What Is Liquid Staking And What Are The Differences With Regular Cryptocurrency Staking?

2 years ago · Updated 2 years ago

✍️ 16 September, 2022 - 19:55 👤 Editor: Jakub Motyka

Liquid staking is a tool in the DeFi world that allows you to earn without blocking your cryptocurrencies.
It started in the Ethereum blockchain and soon spread to other cryptocurrencies.

How does liquid staking work and how can I use it to improve my investments?

The world of cryptocurrencies and decentralized finance (DeFi) offers a wide repertoire of investment tools and one of them is liquid staking. It is a new form of staking that emerged in 2021 on the Ethereum (ETH) network. This method spread little by little to the rest of the market ecosystems thanks to the opportunities it offers.

Through liquid staking, investors can obtain rewards by having cryptocurrencies, without the need to block them for a certain time. It is a simple way to improve the profitability of your investments, while keeping the different assets in your wallet. All this while you wait for the perfect moment to start trading.

What Is Liquid Staking And How Does It Work?

Liquid staking was born with the Ethereum 2.0 update, during which investors had to block their assets until the Shanghai update, which still does not have a specific date. Given the impossibility of moving the funds indefinitely, Lido suggested the option of blocking the ETH and receiving a liquid token called stETH in exchange.

Through liquid staking, users can place their cryptocurrencies to generate profitability, without the need to lock them in a staking contract. In this way new tokens, derivatives, are created as a reward for the service. Also, with the existence of ETH/stETH liquidity pools like those present in Curve, there is no impermanent loss. In other words, there is no risk of losing due to the fluctuation of the price of the pairs, because both assets are directly linked.

Where Can I Do This Kind Of Staking?

Liquid staking started in the Lido ecosystem, after the Ethereum 2.0 upgrade. Since then, a wide variety of DeFi protocols have implemented this type of tool to offer new options to their users. Some of the most famous protocols are Aave, Curve, SushiSwap among others.

For example, Benqi offers the option to liquid stake the AVAX token to earn sAVAX. Similarly, it is possible to feed the AVAX/sAVAX liquidity pool to obtain a higher return by liquidally staking assets and participating in the liquidity pools at the same time.

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