Decentralised Finance (DeFi) has made it possible for users all over the globe to participate in being the maker of their own financial destiny. Interest rates at the bank for “Premium Savings” accounts are terribly low and still fail to outrun inflation. There is a wave of people beginning to realise this and are currently seeking out places to better park their capital.
This has been shown by the astronomical adoption rates in DeFi. With the current total value locked (TVL) across multiple blockchains bubbling just under $100bn, the opportunity of not being involved is increasing day by day.
Ethereum certainly makes up the bulk of this TVL but recently the adoption rates of alternative layer 1 (Solana, Polkadot, Cosmos, Terra etc.) and layer 2 solutions (Arbitrum, Optimism etc.) appear to be slowly chipping away at the market share. It looks like we are heading towards a multichain world that sees different blockchains that are better equipped for specific protocols to be used, rather than a one chain fits all approach.
For example, Solana is built for speed and scalability due to its Proof-of History consensus mechanism which allows it to scale to roughly 65,000 transactions per second. This is ideal for high throughput applications and maybe one day can serve as the execution layer for a decentralised stock exchange.
Ethereum, despite its high fees, is extremely decentralised and could potentially continue to be the settlement layer of choice for global institutions as they continue to expand into the decentralised world. Visa, for one, has begun to build its payment infrastructure on Ethereum and I can imagine other traditional financial institutions will also.
So, in short, different blockchain infrastructures for different applications and purposes seems to be the way to go.
The emergence of staking allows users and investors of these particular blockchains to take their native tokens ETH, SOL, ATOM, DOT, LUNA etc. and help support the security and functionality of their respective networks.
Using ETH as an example, the developments of the ETH 2.0 Proof-of-Stake Beacon chain allows ETH holders to stake their ETH on the network.
So what does this actually mean?
Well, the network is supported by a very large collection of validators that produce new blocks, validate new transactions and overall make sure the network is running as intended.
Validators are proportionally selected randomly and incentivised to maintain their part of the deal by not going offline, confirming transactions, checking other transactions when not selected etc. If a node was to go offline and does not validate a block when selected to do so they can/will incur what is known as partial slashing.
Slashing is the process of a validator losing some of their ETH for failing to meet their expected requirements. If collusion occurs between nodes to process a fraudulent or malicious transaction they are at the risk of full slashing and their staked ETH will be taken from them. Seems fair to me!
It is a lot more complex than what I have just outlined but I think it gives an overview of why staking is important for any blockchain with a PoS consensus mechanism.
Validator nodes are incentivised to act accordingly with staking rewards and also disincentivised to act maliciously by slashing.
Currently, on Ethereum you are required to hold 32 ETH to become a validator node, which is a pretty large amount in dollar-denominated terms but that doesn’t mean you have to miss out on staking rewards.
If you (like the majority of people) have less than the required validators amount of 32 ETH you can delegate your ETH to a validator node. All this means is that you can supply your ETH to validators already supporting the network to bulk up their amount of ETH, which in turn increases their likelihood of being selected and thus more staking benefits/rewards for doing so.
So, with the ever-changing crypto landscape, it can be often tricky to figure out where your tokens are best placed to earn the most optimal rewards over a year or more.
Staking Rewards Dashboard has everything you need to know about all your favourite cryptocurrencies.
From here you can simply click through to the project of your choice and find out all the information you need to start earning staking rewards.
Once you decide to stake your assets, you effectively lose their utility and are hence illiquid. You are bound to earn the designated APY which is great, who doesn’t want to earn more of the tokens you love but wouldn’t it be great to earn more?
Just as you begin to get an understanding of how the industry works another innovative product comes along and throws something new out there for you to wrap your head around. The product I am talking about is liquid staking.
Liquid staking is named so because it allows your assets to be liquid following you delegating them to a validator node. I bet that one took a while to come up with.
Projects such as Lido who are a multi-chain staking provider for some of the biggest blockchains have come up with a way to allow users to delegate to their validator node, earn staking rewards and in return, are provided with liquid staking tokens such as stETH and stSOL.
Think of these as an IOY or a receipt of your deposit. You can unstake at any time and retrieve your ETH and/or SOL with these stTokens.
So why would you want to do this?
Well, for one, if you don’t meet the 32 ETH requirements on Ethereum or you don’t have the hardware/intellectual know-how to run a validator node on Solana, you can easily delegate to Lido or another liquid staking provider to do so.
Liquid staking tokens are tradeable too. They can be traded for multiple different tokens on a decentralised exchange (DEX) like Uniswap, Raydium, Curve etc. but just remember you will need to return the received amount of stake tokens to retrieve your original token deposit once you are done.
Alternatively, stakers can take their stETH or stSOL and pair it with ETH/SOL into a liquidity pair to earn additional yield.
Examples include stETH-ETH or stSOL-SOL, pATOM-ATOM, rDOT-DOT and bLUNA-LUNA.
