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Staking is a core component of decentralized finance (DeFi). It means that users typically get rewarded between 4% - 8% for locking up their coins. The current banking model no longer offers any real form of interest for deposits, so the benefits of this kind of staking are clear and obvious, as it rewards people for their contributions instead of taking from them. But Liquid Staking takes it one step further. Liquid Staking was initially created by Ankr, a Web3 infrastructure firm that helps blockchain startups grow and expand together. Ankr further offers a seamless point of entry into Web3 and DeFi with a large suite of protocols. While the benefits of DeFi are obvious from the perspective of traders, investors, and entrepreneurs, it can also be of huge advantage to institutions and corporations.
What Is Liquid Staking?
With regular staking, users earn rewards on their deposits. This works on proof-of-stake blockchains such as Ethereum, and cannot be done on proof-of-work blockchains such as Bitcoin. Most blockchains are now proof-of-stake or delegated-proof-of-stake, though there are many different models being tested out. Liquid Staking goes a step further than regular staking. With Liquid Staking, you get the rewards from staking, but are given a derivative token in return. For instance, you get the rewards for staking MATIC and are then given an aMATICb derivative token. This derivative token can then be used for other purposes, such as crypto loans or trading. Many people have still not grasped what Liquid Staking is or what its implications are. The existing financial industry is built on derivative trading, and this plays a part in the reluctance of corporations and institutions to take part. Though estimates vary, the derivatives market could be up to $1 Quadrillion. It’s about 10 times global GDP, though the figures are hotly contested. Without a derivatives market, the existing financial infrastructure is not going to be interested in Web3. It takes away its flexibility and ability to innovate. Of course, many would argue that the derivatives market is itself the problem, but this is not 100% accurate. It enables fluidity and mobility of capital, which leads to increased affluence, though also the potential for troublemaking of various kinds.
The Many Advantages of Liquid Staking
The financial world runs on a fractional reserve system, enabling the multiplication of assets in a rapid manner. With Liquid Staking, institutions and corporations can leverage their crypto assets to the maximum potential. There will be a fee for Liquid Staking, typically around 10% or so. But this fee is small in comparison to what could be achieved. The problem with the derivatives market stems from a lack of correct risk mitigation procedures. Moreover, there are systemic risks that are difficult to account for in any economic environment. Many Web3 advocates are against the derivative market and against large corporations and institutions in general. But it’s hard to ignore the fact that Web3 is built through the contributions of large firms such as Binance, Ankr, and Polygon. The infrastructure needs to be put in place to migrate from Web2 (Google, Facebook) to Web3 (decentralized service providers like Ankr). Another point that is missed is that more staked assets will strengthen the blockchain network. In other words, when larger organizations start taking part in Web3, they will heavily support and strengthen security protocols. So, the primary advantages of Liquid Staking include:
- Increased flexibility of assets.
- Increased room for diversification.
- Maximization of profit potential.
- Room for innovative investment in new markets through DeFi protocols.
- Investment strengthens the proof-of-stake network, acting as a form of security.
These are significant advantages for both corporations and institutions. It is especially relevant in the highly unstable global economic environment. Like all markets, there are risks. But Liquid Staking allows you to use the token as a hedge against the core token. In other words, if you are worried about exposure to Ethereum, you can use the derivative to invest in a market that rises as Ethereum falls.
Bottom Line
It’s possible to engage in regular staking through a wallet or through an exchange provider. But liquid staking will require you to work with a liquidity staking platform or a decentralized service provider. You still retain full asset ownership, you are simply operating through a decentralized protocol. The staking of assets is just the click of a button, but it sounds a lot more complicated than it is. Larger entities will want future assurances, but the core ethos of autonomous ownership will still remain the same. As always, the question comes down to risk mitigation procedures. Do not risk more than you can lose, and do research into what you are investing in. Liquid Staking offers unparalleled advantages. It is a core aspect of Web3 and DeFi and intelligent investment can yield enormous profits. But regardless of whether you are an individual, entrepreneur, trader, business, corporation, or institution, no investment is foolproof. Money can be made, and lost, in all markets.