Everything you need to know about liquid staking

Staking is an innovative way to earn rewards while supporting the network's security and operations in the crypto world. It often involves locking up your tokens for a specific period, limiting their liquidity. 

A groundbreaking concept called liquid staking has gained attention among crypto users. If you’re new to the concept, here’s your guide on everything you need to know about liquid staking:

How does liquid staking work?

For crypto users new to liquid staking, the first question is always ‘What is liquid staking?’ It is a new concept that combines the benefits of staking tokens with the flexibility of keeping them accessible and usable.

While traditional staking earns you rewards in the form of tokens, it also means that they become illiquid, meaning you can't easily use or trade them until the staking period ends. Liquid staking changes this by allowing you to stake your coins and earn rewards while still keeping them liquid. 

You can use your staked tokens for other purposes like trading, investing, or even transferring them to other wallets. The process of liquid staking involves a special type of token called a ‘wrapped’ or ‘liquid’ token. 

These liquid staking tokens represent your staked assets and can be freely traded or used like any other crypto. They are often issued by third-party platforms or protocols that handle liquid staking.

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Staking vs liquid staking

Staking and liquid staking are two different approaches to earning rewards, each with its pros and cons. Staking offers the benefit of actively engaging in securing a blockchain network while earning rewards. 

It can be a long-term investment strategy, as you often commit your tokens for a fixed period. However, it limits your token liquidity during that time, which means you can't readily access or use them.

On the other hand, liquid staking provides you with more control over your tokens. You can stake your tokens and still have the freedom to trade, invest, or transfer them as needed. 

This allows you to take advantage of other opportunities or respond to market conditions quickly. Liquid staking also involves risks, such as the security of the third-party platforms or protocols handling the process.

Key benefits of liquid staking

Liquid staking offers more benefits, making it an attractive option for crypto holders. Here are some of its main perks:

Staking rewards in real time

With liquid staking, you can earn staking rewards in real time. Instead of waiting for the staking period to end to receive your rewards, you can start earning them instantly while your tokens remain liquid. This is good for volatile markets where you want to capitalise on trading or investments without forgoing the rewards made by staking.

Reduce cost

In normal staking, you limit your potential to take advantage of short-term investments. On the other hand, liquid staking lessens the cost by allowing you to earn staking rewards while still maintaining the freedom to react to market conditions. This is a good option for d fast-moving crypto markets.

Potential for high returns

Liquid staking offers higher returns compared to normal staking. By keeping your tokens liquid, you can optimise your staking rewards by actively managing your assets. 

For example, you can allocate your tokens to different staking platforms or networks based on their respective rewards and performance. This enhances your overall returns.

Ease of process

Many liquid staking platforms often aim to simplify the staking process, making it simple to use even for crypto users with limited technical knowledge. These platforms provide user-friendly interfaces and easy processes that streamline the staking experience. As a result, even if you're not a technical expert, you can still engage in staking and enjoy its benefits without the need for a complex setup.

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Tokens that support liquid staking

Although liquid staking crypto is relatively new, many tokens already support it. These tokens support liquid staking through decentralised autonomous groups that handle key upgrades and parameters of liquid staking protocols in the network. 

Some of the popular blockchain platforms and their tokens that support liquid staking are:

• Ethereum (ETH) → Lido is the most popular liquid staking protocol for ETH that provides stETH, a liquid token that represents staked ETH and earns staking rewards. Other popular liquid staking protocols for ETH include Rocket Pool, StakeWise, and Frax Shares.
• Cosmos (ATOM) →  Lido also offers liquid staking for ATOM, with a liquid token called bATOM. Aside from Lido, two of the most used liquid staking protocols for ATOM are Osmosis and Evmos.
• Polkadot (DOT) → DOT supports liquid skating through Lido, with its liquid token being stDOT. Some of the liquid staking protocols for DOT include Bifrost and Acala.
• Solana (SOL) → Marinade is the most popular liquid staking protocol for SOL, offering a liquid token known as mSOL. Other liquid staking protocols for SOL you can use include Lido and Saber.

Tips for effective liquid staking

Can’t wait to get started on liquid staking? Follow these tips for effective liquid staking:

• Choose a reliable platform → Look for platforms with a solid track record, transparent operations, and robust security measures. Take into account factors such as user reviews, platform reputation, and the team behind the project. Conduct thorough due diligence to ensure the platform is trustworthy.
• Know the risks → Aside from the benefits that liquid staking provides, it also comes with risks. These include risks that come with wrapped tokens and the potential for smart contract exploits. Always assess the risk factors and evaluate whether the potential rewards outweigh the risks. 
• Consider staking rewards and fees → Compare the staking rewards offered by different platforms and choose the one with competitive rewards to maximise your earnings. You should also consider the fees that come with liquid staking, such as platform fees or transaction fees. High fees impact your overall returns, so it's important to assess and compare the costs involved.

Should you try liquid staking?

Now that you know what is liquid staking, you may be wondering if you should try it. Deciding whether to try liquid staking depends on your conditions, risk tolerance, and investment goals. It's important to carefully evaluate the risks involved, conduct research, and make informed decisions based on your assessment.

Frequently asked questions

Got more questions about liquid staking? Learn more about it with these FAQs:

What is liquid staking?

Liquid staking is a mechanism that allows you to stake your tokens and earn staking rewards while keeping them liquid and readily available for use.

Are there any risks or drawbacks to liquid staking?

Yes, some risks and drawbacks come with liquid staking such as smart contract risks, and platform risks. 

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