How Liquid Staking Will Bridge the Gap Between DeFi and Staking


By Mohak Agarwal, CEO of ClayStack  

These days, crypto users are being faced with a choice: staking or DeFi. They can participate in the DeFi ecosystem and gain access to potentially high yields, but doing so comes with risks. On the other hand, staking provides users with relevantly safe rewards, yet comes with one major downside: the crypto staked is locked up and unable to be used in other yield-producing projects, like DeFi.

But why not both staking and DeFi — especially when the total value locked in DeFi has risen to $75 billion in just five years? The innovation of liquid staking has the ability to allow for both. Yet there are still factors causing crypto users to hesitate when it comes to staking their assets. Here’s what’s holding staking back, and how liquid staking is the solution to strengthen the future of Proof of Stake (PoS) blockchains.

Factors Holding Staking Back From Mainstream Adoption

Having seen the limitations in Proof of Work (PoW), many blockchains are shifting to PoS — and PoS account for over half of crypto’s total market cap, a total of $594 billion. But that success is only dependent upon whether holders will actually stake their crypto. Here are some of the common factors keeping crypto enthusiasts from participating in staking.

Factor 1: Staking has a learning curve

In order to stake tokens, you have to educate yourself on a number of aspects of the process. You not only need to learn all about that blockchain and how staking works, you need to learn about the validators on that network, too: when they are slashed, how good is their communication, what’s the past history of their uptime, and more. This learning curve and required minimal technical knowledge is often a barrier to entry.

Factor 2: Volatility of the asset

When investors stake, they lock up their staked crypto for a minimum period of time. This poses a problem if you stake for a 10% or 11% yield on your investment, and yet the token price has gone down by over 50% while your crypto was locked up. As we found in our newest report, “The State of Staking,” users are hesitant to stake because they don’t want their assets locked up, taking away their ability to sell if the market jumps or plummets.

Factor 3: Network economics

Another factor holding crypto holders back is simply the network economics, including the policies, penalties, and fees by which staking functions. With Graph, for example, when you stake your tokens you lose 0.5% of principle right away. Validators may also be subject to slashing penalties, or loss of their rewards or staked crypto, if they demonstrate any malicious behavior.

Factor 4: Lack of an easy to way to do everything

There’s an ease-of-use problem as well with staking. It may seem as straightforward as buying crypto, then staking crypto. But someone must go to Binance or Coinbase, buy USDC, go to Uniswap if the asset is not available, exchange the asset, then create a wallet, then go to a staking dashboard, where they can then stake that asset. Staking on an exchange is easier, but it’s very difficult if you want to control your stake.

Factor 5: Yields are going down on some networks

When a blockchain launches with staking, a lot of the yields come from the governance subsidies. But with network inflation so low, many chains are not making much on transaction fees, and the rewards are going down. People don’t want to stake for just 4% to 5% yield. On networks like Graph and Matic, staking costs $100 to $150, which is impossible for an average user to pay. If they’re staking $1000, it will take one and a half years just to make their transaction fee back, and then if they unstake, another one and a half to three years just to earn back the transaction fees.

Why Liquid Staking is the Solution

What’s the solution to these prohibiting factors? Liquid staking, which allows holders of staked assets to get liquidity in the form of a derivative token which can be further used in various DeFi protocols. It’s a way to maximize earning potential while having the best of both worlds.

But liquid staking’s benefits aren’t just limited to freeing up assets. Liquid staking also facilitates yield stacking, where users can earn rewards for staking as well as earn yield in DeFi activities. While yield stacking is still available in DeFi, there’s more risk, because if a base layer protocol fails, the entire stack can collapse, resulting in significant losses. Those participating in liquid staking have their base yield coming from the PoS network itself — which they can still rely upon if a DeFi project fails.

Liquid staking also contributes to the overall strength of the network as well. The strength and security of the PoS network is directly proportional to the number of validators on the network and the amount of capital they have staked. Since liquid staking removes the barriers around staking, it can incentivize more users to stake their capital. As the number of validators on the network increases, the amount of staked capital increases, and the stronger the network becomes. 

Both Staking and DeFi

Liquid staking has the ability to unlock the potential of PoS by giving users the ability to not only stake their assets, but have the liquidity to use those assets in DeFi projects during the lock-up time. This opportunity not only increases yields for the individual, but has the ability to grow staking participation in general. Increased participation in staking not only strengthens the network, but is a boon for everyone involved — and will build the future of the crypto ecosystem.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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