Liquid Staking; The Next Narrative.
Liquid Staking is a trend in the crypto sector that is becoming a hot topic, as analysts predict it to be a driving force for crypto’s growth. But from my research, it seems LST-fi is still lowkey, as most people aren’t aware of this coming wave.
What is Liquid Staking.
Liquid Staking is a staking mechanism whereby crypto tokens (eg: XYZ) are exchanged for a staked version (stXYY) that is minted for the staker at a 1:1 ratio.
Most crypto investors prefer staking (or locking/pooling) as their ideal investment style. Looking back at the ETH Shapella upgrade, when over $34Bn was unlocked from ETH staking. The unlocking was predicted to cause sell pressure and a decline in ETH prices. However, we witnessed an increased interest in restaking, as data reports from aggregate sites and data sources report an increase in staked Ethereum post shapella upgrade.
This is because staking can be very lucrative. Staking rewards, increase in token quantity, ecosystem rewards, voting power, opportunity to lock large capital investments, are all some of the benefits of staking.
While all these benefits are attractive enough, the need for liquidity rotation has become a major limitation in traditional staking that LSTs have come to solve, most likely to the benefit of micro investors.
How LSTs work.
Liquid Staking Tokens (LSTs) are equivalent of staked tokens that are minted and issued to the staker by the staking platform. Some studies have described LSTs as “receipt tokens”, that serve as proof of ownership to the underlying asset (XYZ of stXYZ) of a (staked) crypto asset. To own a staked asset (stXYZ), you will have to stake an amount of the underlying asset (XYZ) that is equivalent to the amount (of stXYZ) you want.
With traditional crypto staking, you will lock tokens and wait a certain duration for the rewards to mature, before you can claim both your tokens and reward. Although this staking technique has been crypto’s standard, Liquid Staking is the next step for crypto.
Unlike its predecessor, liquid staking creates an opportunity for staked tokens to be accessible, even during their “locked” duration.
Let’s make a reference below.
An observer who was swayed by the performance of ETH post Shapella, decides to invest in Ethereum staking. The investor would have to stake their ETH in any staking protocol of their choice, and wait until their maturity is due before claiming profits. With traditional staking, once locked, tokens cannot be accessed.
However, several reasons could make the investor need their liquidity, which is where LSTs come in.
With liquid staking, the investor could stake their ETH, receive stETH, and still make use of their st-token for other crypto activities.
This is only possible with liquid staking technology, as tokens can now be used, even when locked.
Benefits of Liquid Staking and LSTs.
Increased token usability:
Liquid staking makes it possible for token holders to stake their tokens into pools, then mint an equivalent amount of their staked token. Now with their st-tokens, stakers can still make use of these tokens in several crypto activities including restaking, providing liquidity, swapping, and even selling (i.e to exit their staking) at any time they wish.
More staking rewards:
Some staking pools also accept st-version of certain tokens. This makes it possible for stakers to earn rewards from both the base and st- version of their token. This isn’t possible in traditional staking.
More flexibility:
With st-tokens, holders can still partake in trading activities, easily access st-tokens with other crypto, and even rotate their portfolio in st-tokens based on higher rewards. This gives the once rigid staking mechanism a whole new flow to it.
Advanced safety.
In the case of an unprecedented crash, stakers will no longer be at the mercy of staking platforms, as they can readily exchange their st-tokens to the staked version, or other pooled tokens and exit the market in advanced safety.
Although new, liquid staking is quietly spreading across networks as several LSTs and their derivatives have begun to form. It is important to note that LST tokens can ONLY reflect the price of the staked token. Thus, LSTs (st-XYZ) cannot “pump” more than the base coin (XYZ). Only LSDs (i.e native tokens of the staking platform) can have an independent price. Every st-token has the same price as its staked token, but the staking platform’s token is independent.
LST platforms in the DeFi ecosystem.
The LST trend has been adopted and recreated by several platforms. As such, there are several DeFi protocols offering liquid staking as a service. These platforms cut across several blockchains, as staking does not need to be “chain based”. Below are examples of DeFi platforms that offer liquid staking services, and issues st- tokens.
- Lido Finance. Lido is presently the largest DeFi platform with over $13Bn liquidity locked in their protocol. Lido is most prominent for its liquid staking in major crypto currencies including ETH, SOL, DOT, KSM, and MATIC.
- Stader Labs. Stader Labs is building a multi-network non-custodial liquid staking platform, where users can deposit tokens into liquid staking contracts in exchange for Stader’s st- form of their token. Stader presently supports liquid staking in Polygon, BNB, FTM, Near, etc, and is coming to Ethereum soon.
- Bifrost. Bifrost is a leading liquid staking platform in the Polkadot-Kusama ecosystem. Bifrost offers liquid staking for Ethereum, as well as other polkadot native projects and tokens. Bifrost has also gone on to create liquidity pools for their v-token holders to also earn from, all within its ecosystem.
To learn more examples of liquid staking platforms and what they’re doing, click here.
Taking advantage.
Utility. Narrative. Timing.
LSTs clearly, will disrupt the way staking is done, and LST platforms and their tokens (LSDs) will trend more. In order to take advantage, it is important to identify credible liquid staking platforms, and follow the Narative — Utility — Timing review process.
Utility.
Obviously, liquid staking offers more benefits and flexibility compared to traditional staking. This “utility” will eventually drive several liquid staking platforms as it becomes the primary staking method in crypto space.
Narrative.
Like traditional staking, protocol rewards are determined individually. While this may attract greedy investors, every unsustainable profit rate will fail.
Each liquid staking platform is another DeFi company that will try to grow. This means that should a company expand beyond just staking, and succeed in other sectors, the “company’s tokens” are most likely to increase in value. While their new success will have zero effect on the value of their st-tokens, its effect will be glaring in the value of the platforms’ token.
Timing.
Timing is the most important factor in crypto. A day could make a lot of difference. Timing is almost as important as the “alpha” itself because wrong timing will have a different result.
While DYOR, it is important to follow the news on key projects and companies that catch your attention. Even in the bears, builders keep building, and the silence is more room for researchers to work.
Did you enjoy your read or find it insightful? Please do leave a few claps below 👏🏾.
Thank you.
