All You Need To Know About Liquid Staking

What Is Liquid Staking? 

If you've staked before, you may have been required to keep your staked crypto assets locked up for some time. This is why the widely used Proof of Stake (PoS) consensus mechanism works so effectively over hundreds of blockchains. It vastly improves the Proof of Work technique as it is very energy efficient and provides rewards quickly. 

If your cryptocurrency is frozen in the staking process, you won't be able to transfer, sell, or use it until the staking period has ended. The unlocking time of staked tokens varies based on the token and platform you're using, but they might range from days to weeks and even months. This isn't a significant issue in staking, but it does deter some users because they won't be able to touch their tokens for an extended period. 

Furthermore, you may be charged a penalty if you un-stake before the end of the staking period. Un-staking typically takes weeks, so you'll have to wait a long time for your funds to become available. This is where liquid staking becomes a viable option. This strategy, also known as soft staking, allows you to access your funds while they are staked. The funds remain in escrow, but unlike PoS staking, they are not frozen and inaccessible. 

This is accomplished by giving you a tokenized representation of the cryptocurrencies that have been staked. You can buy, sell, and use them in the same way your original cryptocurrencies are used. Furthermore, liquid staking does not require a lengthy un-staking procedure. This makes the entire process a lot easier. In a nutshell, liquid staking combines the best of both worlds: a passive revenue stream and easy access to your staked cryptocurrencies.

How does Liquid Staking on Ethereum work?

In the face of the limits of both self-staking and exchange staking, liquid staking emerges as a novel way to avoid the problems of illiquidity, complexity, and centralization. Instead of locking up a user's stake: it allows users to stake any amount of Ethereum and effectively allow transactions without unstaking it. 

This is accomplished by issuing a tokenized version of the staked funds – a derivative form — that can be transferred, saved, spent, and traded just like any other token. A user would deposit their Ethereum into a third-party app such as Lido. 

of Users that stake their ETH into the Ethereum deposit contract in order to secure the Ethereum network. They cannot unstake their ETH until transactions are enabled after ETH merge upgrade. No date has been announced yet for this phase of the upgrade, users may potentially have to wait for months to get back their staked ETH. Here, liquid staking solved this problem.

Applications such as Lido would deposit users' ETH into the Ethereum deposit contract on their behalf (using their own validators) and mint a representative ETH token in exchange (e.g. stETH). 

Users will keep their ETH liquidity by transferring it wherever they want while still receiving Ethereum staking rewards using this representational token. Lido, for example, allows users to stake any amount of Ethereum in exchange for stETH, which can be used for lending, collateral, and other purposes, while still collecting daily staking rewards. A user's balance will increase once each day as their staked ETH creates staking incentives, allowing them to receive the value of their staking rewards. Users can unstake at any time through the use of stETH-ETH liquidity pools.

This representative ETH will be refunded to the third-party issuer once Ethereum transactions are enabled in a future upgrade. The issuer will then refund the customer a sum of ETH equal to their original investment and any incentives they earned while safeguarding the network. Users can also unstake their ETH tokens by exchanging them on the open market. 

Different options for liquid staking services