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Liquid Staking Meaning

Feb 9, 2024 | Updated Feb 9, 2024
Liquid staking is a mechanism that allows users to lock up their cryptocurrency while still retaining their liquidity and tradability.

What Is Liquid Staking?

Traditional staking involves validators locking up the native token of a proof-of-stake (PoS) network to increase their chances of being pseudorandomly selected to confirm transactions and forge blocks. Other users also stake their tokens to liquidity pools to boost the liquidity of DEXs and DeFi protocols. As an incentive, the participants receive staking rewards in the form of the network’s native token. However, native staking comes with a tradeoff – staked tokens can no longer be used during the staking period.

Liquid staking (soft staking) addresses this challenge by introducing financial instruments, called liquid staking tokens (LST) or liquid staking derivatives (LSD), to represent the user’s staked tokens. 

Similar to traditional staking, users lock up their cryptocurrency in a smart contract on the soft staking platform. The platform issues the user with a “receipt token” – the LST – which is pegged to the value of the staked tokens. Like any other cryptocurrency token, users can transfer, trade, and use these LSTs for lending or as collateral on other DeFi applications and services. 

Users can unlock their tokens anytime they want to by burning the LSTs. Once the platform confirms that the LSTs are burned, it releases the staked tokens. 

Examples of soft staking platforms include Lido Finance, StaFi Protocol, Harmony, and Rocket Pool.

What Are the Benefits of Liquid Staking

Soft staking holds a ton of advantages over regular staking. Some benefits include:

  • Unlocked liquidity: Liquid tokens can be traded, transferred, and used in lending or as collateral for borrowing in DeFi protocols instead of remaining locked for a fixed period. As a result, the value and utility of the underlying cryptocurrency increase, thereby boosting liquidity.
  • DeFi composability: By serving as derivatives for the staked tokens, LSTs are usable across countless DeFi platforms.
  • Reward opportunities: This form of staking reduces the opportunity cost of staking by allowing users to earn staking rewards while still leveraging the value of their staked tokens. Thus, the LST can be used on other platforms to earn additional rewards on the same investment.
  • Accessibility: Unlike traditional staking, which is bound by a lock-up period, users can redeem their staked tokens anytime in soft staking.

You can refer to the full article on Ledger Academy for a more detailed look into liquid staking.

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