The crypto staking space is booming with innovation and massive funding is being funnelled into companies which have the strongest teams, vision and underlying technology.
Within that space, one of the biggest plays right now is liquid crypto staking, and it looks like everyone wants a piece of the pie (or… a cut of the stake?).
Whether it’s going after the retail clients, or the institutions and wealthy individuals, crypto companies, and crypto staking companies in particular are waking up to the fact that people are after liquidity and maximizing profits with the power of DeFi.
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What Is Liquid Crypto Staking?
Liquid crypto staking is similiar to regular crypto staking, as in you’re depositing your crypto asset into a smart contract in order to help facilitate transactions on a Proof-Of-Stake blockchain and secure it. You could stake in a great number of ways, with various services and levels of custody, but that’s it in a nutshell.
While staking is great, one of it’s drawbacks is that your funds become illiquid while you’re staking them.
They’re essentially locked, and you receive staking rewards (interest) for whatever you deposited.
When staking crypto with a liquid staking service however, it’s a different ballgame.
In exchange for your tokens, you recieve the service’s native token, usually pegged 1:1 to whatever you deposited, and you can then use that token on DeFi platforms in order to earn additional yield.
You get to earn the staking protocol’s original rewards, but then on top of that, you can get DeFi yield farming rewards as well, for a total interest rate that’s much more significant than regular staking.
You can trade it, lend it, use it as collateral.
Whenever you wish, you can trade back your tokens for the original deposit, and walk away.
Liquid Crypto Staking Example
Imagine you’re staking ETH on Rocketpool for example. Let’s say 3 ETH.
You would deposit your 3 ETH on Rocketpool, and get 3 rETH in return.
You then go on Balancer, for example, and invest in an rETH/wETH liquidity pool for an additional 2.22% APY that you’d earn on top of your existing staking rewards from ETH.
So if we take 3 ETH and 5% Ethereum Staking Rewards, that’s 0.15 ETH per year in profit. But with liquid staking an using the Balancer strategy above, that number turns into 7.22% and 0.216 ETH.
That’s a significant difference, especially if you scale the numbers.
Imagine that number was 32 ETH. Or imagine you’re an institution holding 5000 ETH.
Liquid staking becomes an extremely powerful tool.
And that’s just 1 rather conservative example with 2.2% in additional yield. You could trade your rETH for another token and aim for much higher interest rates. Imagine an additional 10%, 20%, or more.
That’s just one example, there’s a ton of stuff you can do with the power of DeFi.
The only thing to remember is when you’re ready, you’d need to get your pegged tokens back, and head back to the liquid staking provider in order to exchange back into your original staking token.
The Liquid Crypto Staking Arms Race
Companies like Lido Finance have been the pioneers of liquid staking, bringing it to Ethereum in December of 2020 and capturing a huge chunck of the Ethereum Staking market share.
The company currently holds $14B+ in total value locked across the company’s liquid crypto staking networks.
Lido’s success and the realization that the market is hungry for liquidity has pushed many companies to open up subsidiaries that offer liquid staking alternatives to their main staking products.
New companies like Rocket Pool, Stader, StakeHound, Ankr, pSTAKE, LiquidStake, StakeWise and StakeFi have since launched to offer their own liquid crypto staking solutions to the retail market.
Other notable companies like the Canadian-based Figment are currently following suite, but seem to have decided against direct competition on the retail front, and are instead choosing to go after institutions and large-scale investors that are looking for a more white glove solution.
Blockdaemon has partnered with Stakewise to ship a similar product, based on existing StakeWise infrastructure.
Is Liquid Crypto Staking Better Than Regular Staking?
So should everyone stake crypto on a liquid type of protocol? It sounds like a no-brainer.
Liquid staking is great, yes.
But you should also keep in mind that by using one of these services, you are essentially adding another layer between you and the native staking smart contract of the asset.
That means that if you’re staking ETH for example, and you use a solution such as Rocket Pool, you’re staking through their smart contract, and you’re exchanging your ETH for their coin – rETH. And that would be the case for other services as well.
Even though Rocket Pool is a heavily audited and fantastic service, that is still a bit more risk than staking natively directly on the Ethereum network without any service in between and the risk of any sort of hack or exploit that could potentially happen.
Ultimately though, as these services become more mature and more heavily tested, this risk will be greatly minimized.
This article is for educational purposes only. Not financial advice.
Please make sure to read our Disclaimer before making any financial decisions.