What is Liquid Staking?
What is Staking?
Proof of Stake (PoS) is a consensus mechanism used in blockchain technology that allows the creation and validation of new blocks through the process of staking. Unlike Proof of Work (PoW), which requires significant computational power to mine blocks, PoS relies on validators who hold and stake the native cryptocurrency to participate in the consensus process in order to produce new blocks. Users who stake their assets by delegating to these validators are eligible to earn staking rewards as blocks are produced. However if the validator acts maliciously, then user assets that are staked with that validator are at risk of slashing. Through this methodology, validators are disincentivized to act maliciously and incentivized to act honestly.
The Problem
Proof of Stake (PoS) networks, while energy-efficient, introduce a dilemma for asset holders. When users stake their assets, they become less liquid, impacting their utility. This trade-off between staking rewards and liquidity affects on-chain activity metrics like Total Value Locked (TVL) and Transactions Per Second (TPS). Two major problems PoS chains face with traditional staking are that.
1) The more people stake, the larger the security of the network, but the less the liquidity available for other on-chain activities like DeFi.
2) The higher the network staking rewards are, the more difficult it is for DeFi products to offer an attractive reward to attract users to deploy assets. They, in essence, lose their competitive advantage as they cannot overcome the base rate of the onchain.
The Solution
Liquid staking is a solution which liquefies assets that are staked in the staking pool by tokenizing them. In liquid staking, users can access their locked funds for other crypto-based activities while still earning rewards from their original deposit. By allowing cryptocurrency holders to stake their assets without immobilization, liquid staking ensures that tokens remain active and transferable, represented by Liquid Staking Tokens (LSTs). This approach not only preserves the liquidity and utility of the staked assets but also enhances capital efficiency by enabling participation in DeFi activities. The flexibility and control retained over staked tokens, coupled with the elimination of minimum stake requirements, make liquid staking an accessible and attractive option for token holders seeking to optimize their investments while contributing to the network's security and governance.
What are LSTs?
Liquid Staked Tokens (LSTs) are tokenized representations of staked assets on PoS blockchains. Popular LSTs in the market include.
tsTON by Tonstakers on TON
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