On a Proof-of-Stake (PoS) blockchain, a liquid staking token symbolizes the amount of cryptocurrency that has been staked. Liquid staking tokens provide more flexibility and liquidity, enabling staking while retaining the ability to purchase, sell, or trade the token.
Within the cryptocurrency ecosystem, staking is a well-liked method of earning interest on holdings. In short, network users can operate a validator node by staking tokens, which can be cut or removed as a punishment if the node engages in malicious activity.
Staking protects Proof-of-Stake (PoS) blockchain networks. Staked tokens are often not convertible into cash or cannot be used as collateral for yield in the decentralized finance (DeFi) market.
Staking has developed into a crucial component of the decentralized finance (DeFi) environment. Liquid staking tokens (LST) have surfaced as the cryptocurrency environment keeps changing, offering a new angle on staking.
Staking usually entails locking up a predetermined quantity of tokens to maintain network functionality. Validating transactions and assisting with consensus techniques like Proof-of-Stake are two examples. Once staked, tokens typically become illiquid—challenging to access or sell. This is the application of LSTs.
Liquid Staking Tokens (LSTs) deal with the constraints of traditional staking by offering an extra bendy and person-friendly experience. Here’s what makes them particular:
The process of liquid staking typically includes the following steps:
There are numerous blessings to utilizing LSTs on your staking needs:
While LSTs offer giant benefits, there also are a few capacity drawbacks not to forget:
Liquid staking tokens can be categorized into two main types: rebasing and reward-bearing.
In some jurisdictions, reward-bearing tokens may offer tax advantages, as the rewards are incorporated into the token’s value rather than increasing quantity. It can defer taxation until the asset is sold or disposed of.
In addition to these two main types, there is a less common method known as the dual token model, which utilizes two separate tokens: one representing the staked asset and the other representing staking rewards. Frax uses this model for its ETH liquid staking tokens.
Wrapped tokens are another essential concept. These tokens lock the original asset in a smart contract to create a new token with enhanced usability. For example, Lido’s stETH can be wrapped to become wstETH, allowing it to earn staking rewards while maintaining compatibility with various DeFi protocols and blockchains.
The fundamental difference between staking and liquid staking lies in the flexibility of the assets.
In traditional staking, customers lock their tokens into clever contracts for a predetermined duration in exchange for rewards. The tokens are inaccessible and can not be traded or transferred during this time.
On the other hand, liquid staking allows token holders to change their tokens while earning staking rewards. This flexibility permits customers to actively manipulate their belongings and participate in buying and selling activities while benefiting from staking rewards.
However, it’s vital to note that the rewards in liquid staking can be slightly lower than those in conventional staking methods. Additionally, liquid staking typically involves much less energetic participation in governance choices than standard staking.
Staked tokens are locked assets that can only be spent, exchanged, used as collateral, or farmed. Liquid staking tokens make these tokens liquid.
Liquid staking tokens allow for any-time trading and provide a more convenient means of earning a staking yield for many investors.
But, as the token is tradable, you can also use it to make extra money with well-known DeFi apps like Uniswap and Aave.