Liquid Staking

What is Liquid Staking?

Liquid Staking harnesses the advantages of traditional staking while allowing assets, which would otherwise be bonded and unusable in DeFi or other web3 applications, to be tokenized. This tokenization enables the immediate use of these assets within these applications. Typically, interest is automatically accrued to the tokenized assets, and most liquid staking protocols take a fixed percentage of the rewards as a fee.

What are its Key Benefits?

As mentioned earlier, one of the advantages of liquid staking is the liquidity of assets even after staking. This allows users to earn staking rewards while retaining ownership of the staked assets. The derivative assets issued after staking, which are tokenized, are commonly referred to as liquid staking tokens (LSTs). Users can generate extra income by utilizing these LSTs in DeFi applications.

Additionally, traditional staking often requires a lock-up or unbonding period during which the assets cannot be accessed. Liquid staking allows you bypass this restriction. The LSTs provide immediate liquidity, meaning users can sell, trade, or leverage these tokens in various DeFi protocols without having to wait for the unbonding period to end.

The conversion rate between liquid staking tokens (LSTs) and the underlying staked assets is an important factor that can influence a user's decision to use liquid staking or wait for the unbonding period. The actual trading value of LSTs on secondary markets can fluctuate due to supply and demand dynamics, liquidity, and market sentiment.

Sometimes, LSTs might trade at a discount or a premium compared to their intrinsic value based on the underlying staked assets and accrued rewards. Understanding this dynamic can help users make informed decisions about whether to trade their LSTs in the market or wait for the traditional unbonding period to unstake.