As proof of stake blockchains gain adoption, staking has become a pivotal way for cryptocurrency holders to earn yield on assets while securing these next-gen networks. However, conventional staking requires locking funds which lacks flexibility for some investors. Enter “liquid staking”.
Liquid staking allows generating staking yields without giving up liquidity — you can stake your crypto but still trade assets freely. This unlocks wider utility for staking, allowing decentralized finance (DeFi) borrowing, payments, transfers all while earning compound rewards.
Let’s examine how liquid staking works, its current limitations, which crypto ecosystems are innovating with liquidity in staking, and why the model could proliferate further.
What Exactly Is Liquid Staking?
With traditional crypto staking, you commit or “lock up” an amount of tokens to act as a network validator, processing transactions to earn more crypto over time. However these staked assets cannot be immediately moved or used elsewhere.
Liquid staking involves issuing a derivative token representing your staked crypto that retains liquidity. This derivative — whether an IOU note, wrapped token or synthetic asset — tracks staking yields and can still be freely traded, utilized across DeFi, or sold to realize gains without interrupting compound growth from the staked capital continuing to validate and earn rewards.
Put simply, liquid staking tokens allow having your cake and eating it too! Users can earn native staking rewards while accessing flexible utility from their stake thanks to these liquid derivative wrappers.
Early Forms of Liquid Staking Workarounds
Even in the early days of proof of stake exploration, workarounds existed to regain some flexibility from locked staking:
Centralized Lending
Centralized crypto lending platforms like Celsius Network accept staked coins such as Tezos as collateral for cash loans leveraging the underlying assets while they continue staking. However centralized services can be risky.
Delegated Staking
Delegated staking pools like Everstake let users earn staking rewards without…
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