What is Liquid Staking and how does it work?
Proof-of-stake chains allow you to stake your coins in exchange for staking rewards. Depending on the chain the interest that you earn can be in the double digits but at the same time you opt-in to lock up your coins for a specified time for which you cannot sell or trade them. This fact can have some downside, for example in a sudden market crash, the ETH that you have staked, can’t be acted upon in a timely manner.
Liquid staking provides an alternative. It allows users to stake any amount of ETH and to effectively unstake their holdings without a condition. This is done through the issuance of a tokenized version of the staked funds. The token then can be transferred, exchanged, stored or spent like any other token. The user would simply deposit their ETH into a 3rd-party application which would stake their ETH into the staking pool (through their own validator nodes) and in return would mint a new token representing this position. This allows the user to maintain their ETH liquidity while earning staking rewards provided by the 3rd-party protocol.
An example of such a protocol is Lido . Lido allows users to stake any amount of ETH (and in the meantime also other cryptos like Luna or Polygon) and issue in return stETH than can be then used by the users in the Ethereum ecosystem. The staked ETH generates rewards that are released on a daily basis and the user can exit the staking position anytime through the use of the stETH-ETH liquidity pools.
Next to Lido there are also other options on Ethereum, whereas Lido has the largest share.
If you are interested in using Liquid Staking for Solana, there is Marinade. It uses the very same mechanism like Lido, whereas you will receive mSOL for your staked SOL which you can use in the Solana ecosystem.
Liquid staking manages to seamlessly balance risk, reward and convenience without the strict requirements that prohibit stakers on Ethereum.
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