Liquid Staking: The Future of Passive Income

You already know that staking is one of many ways to generate passive income using your crypto assets, instead of letting them collect dust.

But what if you could leverage that potential even further? Imagine being able to use the staked funds while still collecting rewards on them 😮 That’s where liquid staking comes in.

Traditional Staking Vs. Liquid Staking

When you stake tokens, you lock them up in a smart contract which helps secure the blockchain network and, in return, you earn rewards. However, traditional staking often ties up your assets, making them inaccessible for other activities.

Liquid staking solves this problem by providing all of the benefits of traditional staking services while unlocking the value of staked assets by issuing tokens that represent them; these are known as liquid staking tokens.

What are Liquid Staking Tokens?

Liquid staking tokens (LSTs) are issued to users in exchange for staking their crypto on proof-of-stake blockchain. The tokens represent your staked assets and can be traded on DEXs, used as collateral for loans, or even staked further.

How does Liquid Staking work?

Simply put, liquid staking is the process of allowing users to stake their cryptocurrencies while still retaining the ability to use or trade their staked funds. Liquid staking providers take the user's staked tokens and issue them a liquid staking token in return.

Liquid Staking: The Pros and Cons

The advantages of liquid staking are:

1. Capital Efficiency: Users can make the most of the utility of their staked assets by simultaneously earning staking rewards and engaging in other DeFi activities.

2. Flexibility: LSTs provide the freedom to exit positions or engage with the market without waiting for long unstaking periods typical of many staking protocols.

3. Diversification: Users can diversify their strategies, staking on one platform while using LSTs to engage with another.

4. Additional Rewards: Some liquid staking platforms offer additional rewards or benefits to users, such as discounted fees or access to exclusive features.

While liquid staking undoubtedly offers multiple benefits, there are also certain demerits to consider:

1. Added Risk: Potential vulnerabilities in a high-risk smart contract protocol could expose users to risks.

2. Complexity: The introduction of liquid staking adds another layer of complexity to the already intricate DeFi landscape.

Liquid Staking Tokens vs. Liquid Staking Derivatives: What's the Difference?

While the terms ‘Liquid Staking Tokens’ (LSTs) and ‘Liquid Staking Derivatives’ (LSDs) are often used interchangeably, there are subtle distinctions between the two.

LSTs are directly issued by liquid staking protocols, and represent a claim on the underlying staked assets and the associated rewards. LSDs, on the other hand, are derivative assets that track the value of staked assets, and are often issued by decentralised exchanges or other financial platforms.

LSTs are typically tied to a specific protocol, and their value and functionality may vary across different protocols, whereas LSDs can be used across various protocols, offering a wider range of opportunities for yield generation and other financial activities.

The Future of Liquid Staking

Liquid staking is a rapidly evolving technology with immense potential to reshape the crypto landscape. Here are some key trends to watch for:

• Increased adoption: As more blockchains transition to proof-of-stake, liquid staking will become increasingly popular, making it easier for users and institutional investors to participate in network security and earn rewards.

• Greater interoperability: Liquid staking is likely to become more interoperable across different blockchains and DeFi protocols, expanding their use cases and unlocking new opportunities for yield generation.

• More innovation: Liquid staking platforms are likely to explore ways to maximise returns for users, including leveraging DeFi protocols and yield generation strategies.

• Regulatory clarity: As the regulatory landscape for cryptocurrencies evolves, clearer regulations for liquid staking could provide greater confidence to institutional investors and drive wider adoption.

• Enhanced security: Liquid staking providers will continue to focus on improving security measures and implementing robust risk management practices to protect user funds and ensure the integrity of the staking process.

The Final Word

Liquid staking is a powerful tool that can help you maximise your crypto earnings. By understanding how it works and exploring the available protocols, you can unlock the full potential of your staked assets.

If you're looking to amplify your yield potential, consider exploring protocols such as Multipli which leverage the power of liquid staking tokens to unlock additional value from your staked funds.