Liquid staking: If you’re looking for a relatively safe way to earn passive income in decentralized finance (DeFi), there’s nothing better than staking your tokens to validate the network, says Alexander Chambers, Content Strategist at Geode Finance.
Not only is it a less risky way to generate return, but it’s getting progressively easier to do. You can even stake tokens to validate Proof of Stake (PoS) networks like Ethereum on centralized exchanges such as Coinbase now. Despite the strong learning curve decentralized finance puts users through, the barrier to entry for staking is now much lower than it has ever been.
However, good news travels fast (especially in the crypto scene), and when it comes to staking options, the tide is turning. As a result, an increasing number of users now opt for the benefits of liquid staking over this conventional vanilla staking model. But what is liquid staking, and how does it benefit users looking to maximize their DeFi earning potential?
Liquid Staking: What is it??
Most investors don’t want to leave money on the table when it comes to their earning potential. Why hold an asset in your wallet that you can only speculate on, when staking it will earn APY? Unfortunately, utilizing a vanilla staking contract locks up your tokens, and prevents you from taking advantage of other opportunities within DeFi. Liquid staking is the next step, allowing users to validate the network, while also leveraging their liquidity toward other actions in DeFi. An example could be borrowing DAI against your staked tokens, in order to participate in a stablecoin farm. The greatest value of liquid staking comes from empowering users to maximize their capital efficiency and compound their yield.
Building DeFi Composability
Since the value of liquid staking comes from being able to leverage your liquidity toward other DeFi actions, DeFi composability is an important measure in the efficacy of the solution. This is why DAOs engaged in liquid staking must form partnerships with other projects, as it ensures compatibility for their particular staking solution. Thus, composability is a byproduct, determined by the quality of partnerships. An example would be a liquid staking protocol partnering with a DEX (decentralized exchange), enabling lending and borrowing against the staked asset. The more partnerships, and the greater the quality, results in increased DeFi composability, which in turn creates more options available for users to earn additional yield.
Staking Time: Benefiting the Network
PoS chains require users to validate the network in order to function properly. Vanilla staking accomplishes this, but results in an opportunity cost when it comes to participating in DeFi, because users’ liquidity is locked up. This means users might only stake their tokens for short periods of time, as they will eventually opt to unstake in order to free up their liquidity for use within other DeFi protocols. Alternatively, liquid staking unlocks liquidities, giving users the passive income from validating the network, while enabling them to compound their yield through other DeFi activities. Liquid staking effectively incentivizes users to stake their tokens for longer and freely deploy their capital to earn yield within the DeFi ecosystem, while simultaneously securing and validating proof-of-stake blockchains.
Liquid Staking: Evaluating Solutions
Across all PoS chains, there are already a plethora of so-called ‘liquid staking’ solutions. However, not all of them are real liquid staking protocols. For one qualification, they must offer real DeFi composability. If there are no DeFi integrations with other projects, there’s no way to leverage your asset in other DeFi protocols to compound your return.
Another important way to compare liquid staking projects is how they maintain the peg of their native asset. For liquid staking to work as intended, the asset must remain liquid and tradable at a fair exchange rate. How projects accomplish this varies, with some projects requiring lockups or waiting periods on withdrawals, which is not a pleasant user experience. Other projects set aside a certain percentage of the native asset as exit liquidity, though this lowers ROI and puts the protocol at risk if there is a net flow of users exiting.
The Trade-Offs
Ultimately, liquid staking solutions often come with trade offs. Users have to decide which features matter most to them, such as instant access to funds or expansive DeFi composability. Liquid staking solutions that effectively balance the needs of the network with the needs of the user will have the greatest success in attracting users to this exciting and innovative product in decentralized finance.
Geode Finance is creating the liquid staking universe across all Proof of Stake (PoS) chains. DAOs can leverage Geode’s white label liquid staking solution to offer a new product to their users while charging what they want for the privilege. Compounding yield is possible with DeFi integrations, which increase as Geode’s universe expands. Geode charges no fees for this service, making it the perfect solution for any DAO looking to diversify their treasuries into liquid staking.
About the author
Alexander Chambers of Geode Finance is a freelance blogger who has written for a variety of industries including Biz Dev, comedy/satire, cannabis, food services, medical, child advocacy, healthy living, legal, and more. In early 2021, his deep passion for writing found its way into the world of cryptocurrency and DeFi after noticing a lack of easily-digestible content available for newcomers.
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