What is Liquid Staking?

Liquid staking is a new and reliable way to grow your savings! Before we talk about liquid staking, you need to know about liquidity. 

What is Liquidity?

Liquidity can be defined as the flow rate of any form of money. When comparing various kinds of assets such as your house, gold, stocks, and cash – cash is the most liquid asset as it can be easily exchanged for any goods or services. In contrast, your house is the most illiquid asset you own, considering how hard it is to sell the house in exchange for cash or any other asset. 

So, in simpler terms, liquidity is your ability to exchange an asset for any goods or services. The more convenient it is to convert an asset into cash (thus quickly exchanging it for any goods or service), the more liquid it is. Therefore cash or money in your savings bank account can be called the most liquid asset. For example, cash in a savings bank account can be accessed instantly and easily, either via a digital bank transfer, depositing the money directly into the account of the payee or via an ATM withdrawal, then paying the payee directly through actual physical currency.

Why is it Essential to Own Liquid Assets?

Owning liquid assets is crucial because it helps you to pay for basic living expenses. It also enables you to handle emergencies when they arise. 

Holding some of your total net worth in the form of liquid assets is a vital part of wise long-term financial planning. It’s essential to keep in mind that holding liquid assets comes at a cost. Generally, the more liquid an asset is, the less its value will increase over time. Completely liquid assets, like cash (fiat money), may even decrease in value due to inflation.

Many financial advisors recommend that you have at least three to six months of your expenses in liquid assets should you lose your job or experience financial hardship.

What is Staking?

In simple terms, staking can be defined as an act of locking up your crypto assets for a given time period to support and secure a blockchain network in exchange for earning rewards. Staking is an energy-efficient alternative to mining.

To better understand staking, we first need to understand the concept of the Proof of Stake consensus mechanism. A consensus mechanism is a methodology to achieve consensus or agree on a common network state by all its participating nodes. Like how in a democracy, citizens and politicians alike take part in elections so as to reach a consensus to elect a president or prime minister.

Similarly, the Proof of Stake consensus mechanism provides a way for all the participant nodes to agree to a common state of the network without having to run the race to solve a complex cryptographic puzzle, as is the case in mining.

The participating nodes are called validators in the Proof of stake (PoS) mechanism. To become a validator and participate in a PoS network, each participant needs to deposit a certain amount of the network’s native tokens as a stake. The stake acts as a safety deposit while allowing the participants to earn rewards by validating new blocks on the network.

The Proof of stake (PoS) mechanism is less resource-intensive, offers high transaction throughput, and is not prone to 51% attacks, unlike the Proof of work mechanism.

Even though staking is much better than Proof-of-work, it still has drawbacks. Staking often requires a lockup period, during which your crypto assets can’t be exchanged or transferred, thus, making them illiquid assets. This is where liquid staking comes into the picture.

What is Liquid Staking?

Liquid staking is the act of delegating your tokens in exchange for a derivative token, thus allowing you to stake your tokens and keep the liquidity to a service that stakes for you without locking up your funds, usually with a trade-off of a lower APY (Annual Percentage Yield). The funds remain in escrow but aren’t locked or inaccessible as they would be with PoS staking.

In PoS Staking, you have to lock up your cryptocurrency for a specified time period, during which you cannot sell or transfer those tokens. If there is a market crash during your lock period, you won’t be able to take timely action, as your funds will be locked. 

Liquid staking solves this problem by offering the best of both worlds: a passive income in the form of staking yields and access to your staked funds, which can be used elsewhere in DeFi simultaneously.

With liquid staking, you can remain in much greater control of your funds, adding and removing funds as you please. PoS Networks have significantly benefited from liquid staking with increased liquidity and better network security.

Where can you Liquid Stake?

The two leading liquid staking platforms are Lido Finance and Marinade.

LIDO

Lido is the leading liquid staking solution for ETH 2.0. The staked ether in Lido is represented by the stETH token. These tokens are minted upon deposit and burned when redeemed. The value of stETH always trades at a slight premium to ETH. These tokens can be used as one would use ETH, allowing you to earn ETH 2.0 staking rewards while benefiting from, among other things, yields across other DeFi products. Out of all the staking protocols on Ethereum, Lido dominates with a 35% market share of staked ETH, holding 17.5% of the entire staked ETH supply.

Marinade

Marinade is the leading liquid staking protocol on Solana. You receive mSOL in exchange for staking your SOL, and you can use it to do other DeFi operations. The price of mSOL, like stETH, always trades at a slight premium to SOL. 

This means if you were to unstake mSOL for SOL, you would unstake more SOL than you had originally deposited.

Liquid Staking has thus proved to be a great and safe solution to safely grow your crypto investments while at the same time keeping the funds liquid and allowing you to use them in other DeFi operations to grow them even further or redeem them whenever need be. Everything said, remember to always do your own research too before investing anywhere. 

Personal Note From MEXC Team

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