What will liquid staking bring us?
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What will liquid staking bring us?
Liquid staking allows users to stake their cryptocurrency to earn low-risk interest while maintaining liquidity of their funds to maximize capital efficiency.
Navigating Web3 tides with focused insightsBy: Chen'ai Tech
One of the most popular financial activities in the cryptocurrency industry is undoubtedly staking.
From an investor's perspective, staking is a choice to deposit funds into a crypto wallet to earn fixed returns over time—similar to placing deposits in a bank.
The key difference between the DeFi ecosystem and traditional banking lies in blockchain technology, which makes everything transparent.
Staking under the PoS consensus mechanism serves as an eco-friendly alternative to cryptocurrency mining. Stakers help secure the blockchain network and, in return, receive rewards granted by the network during transaction validation.
Although it has long been one of the most popular DeFi products among crypto enthusiasts, its lack of liquidity has remained one of the major challenges investors face.
Simply put, liquid staking allows users to stake their cryptocurrencies to earn low-risk interest while maintaining the liquidity of their funds to maximize capital efficiency.
Why Participate in Liquid Staking?
Liquid staking enables token holders to stake their tokens while still using them within DeFi applications.
Benefits of liquid staking:
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Fast access to funds: In PoS protocols, there is no need for a lengthy "unbonding" period, nor penalties for early withdrawal.
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Derivative strategies: By utilizing derivative assets in DeFi protocols to generate income and staking rewards, it addresses cross-chain incompatibility issues in DeFi and helps unlock an estimated $600 billion in liquidity locked within PoS networks.
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Reward stacking: Through practices like yield farming, users can earn returns from multiple assets simultaneously by leveraging tokenized derivatives while trading via liquid staking protocols, maximizing returns on a single capital pool.
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Exposure to crypto-backed loans: With liquid staking, investors do not need to split their assets to overcome unexpected constraints in accessing fiat funds. Instead, they can use their existing crypto assets to obtain crypto-backed loans through liquid staking protocols.
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Low fees: Liquid staking supports borderless finance without costly financial intermediaries, making it easier to compare options and secure optimal fees and performance.
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Better risk-return balance: Since the strength and security of PoS networks are directly tied to the number of locked tokens, liquid staking enhances overall network robustness. Lower risk encourages broader participation, increasing the amount of capital staked within PoS networks.
How Does Liquid Staking Work?
With liquid staking, users can simultaneously earn staking rewards and additional yields from using their tokens in DeFi applications.
Essentially, liquid staking issues L-tokens to users at a 1:1 ratio with their original tokens in exchange for staking those tokens within respective protocols.
For example, if you stake ATOM on the Persistence protocol, you will receive a pATOM token equivalent in value to your ATOM holdings, which you can freely use across any DeFi protocol.
In the case of Persistence, these liquid staking-derived tokens represent both the underlying asset (ATOM) and the accumulating staking rewards earned by helping secure the Cosmos network.
Thus, while earning passive income from traditional ATOM staking, you can deploy pATOM into DeFi protocols and leverage opportunities such as yield farming, liquidity provision (LP), and lending to maximize potential returns.
Anyone can participate in liquid staking by following these simple steps:
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Connect your wallet holding tokens from a Proof-of-Stake protocol.
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Stake your tokens on a Layer 1 network that operates on Proof-of-Stake.
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After receiving synthetic tokens representing the underlying staked assets, you can connect to any DeFi protocol to access strategies that maximize capital returns.
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Withdraw your rewards anytime—whether from DeFi strategies applied to your L-tokens or from the underlying staked assets generating staking rewards.
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You can redeem the synthetic token at any time to unlock access to the underlying asset.
Risks to Consider in Liquid Staking
Beyond the benefits of liquid staking and the satisfaction of maximizing capital in our wallets, we must be aware of certain risks when using derivative (or synthetic) assets in DeFi:
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Note that if validators fail, users may lose part of their tokens.
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Strategies used in liquid staking investments—such as yield farming and lending—are high-risk. Every increase in leverage raises the risk of liquidation when market volatility causes the value of derivative assets to fall below required collateral thresholds.
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Without proper financial education and investment planning, actively engaging with multiple liquid staking protocols to maximize capital may not be profitable.
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Liquid staking on exchanges or centralized platforms may carry risks under the principle of "no keys, no funds."
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With liquidity participation, you can add or remove funds as needed, but annual percentage yields are typically lower.
A Growing Potential Market
According to JPMorgan, staking rewards could grow to $40 billion by 2025—nearly five times the current market size—with ETH2 serving as the primary driver of this growth.
As part of the solution for ETH2 implementation, liquid staking has become one of the fastest-growing sectors in recent months, with nearly 30% of ETH staked through pools in liquid staking protocols such as Lido, Rocket Pool, or StakeWise.
This highlights the growing interest in this emerging sector of decentralized finance under the PoS consensus mechanism, which has already surpassed $190 billion in scale.
As concerns about climate change challenge networks operating under the PoW consensus algorithm, further investments may shift toward more environmentally friendly alternatives like ETH2, fueling the staking industry envisioned by JPMorgan.
Therefore, once liquid staking platforms begin significantly unlocking staked assets for multi-chain availability, they will open doors to unprecedented growth and revenue generation.
Conclusion
How to use liquid staking to enhance DeFi yields will depend on each investor’s or user’s individual risk profile and the specific DeFi strategies they find most suitable at any given time.
The benefits and improvements that liquid staking brings to DeFi remind us that we are at the dawn of a new era in decentralized finance—one that upholds the pure essence of DeFi: empowering users with financial tools to manage their capital and build their future without third-party interference.
Source: m6labs, slightly modified. Author: Kadeem Clarke
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