Blockchains have relied on proof-of-work (PoW) validation since their inception. Yet the PoW consensus proved to be unsustainable with its high energy usage and its need for fast, powerful hardware creating high barriers to entry. That’s why blockchains are adopting proof-of-stake consensus algorithms (PoS), where those wanting to earn rewards don’t have to compete against other miners, but can simply stake part of their crypto for a chance to be chosen to be a validator — and reap the returns.
Everyone who owns crypto on PoS blockchains must want to take advantage of the opportunities staking provides, right? Actually, according to our report, while 56% of those surveyed had staked before, many who hadn’t staked or wouldn’t stake again pointed toward the same hesitation: They don’t want their assets locked up in staking, not when those assets could be put to use elsewhere. This is why liquid staking provides the best of both worlds. It allows investors to stake their assets while also allowing them to use those assets in other projects during lock-up.
Despite the fact that this innovation is able to lower barriers to staking, there’s still confusion about what liquid staking is and what it can offer to the crypto community. What follows are some of the misconceptions about liquid staking and what the truth is about this new opportunity.
Related: The many layers of crypto staking in the DeFi ecosystem
What is liquid staking?
Staking is changing the way blockchains function. It brings better energy efficiency to blockchain validation, more flexibility to the hardware needed and quicker transaction frequency. But despite its benefits, one of its biggest challenges — and what’s holding many back from staking — is the lock-up period. Assets are inaccessible to the holder while being staked, and those owners can’t do anything with them — like invest in decentralized finance (DeFi) — while they’re being staked. It’s because of this sacrifice that many are hesitant to stake.
However, liquid staking solves this issue. Liquid staking protocols allow holders of staked assets to get liquidity in the form of a derivative token that they can then use in DeFi — all while the staked assets continue to earn rewards. It’s a way to maximize earning potential while having the best of both worlds.
PoS is also swiftly rising in popularity. PoS protocols account for over half of crypto’s total market cap, a total of $594 billion. The opportunities will only increase as Ethereum moves fully to PoS in the coming months. However, only 24% of the total market capitalization of staking platforms is locked in staking — meaning there are many who can stake but aren’t doing so.
Related: The pros and cons of staking cryptocurrency
Four misconceptions of liquid staking
Despite the benefits of liquid staking, there’s still confusion about how it functions. Here are four common misconceptions, and how you should be thinking about liquid staking instead.
Misconception 1: Only one player or protocol will exist. One of the misconceptions about liquid staking is that only one player will exist through which investors can gain liquidity. It may seem that way since it’s still so early in the liquid staking space, but in the future, multiple liquid staking protocols will coexist. There may also be no capping to the number of liquid staking protocols that can coexist, either. In fact, the more the number of protocols, the better it is for the network, as it can reduce instances of stake centralization and fears of a single point of failure.
Misconception 2: It’s only limited to liquidity. Liquid staking isn’t just a way to get liquidity. While liquid staking does help PoS networks acquire staked capital that secures the network, it is not just limited to that. It’s also a way to get composability because you can use your derivative in multiple places, which you can’t do with an exchange. The synthetic derivatives that are…
Read More: cointelegraph.com