Liquid Staking

What Is Liquid Staking (LSD)?

In networks with the Proof of Stake (PoS) algorithm, new blocks are created by validators rather than miners. To become one, you need to block a certain amount of crypto in your account. This process is called staking. There is a reward for supporting the network’s operation.

Liquid Staking Derivatives (LSD) is a strategy with which you can earn interest and simultaneously perform other operations with your assets. By blocking a certain amount, you will receive a derivative token in return, which you can apply in the DeFi ecosystem, generating additional income.

Main Advantages of Liquid Staking

How can liquid staking be beneficial to an investor? Let’s look at the details.

Opportunity to earn money

A staker can get a cryptocurrency loan secured by a derivative token and then deposit the liquidity into a pool on a decentralized exchange. This will allow for earning commissions from the transactions that go through it.

Investment efficiency

Liquid staking is a good opportunity to simultaneously earn interest for supporting the blockchain’s operation and generate additional income from other projects.

Flexibility

There is no instant withdrawal feature in traditional staking, which can bring losses if the value of assets declines. Derivative tokens help equalize the situation because transactions with them can be made at any time.

What Are the Disadvantages of Liquid Staking?

Liquid staking can lead to losses. To avoid this, we advise you to familiarize yourself with its disadvantages beforehand.

Additional costs

The services of liquid staking providers are not free. The commission can be 10%-25%, which reduces profitability.

Price difference

A derivative token is essentially a new market asset, the rate of which may not match the price of the underlying cryptocurrency even with a nominal 1:1 peg.

Liquid Staking: How It Works

LSD services are offered by DeFi platforms, whose protocols “freeze” crypto for blockchain support and generate the same amount of derivative assets in return. The new tokens are backed by the underlying cryptocurrency, with the value increasing after interest accrues.

Risks of Liquid Staking

Like any investment strategy, liquid staking involves certain risks:

• If there are bugs in the code of a smart contract, fraudsters can exploit them and steal the funds locked in it.
  
• Blockchains sometimes have glitches that affect validation and payment of rewards.
  
• Liquid staking tokens are sensitive to volatility and trend shifts, which reduces returns.
  
• Many DeFi projects utilize the same smart contracts and liquidity pools, which creates a tight coupling between the two. If one protocol experiences collateral difficulties, other projects may also suffer.
  

Services for Liquid Staking

We have prepared an overview of five popular platforms that specialize in Liquid Staking:

Rocket Pool

On the platform, you can lock in from 0.01 ETH with a yield of 4.85%. Moreover, participants receive a new token sETH, available for use in decentralized applications (dApps). Extracting Ethereum from staking is allowed at any time.

Acala Network

The service offers to tokenize Polkadot and receive LDOT in return. You can borrow aUSD (Acala’s internal stablecoin) to become a liquidity provider in the LDOT/aUSD pool and receive additional income to your staking fee. The minimum entry threshold is 5 DOT.

Lido

The service supports Ethereum, Polygon, and Solana and is ideal for beginners. It offers APYs from 4.4% to 6.7% with daily payouts and no minimum deposit limits. Interest for supporting the network operation is accrued daily. Derived tokens are compatible with dApps.

Tempus Finance

The platform allows you to work with tokens created on the Ethereum and Phantom blockchains, such as ETH, DAI, Sushi, and others. In return, users receive stETH, cDAI, or xSushi. In addition to standard features, Tempus Finance provides tools for hedging (fixing yields to protect against fluctuating rates) and speculation (a way to make money on changes in yields).

Meta Pool

Stakers block Near, and in return, the platform gives them stNEAR. On Meta Pool, you can also accumulate interest income, take loans, and participate in liquidity pools. The average rate is 10%.

Conclusion

We have found out what liquid staking is and how you can multiply your capital with it. So, what should you remember?

1. Liquid staking allows you to combine passive interest income with other activities on DeFi platforms.
   
2. By blocking crypto to support the network, investors receive derivative tokens and can use them as collateral for cryptocurrency loans to participate in liquidity pools or for decentralized trading.
   
3. Frozen assets are always available for withdrawal.
   
4. The most popular LSD providers are Lido, Rocket Pool, Tempus Finance, Meta Pool, and Acala Network. They charge commissions for their services.
   

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