BNB Liquid Staking: DeFi Upgrade
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BNB Liquid Staking: DeFi Upgrade
Unlike traditional finance (TradFi), DeFi lowers the barrier to entry into financial markets.
Navigating Web3 tides with focused insights
Decentralized finance (DeFi) is ushering in a new economic era. Unlike traditional finance (TradFi), it lowers barriers to financial markets, eliminates the need for centralized intermediaries, and enables seamless cross-border asset transfers.
However, staking has long been notorious for locking up crypto assets and restricting investment opportunities. With liquid staking, highly liquid and interoperable financial services are now possible.
Looking at DeFi's expansion, it’s clear this financial sector is experiencing explosive growth. According to DeFi Pulse, the total value locked (TVL) in DeFi platforms reached $100 billion in 2022. Yet numbers alone don’t capture the incredible innovation DeFi has generated in such a short time.
Despite its impressive track record, crypto staking via smart contracts has some serious shortcomings in capital efficiency. When attempting to grow the DeFi economy, they particularly impact liquidity-seeking investors. One such issue is the inability to earn yield on staked assets. As a result, the DeFi market introduced liquid staking.
Why Is Liquid Staking So Innovative?
The traditional goal of staking in PoS-based projects is to lock up one's assets for a given period in exchange for predetermined staking rewards. While this guarantees a return on staked assets—similar to bonds—it also restricts token holders from leveraging these assets for higher returns across the DeFi ecosystem.
How Does It Differ From Regular Staking?
If you've staked all your cryptocurrency, you face a liquidity crunch. This means you're stuck, unable to invest in more profitable crypto pairs on exchanges. Liquid staking means protocols mint derivative tokens equivalent to the staked tokens, allowing users to use them as collateral in other financial applications. These staking derivatives are liquid versions of staked assets, functioning similarly to derivatives by enabling free trading among parties, regions, and blockchains. As the name suggests, it allows you to utilize your staked crypto assets across various trading and investment opportunities—giving you the best of both worlds: the staking returns you expect, plus additional APR profits from new investments.
This is the foundation behind the current surge in liquid staking. New initiatives featuring liquid staking are emerging across the DeFi ecosystem, as crypto token holders seek greater yields from their stakes. Here, we’ll examine one such initiative that has recently attracted significant attention.
How Does It Relate to DeFi?
Investing in cryptocurrency and profiting from liquidity lies at the heart of DeFi. Whether earning interest, borrowing funds, or yield farming—the choice is yours. This stands in stark contrast to TradFi, where once you invest in stocks or other instruments, you only profit when the asset appreciates or depreciates. Liquid staking is essentially an extension of this concept, with the key difference being that idle assets can be used as collateral in other financial applications.
Thus, it expands investment opportunities and strengthens integration with DeFi. For example, you can tokenize most of your assets staked on a blockchain, integrate them into other protocols, and then use them on DEXs and other DeFi platforms. Staking investors can leverage this to limit exposure and earn additional profits from their staked crypto assets.
What Challenges Exist?
One major challenge is that liquid staking derivatives aren't necessarily fungible and may not fully reflect underlying risks. In practice, speculation, appreciation potential, network adoption, and reliability should all be considered when evaluating staking derivatives. Therefore, pricing and adequately explaining the risks arising from such differences and interdependencies remains difficult. The elastic supply peg mechanisms used by most liquid staking tokens also carry inherent risks. Since it’s far more complex than causal risk analysis, assessing the risk of liquid staking L-tokens isn’t always straightforward.
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