The Cryptocurrency market is continuously innovated to accommodate and satisfy the needs of the users, especially in the aspect of putting one's assets to work.
New and innovative ways to earn rewards and grow your assets are constantly emerging. The existing ways are also modified to offer better opportunities.
In today's Blog, we will look into Liquid Staking and understand how we can maximize our profit using it.
What is Liquid Staking?
Traditionally, Staking can be seen as the process of participating in a blockchain network by locking up your tokens and earning rewards from it. With the coming of the Proof Of Stake ( POS) Consensus mechanism, Staking Can also be seen as the process of participating in a blockchain network by locking up your tokens to help secure the network and validate transactions. In return, stakers receive rewards, typically in the form of additional tokens. Liquid staking takes this concept to the next level by allowing you to stake your tokens while keeping them readily tradable and transferable.
Traditional staking usually involves a lock-up period during which your tokens are inaccessible. Liquid Staking platforms, on the other hand, provide you with staked tokens that are represented as liquid tokens (e.g., staked ETH becomes stETH). These liquidity tokens can be traded or used in DeFi (Decentralized Finance) applications, such as providing Liquidity in decentralized exchanges, lending, borrowing, etc. This offers flexibility and more earning opportunities (dual rewards).
Why should I participate in Liquid Staking:
Liquidity: As the name suggests, one of the primary advantages of liquid staking is the ability to maintain liquidity. You can access your staked tokens at any time, which is not possible with traditional staking. Having this privilege helps one to be able to exit the market during unfavorable events.
For example, I remember staking my $JUNO before the major network issue the network had, that led to a huge decline in the price of the token and the number of investors. Because there is an unbonding period of 21 days ( the time it takes from the point you unstake your tokens to the point your tokens become available to you), I wasn't able to exit the market ( sell off my tokens ) early because the tokens were locked.
If the $JUNO were Liquid staked, selling off the tokens would be a click away.
Maximized Earnings: Liquid staking platforms often compound your staking rewards, leading to potentially higher returns compared to traditional staking.
For example, in the traditional staking process, the investor receives his staking reward which can be claimed immediately. This means that his rewards may not likely increase if the deposited amount is kept constant.
With Liquid Staking, the rewards are compounded, that is, they are added to the initial deposited amount. This increases the staking rewards with each passing day.
3. Participation in DeFi: Since a staker receives a receipt of the staked tokens, the staker can engage in various DeFi activities like yield farming, lending, and borrowing, further increasing his earnings. The good thing is that there are several platforms and decentralized exchanges where Liquid Staking services are offered.
You can also move your stTokens from one Blockchain to another either to enjoy higher liquidity or for scalability's sake.
4. Risk Mitigation: As explained above, Liquid staking can provide a level of risk mitigation as you can react to market conditions and price movements by moving your funds as needed. This is one of the major edge Liquid Staking has over native staking.
Getting Started with Liquid Staking:
1. Select a Liquid Staking Platform: Choose a platform that offers liquid staking services. Some popular choices include Lido Finance (which Supports Polygon, Ethereum, and Solana), Stride (which supports Cosmos network), BENQI ( Avalanche), etc, each supporting various cryptocurrencies.
2. Know The Compatible Wallet:
You'll need a compatible wallet to interact with the chosen platform. For example, Metamask and Core Wallet can be used in Lido Finance and BENQI, but using the Stride platform requires using a Cosmos network-compatible wallet such as the Keplr wallet and Leap Wallet.
Ensure you have the required assets to stake, and in some occasions, the asset for the gas fee. In some platforms, the asset for the gas fee is either the native token on which the platform itself was built or the native token of the platform itself.
For example, In Stride which is built on the Cosmos network, the gas fee is paid with $STRD, This means that if you want to Liquid Stake Cosmos ( $ATOM) you will need both $ATOM which will be staked, and then, $STRD for fees.
3. Stake Your Tokens: Follow the platform's instructions to stake your tokens. Most of the Liquid Staking Platforms have a user guide tutorial.
In return, you'll receive liquidity tokens that represent your staked assets ( stToken, e.g sthETH)
4. With your liquidity tokens in hand, you can start participating in various DeFi products. If you are conversant with managing impermanent loss, you can provide Liquidity with the Liquid token. You can also Lend them out.
Keep an eye on your staking rewards.
While liquid staking offers many benefits, it's important to be aware of potential risks. Market fluctuations can affect the value of your liquidity tokens as it is with every other token, and platform vulnerabilities could expose you to smart contract risks. Remember, when you interact with Smart Contract, you give them the exclusive right to spend your tokens. I always revoke permission after interacting with a Smart contract.
Always do your research and use secure platforms with a proven track record.
Secondly, you can maximize the opportunity in Liquid Staking only when you employ your Liquid tokens in any DEFI product ( lending, providing Liquidity, etc). This will allow you to earn dual rewards.
In conclusion, liquid staking is an advancement from native staking to Staking that allows you to earn dual rewards while maintaining flexibility and liquidity. Remember to assess risks, and make informed decisions as you embark on your liquid staking journey.