Staking is super hot right now, but locking up your crypto to earn a bit of yield may not be worth it. Here's how liquid staking platforms solve that dilemma.
Updated Apr 14, 2022
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Crypto
Passive Income
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Staking is the new HODLing and everyone who's investing in DeFi is trying to cut themselves a piece of that juicy stake APY.
While the yield on the best proof-of-stake coins can serve as significant passive income, the problem with staking is that locking up your assets renders them idle and unproductive when new profitable DeFi opportunities arise. The way around this is using a liquid staking platform so that you can have your cake and eat it too.
Platform | Lido | Ankr | Marinade | Rocketpool |
|---|---|---|---|---|
ETH | 3.9% | 4.97% | N/A | 4.03% |
SOL | 5.9% | N/A | 6.08% | N/A |
LUNA | 6.7% | N/A | N/A | N/A |
MATIC | 8.7% | 9.07% | N/A | N/A |
ATOM | TBD | N/A | N/A | N/A |
BNB | N/A | 4.22% | N/A | N/A |
AVAX | N/A | 8.29% | N/A | N/A |
FTM | N/A | 9.3% | N/A | N/A |
DOT | N/A | TBD | N/A | N/A |
KSM | 23.5% | TBD | N/A | N/A |
Liquid staking solutions are platforms that allow holders of PoS coins to delegate their crypto in a PoS consensus protocol and receive a derivative in return.
For example, when Ethereum first deployed the staking contract in October 2020, people hesitated to deposit their ETH because the maturity period—or the waiting period for withdrawing assets—was indefinite (since the Ethereum merge date is TBD).
Additionally, setting up a PoS validator node is a highly technical process that requires 32 ETH and the capacity to be active 24/7, meanwhile delegating fewer ETH with a validator can be less profitable and riskier. All in all, these drawbacks made the prospects of staking ETH economically unfavorable for most people, at least at first.
Platforms like Lido and Rocket Pool addressed this by enabling stakers to delegate practically any amount of ETH in exchange for a token that represents staked ETH plus staking rewards—such as stETH and rETH from Lido and Rocket Pool, respectively. Stakers are able to utilize these tokens in other DeFi applications to gain additional yield by using them as collateral or depositing them into other protocols that accept staked ETH derivative tokens like stETH or rETH.
Unlike Lido, which can be described as a custodial crypto staking service, Rocket Pool is a decentralized staking protocol that offers non-custodial liquidity to ETH stakers. While both are essentially the same in how they function, decentralized staking may be more attractive to hardcore blockchainers since there is no single point of failure that a malicious actor could exploit. In other words, ETH stakers who perceive a decentralized structure to be more secure may be inclined to use Rocket Pool over Lido.
Once you deposit your crypto into the liquid staking platform of your choice, you can just sit back and enjoy that passive yield. While the number of derivative tokens you receive—which represents your portion of the staking pool—remains static, your platform will automatically adjust the exchange rate based on the rewards generated.
To check your liquid staking gains, all you have to do is log back into your platform, check the exchange rate, and Bob's your uncle. When you choose to withdraw after the applicable maturity period, you will receive back the original token at the current exchange rate.
One thing you can do with your liquid staking tokens is deposit them into an automated market maker protocol, AKA decentralized exchange (DEX). Providing liquidity on platforms like Uniswap and Curve Finance comes with certain risks, but is nonetheless a popular 'yield farming' strategy that can earn you additional yield on top of your staking rewards.
For instance, Curve Finance is a DEX that offers an ETH-stETH liquidity pair among its many exchange pools. Traders who want to exit their stETH position can use this pool to trade it back for ETH in exchange for a small fee. That small fee serves as the incentive for liquidity providers to deposit an equal dollar amount of ETH and stETH into the pool, and those fees comprise the rewards that are distributed proportionally among all liquidity providers.
Another thing you can do with liquid staking tokens is use them as collateral by depositing them into a lending protocol like AAVE. Lending protocols that accept liquid staking tokens like stETH enable users to use those tokens as collateral to borrow other cryptos.
While there is a liquidation risk during volatile markets, depending on how large the loan is relative to the collateral, this option allows you to leverage your staked crypto by borrowing other cryptos that can be used for lucrative DeFi opportunities.