Liquidity staking brings numerous benefits to all users in the Oasis ecosystem.
Staking is a fundamental component of the ecosystem and economic security of any Proof-of-Stake blockchain. Staking is the mechanism that allows participants in the network to participate in the network consensus process and receive rewards. Traditionally, staking requires users to manage their own infrastructure, lock up tokens, and go through long staking and unstaking cycles. But Liquid Staking changes all that.
The Oasis Network is excited to support builders who are bringing Liquidity Staking to the Oasis ecosystem. In this post, readers will find a comprehensive introduction to Liquidity Staking, an overview of its importance to Oasis, and a preview of the teams who are building Liquidity Staking on the Oasis Network.
What is Liquidity Staking?
Liquidity staking is a simple concept. Network participants can stake their assets while retaining liquidity to use them in applications running on the network, which eliminates significant opportunity costs. Unlike traditional staking, where assets are often locked for a longer period of time, stakers receive a liquid staking token (LST) that represents the assets they stake.
The token acts as a receipt, issued programmatically by the liquidity staking protocol. The entire process is run through smart contracts, and receipt tokens are typically issued at a 1:1 ratio with the staked assets. Liquidity staking tokens can be redeemed for staked tokens, minus any associated fees. The tokens can then be traded, lent, or used with other applications while tracking the price of the underlying asset and accumulating interest.
In this way, LST unlocks dormant capital, enabling further yield-generating opportunities, which is actually a very popular service with billions of dollars held in liquidity staking applications.
What are the benefits of liquidity staking?
The main benefit of liquidity staking is right in the name: liquidity.
Liquidity staking transforms funds that would otherwise be locked in a staking contract into freely usable and fungible tokens. These staking tokens make it possible to collect network rewards while executing trading strategies and responding quickly to market conditions. The financial flexibility brought by liquidity staking, coupled with a dual or multi-income mechanism, provides a better staking experience for all types of users.
Liquidity staking is also a new and important primitive in the decentralized finance landscape. Liquidity staking can help Web3 realize new use cases and collaborations for crypto-native assets. LST can be easily integrated with existing DeFi platforms, tools, and services, which allows it to be used for a wide range of possibilities, such as stablecoin staking, fixed-rate yield strategies, and more.
Liquidity Staking Protocol on Oasis
Liquidity staking is an important part of every DeFi ecosystem, and some early steps are being taken to bring this functionality to the Oasis ecosystem. For example, earlier this month, the Accumulated Finance team launched their protocol on the Sapphire network. Other liquidity staking projects are also in development, and their launches will be announced in the coming months.
Risks and limitations
Liquidity staking carries all the risks of direct staking and delegated staking. Liquidity staking is actually outsourcing the operation of the validator, which may incur some counterparty risks or potential fines if the validator engages in any malicious or unreliable behavior.
Liquidity staking also comes with smart contract risk. Since liquidity staking relies on smart contracts, it brings with it all the possible disadvantages associated with vulnerabilities or attacks on these contracts. If a vulnerability is discovered, it can result in losses and token depreciation. Liquidity staking users need to research whether the application they are using has passed a rigorous security audit before depositing funds.
The value of liquidity staked tokens may also fluctuate based on market conditions, which can cause losses during market declines or liquidity crunches. Sometimes, these value fluctuations can be so extreme that they lead to unpegging events, meaning that the value of the token deviates and is no longer equal to the staked asset.
Oasis and the Future of Liquidity Staking
Introducing Liquidity Staking to Oasis adds liquidity and capital efficiency to the entire ecosystem while lowering the barrier to direct participation in network security. As a result, the entire Oasis community will enjoy a better on-chain experience, which may directly benefit network activity across multiple important metrics. With the development of Liquidity Staking, the future of the Oasis Network will be even brighter.
This article is originally from the Oasis official blog. You are welcome to visit the official website directly to learn more about the Oasis ecosystem.