What is Liquid Staking

What Is Staking?

Staking is the process of locking up the native assets of a blockchain with the consensus mechanism of PoS (Proof-of-Stake), for a certain period to help maintain the blockchain and earn a corresponding return.

What Is Liquid Staking?

Liquid staking is an alternative to traditional staking and solves some of the drawbacks of traditional staking to some extent.

When staking in the traditional way, users need to become validators of the blockchain network first. In the case of Ethereum, for example, to become a validator, a user needs to prepare hardware devices that meet certain requirements and 32 $ETH for staking, which is a relatively high threshold. After becoming a validator, staked $ETH will be locked in the smart contract and cannot be used for other purposes, which locks the liquidity of $ETH.

Ethereum "Merge" was completed on September 15, 2022, transitioning from PoW to PoS consensus mechanism. However, staked $ETH will not be available withdraw until the completion of the Ethereum "Shanghai Upgrade" on April 13, 2023. Participation in traditional staking during this period will result in a further reduction in the liquidity of $ETH.

The Liquid Staking Platform proposes an alternative solution that lowers the threshold for participation in staking while increasing the liquidity of the staked assets. Specifically, instead of participating in traditional staking, a user can provide $ETH to the Liquid Staking Platform, which collects the $ETH provided by the participating user and distributes the $ETH in packages of 32 to eligible validators. These validators will take part in traditional staking, and the proceeds from the staking will be shared among the user, Liquid Staking Platform, and the validator. As a result, liquid staking has a lower threshold but also a lower yield than traditional staking.

Well-known liquid staking platforms include: Lido Finance, Rocket Pool, Frax Finance, etc. Click here to check for more liquid staking platforms.

What Is Liquid Staking Derivatives (LSD)?

When users participate in liquid staking and provide $ETH to the liquid staking platform, the platform will mint a number of derivatives equal to $ETH as evidence of the user's participation in the liquid staking. These derivatives are known as Liquid Staking Derivatives. Since these derivatives represent users' $ETH on a liquid staking platform, they are generally considered to have a slightly lower value than the original $ETH. Therefore, these derivatives can also be traded directly, or used in other DeFi protocols to earn additional revenue.

Well-known liquid staking derivatives include Lido Finance's Lido Staked Ether, Rocket Pool's Rocket Pool Ether, Frax Finance's Frax Ether, etc.