Staking
What is Liquid Staking?
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In Brief
Learn everything you need to know about liquid staking. Explore what it is and discover popular protocols including Lido and RocketPool.
Staking has become a popular way to earn passive income on your crypto holdings. Proof-of-Stake (PoS) blockchains rely on stakers to validate transactions and secure the network. By locking up your tokens for a period of time, you contribute to the network's security and get rewarded.
Traditional staking, however, comes with a drawback: locked liquidity. Once you stake your tokens, they become inaccessible for trading or using in DeFi applications. This is where liquid staking comes in. What is liquid staking? Liquid staking offers a solution for those who want to enjoy the benefits of staking, while maintaining control over their assets.
Let's explore how liquid staking works, its advantages, and some popular protocols leading the charge in this innovative space.
Understanding Liquid Staking
Liquid staking is an innovative tool that unlocks the potential of staked assets in Proof-of-Stake (PoS) blockchains. Liquid staking enables you to earn staking rewards, while maintaining control and liquidity over your crypto holdings.
Traditionally, participating in staking on a PoS blockchain involved locking up your tokens for a set period of time. This limited your ability to access or use those assets for other purposes. Liquid staking disrupts this model by introducing a layer of flexibility. By depositing your tokens into a staking pool, you essentially delegate the staking process, while receiving liquid staking tokens (LSTs). These LSTs represent your stake in the pool and they are tradable on secondary markets. This enables you to enjoy the benefits of staking rewards, without sacrificing the liquidity of your underlying assets. This opens doors for advanced investment strategies, where you can leverage your LSTs in DeFi protocols to generate additional yield.
Before We Get Started
Before we explore liquid staking in more detail, it’s important to remember that you can manage and interact with 10M+ crypto assets across 100+ blockchains on Trust Wallet. Download the latest version of Trust Wallet today.
Download Trust Wallet as a mobile app, or install the Trust Wallet Extension on your desktop browser.
How Does Liquid Staking Work?
Liquid staking offers a compelling solution for those seeking staking rewards without sacrificing asset accessibility. Here's a deeper dive into how it works:
1. Entering the Pool
A staking pool is a collection of assets pooled from various users. These pools participate in staking on Proof-of-Stake (PoS) blockchains. You start by depositing your PoS tokens (e.g., Ethereum) into this pool, contributing to its overall stake in the underlying blockchain.
2. Delegation and Validation
The pool acts as a single, powerful entity. It combines all deposited tokens to meet the minimum staking requirements for validators on the chosen PoS blockchain. The pool then delegates this collective stake to reliable validators on the network. These validators are responsible for verifying transactions and securing the blockchain, earning rewards in the process.
3. The Power of Smart Contracts
Liquid staking relies heavily on smart contracts, which are self-executing code stored on the blockchain. These contracts automate critical functions:
Tracking deposits and ownership: Smart contracts meticulously track the amount you deposit and issue a corresponding number of LSTs (liquid staking tokens), representing your stake in the pool.
Distributing rewards: When the validators earn rewards for securing the network, the smart contracts automatically distribute these rewards proportionally to all LST holders based on their token holdings.
4. Redeeming Your Stake (Optional)
While LSTs offer liquidity, you may want to access your original tokens. The redemption process is also facilitated by smart contracts. You simply exchange your LSTs back for the underlying tokens within the pool, minus any applicable fees. The pool manages the unstaking process on the blockchain, returning your original tokens to your wallet.
It's important to remember that the specific mechanics of liquid staking can vary depending on the chosen platform or protocol. Some might have additional features or fees, so be sure to do your research before diving in.
What are the Benefits of Liquid Staking?
Liquid staking offers several compelling benefits over traditional staking methods, making it an attractive option for cryptocurrency investors seeking flexibility and maximized returns. Here's a breakdown of the key benefits:
Earn Staking Rewards
Just like traditional staking, liquid staking enables you to benefit from the passive income generated through Proof-of-Stake (PoS) blockchains. The staking pool you participate in will distribute these rewards proportionally based on your holding of liquid staking tokens (LSTs).
Maintain Liquidity for Staked Assets
Unlike traditional staking, where your tokens are locked away for a set period of time, liquid staking offers you a significant advantage: liquidity. You receive LSTs representing your stake in the pool, and these LSTs are tradable assets. This means you can freely buy, sell them on exchanges, or even use them as collateral in DeFi applications to generate additional yield.
Lower Minimum Staking Requirements
Running a validator node on a PoS network often requires a high minimum stake amount. This can be a barrier to entry for many users. Liquid staking pools aggregate deposited tokens, allowing you to participate in staking even with a smaller initial investment. This makes staking more accessible to a wider range of users.
Increased Capital Efficiency
With LSTs, you can unlock the full potential of your staked assets. They can be used for various income-generating activities beyond simply earning staking rewards. This allows you to maximize the returns on your crypto holdings.
Interoperability
Liquid staking protocols often support interoperability with various decentralized finance (DeFi) platforms and applications. This interoperability enables seamless integration between staking activities and other DeFi services, unlocking new opportunities for yield generation and financial innovation.
Exploring Popular Liquid Staking Protocols
There are various liquid staking protocols offering distinct features and functionalities. Let's explore two leading examples: Lido and RocketPool.
Lido Protocol
Lido operates as a centralized liquid staking service. Users deposit their PoS tokens (e.g., Ethereum) into Lido's staking pool. Lido then aggregates these deposits and uses them to run validator nodes on the underlying blockchain. In return, users receive stETH, which represents their stake in the pool. stETH is a tradable asset, enabling users to maintain liquidity for their staked ETH. stETH enjoys high liquidity on major cryptocurrency exchanges, allowing for easy trading and use in DeFi applications.
RocketPool
RocketPool takes a different approach, functioning as a decentralized liquid staking protocol. Users can become node operators themselves by locking up ETH and RPL, RocketPool's native token. Alternatively, users can act as stakers, depositing their ETH to participate in staking without running a node. In return, stakers receive rETH, RocketPool's liquid staking token.
How to Deposit Liquid Staking Tokens to Trust Wallet
You can receive liquid staking tokens from another wallet or from a centralized exchange. Here’s how:
Select “Receive” from the home screen.
Search for your desired token, and select it. For this Example, we use RPL.
From here you have two options. You can either:
Copy your deposit address and use that on your exchange account or other wallet to send funds to.
Use the “Deposit from exchange” option to deposit crypto from your exchange account.
In addition to RPL, Trust Wallet lets you manage and interact with 10M+ crypto assets across 100+ blockchains. Download the latest version of Trust Wallet today.
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Note: Any cited numbers, figures, or illustrations are reported at the time of writing, and are subject to change.