake (DPoS) chains, make liquid staking seamless. Cosmos’ Inter Blockchain Communication (IBC) protocol also introduces new opportunities for users to maximize their yields.

Popular Liquid Staking Protocols

pSTAKE

pSTAKE is one of the fairly newer and much-awaited projects on Cosmos. It is a liquid staking protocol developed by the Persistence team and supports multiple PoS assets, including Cosmos’ $ATOM and Persistence’s $XPRT.

By staking their assets on pSTAKE, users are able to mint an equivalent amount of stkASSETs, which can then be used to earn more yield (on top of staking rewards) through a money market or other supported DeFi protocols.

Lido Finance

Lido Finance is particularly popular for enabling liquid staking of Ether tokens ($ETH) while providing an APR of 3.9%.

Other networks supported by the protocol are Terra ($LUNA), Solana ($SOL), Kusama ($KSM), and Polygon ($MATIC) at 6.6%, 5.8%, 23.6%, and 8.7% APR, respectively. However, these APRs are subject to change with time and market fluctuations.

Osmosis

Osmosis is the most popular decentralized exchange (DEX) in the Cosmos ecosystem. It offers superfluid staking, a slight variation to the liquid staking mechanism. Here, $OSMO liquidity providers of elected liquidity pools can earn greater yield by staking 50% of their $OSMO liquidity and 25% of their pool position. However, there is a 14-day bonding period, which makes this slightly illiquid compared to regular liquid staking.

Summing Up

In a nutshell, liquid staking is a way for users to radically increase the capital efficiency of their assets in DeFi. By staking assets through liquid staking protocols, users are empowered to minimize risk while increasing returns on investment.

For example, pSTAKE users can utilize their representative tokens on other platforms like Anchor Protocol or   SushiSwap to earn additional rewards. Alternatively, users can borrow stablecoins against their tokens and use them on other DeFi applications.

Thus, liquid staking is arguably a better alternative to leverage trading and so on, when it comes to maximizing yields, especially for amateurs. And above all, it broadens the scope and relevance of DeFi.

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