In the past, engaging in staking necessitated a substantial initial investment, typically in the tens of thousands of dollars, to establish a personal node.
Liquid staking has revolutionized this process by allowing individuals to stake any amount, even if it’s a modest sum. This inclusivity significantly broadens participation in the blockchain ecosystem enabling anyone, regardless of their financial capacity, to earn substantial yields in decentralized finance (DeFi) networks by locking their tokens into staking ecosystems.
Transfer of Risks to the Protocol
In a delegated proof of stake system, users can opt for a validator node they consider trustworthy to avoid the risk of incurring penalties arising from dishonest node behavior, which is referred to as slashing. However, conducting individual research on delegated nodes can be challenging.
Liquid staking simplifies this process by transferring all node slashing risks to the chosen protocol. Essentially, if a node selected by the protocol undergoes slashing, the protocol itself is responsible for covering the loss, relieving users of this potential financial burden.
Some of the most mentioned protocols include:
- Lido on Ethereum
- Marinade on Solana
- Ankr on Binance SmartChain
The following are the benefits that such protocols introduce to the market:
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Instant Access to Liquidity Solutions
Liquid staking offers users the ability to utilize your staked crypto while maintaining its liquidity. This flexibility opens up opportunities to generate additional yield by participating in various decentralized finance (DeFi) lending strategies. These strategies encompass a wide range of activities, including liquidity mining, yield farming, and lending assets to protocols and vaults.
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Derisking Impermanence
Using liquid staking allows you to earn additional yield through various DeFi strategies, such as liquidity mining and lending, without the concern of impermanent loss associated with traditional liquidity pool lending. Impermanent loss occurs when the value of the assets in a liquidity pool changes relative to holding those assets outside the pool.
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No Technical Barrier to Entry
Liquid staking offers a straightforward alternative to the complexity of setting up validator nodes. Instead of requiring extensive programming skills, it involves a simple process of exchanging assets for liquid tokens. Using ANKR as an example, staking BNB is as easy as swapping it for aBNBb tokens, making the staking process hassle-free.
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Decentralization
The majority of protocols not only handle the operation of validator nodes on your behalf but also select trustworthy nodes. This decentralizes the network by distributing influence across numerous nodes, mitigating the risk of a single centralized entity impacting transactions or orchestrating a potential 51% attack.
In summary, liquid staking represents a DeFi investment strategy with low risk and moderate rewards. It stands out for its simplicity, lacking the complexity of other yield-earning approaches, and doesn’t require technical expertise or involve impermanent loss risks.
Investors can begin with their preferred investment amount and start earning rewards promptly. Typically, the rewards fall within the 4-10% range, providing a reliable and low-risk avenue for earning additional rewards by contributing to the security of a chain on the preferred network.
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