From there users can provide their LPs to certain yield farming protocols to earn trading fees each time someone trades their deposited assets.
Use the Staking Rewards Calculator to figure out how much yield you could be missing out on.
Liquid Staking vs. Illiquid Staking
There are multiple things to take into consideration when deciding if liquid or illiquid staking is the one for you.
With illiquid staking, you can provide your tokens directly to a validator, earn the quoted % APR and you don’t have to worry about any additional smart contract risk. It is simple, effective and the APR is very reasonable.
You can check the best place for your tokens to be staked by checking out the handy list of staking providers that Staking Rewards has compiled.
So what are the drawbacks? Well, as the name suggests it is illiquid. Your assets, although they can be removed, are limited in their earning potential which is determined by the validators and how much they can pay out to still be profitable from their end.
Risks involved with Illiquid Staking
As with anything there are inherent risks when choosing a validator node to delegate your hard earned crypto to.
Lock Up Risks
A lot of validator nodes will require your tokens to be locked up for a designated amount of time if you choose to delegate with them. For example, staking ATOM and LUNA will result in a 21 day lock-up period whilst SOL delegation requires around a 48-hour unbonding period. If you need access to your funds during this time you won’t have much choice.
As mentioned above, Validator nodes can be at risk of slashing penalties if they do not meet the up time quota and their validation requirements.
If your chosen validator is down and is subject to slashing then this percentage of the slashed amount could see your funds slashed proportionally. This is why it is always vitally important to do your due diligence and select your chosen validator accordingly.
You can check the best performing validators by selecting which crypto you wish to stake on Staking Rewards and scroll down to the validators list.
Something to also keep an eye out for when choosing a validator is the fees. As they are providing a service and have their own overheads, validators fees may also be variable. So, if you select a validator based on low fees be sure to always check-in and make sure that these aren’t steadily increasing. This can create an opportunity cost where there may be a better place to stake your assets. Liquid Staking – Liquid staking however allows you to be able to deposit your tokens with a liquid staking provider earn the delegators APR and then also to be able to properly utilise the liquid staking token you receive to earn additional yield.
On top of that there tends to be more liquid staking providers that don’t have a lock up period. This gives you access to the yield but also to your tokens as and when you need them.
For example with LIDO, you can stake SOL or ETH and you could (if required) reclaim your SOL/ETH at anytime without any lockup period.
This gives a user that added level of flexibility and reassurance in volatile markets.
There is additional third-party and smart contract risk if you are going to be using your liquid staking tokens to earn additional yield. Adding additional layers of complexity may not be the best for a beginner in this space.
As with illiquid staking, there is still an inherent risk of slashing. Liquid staking providers like LIDO will then distribute the SOL/ETH to validators which are still at the risk of slashing. If for whatever reason their chosen validators incur a harsh slashing penalty the risk of large redemptions from stSOL/stETH holders is also something to consider.
How Liquid Staking Works in Practice – Using Solana as an example:
Head to Lido.Fi to deposit your SOL.
Simply hit “Stake SOL”
Input the amount of SOL you wish to delegate to Lido as your staking provider.
From here you can do nothing and earn 7.25% APR which is great or you can take your stSOL and earn a higher yield.
Note – If you wish to provide stSOL and SOL as liquidity you will need to hold on to an equal amount of SOL to do so.
If you wish to provide stSOL and SOL as liquidity you can use various dapps like Raydium or Saber.
I will continue the example using Saber.
Head to Saber and click Launch App.
Click the “Pools” tab across the top panel.
Find the pool you wish to deposit and provide liquidity to, in this case, it is stSOL-SOL LP.
From here select the required deposit amount and select the amount of each of your tokens you wish to deposit. You can select max on stSOL but always remember to keep a residual amount of SOL for transactions later.
Note – You will always need at least 0.1 SOL to cover future transactions in and out of liquidity pools and for trades etc.
Once you have deposited your tokens you will receive a corresponding amount of stSOL-SOL LP tokens. From here you can head to the “Farms” tab and find the stSOL-SOL LP farm.
Once you find the farm you simply hit “Stake” and deposit the amount you wish to stake in the pool. Usually, this would be the maximum option.
Once you have hit stake then you are finished. So now you are earning rewards on your original SOL deposit and also on top of that you are earning on your stSOL-SOL LP deposit, yield on top of yield.
To unstake simply carry out the process in reverse:
- Remove your LP from the farm by simply clicking “remove stake”.
- Head back to the pools tab and click remove liquidity
- From here you will have SOL and stSOL in your wallet. If you wish to retrieve your SOL from Lido you will need to head back there and click unstake.
So this was just one of many, many examples of liquid staking. There are multiple opportunities to carry this strategy out on multiple chains and across multiple protocols.
Always factor in your tolerance for smart contract risk when operating in the DeFi environment.
With other chains such as Cosmos, Terra and Polkadot becoming increasingly popular there are also liquid staking opportunities that are popping up too.
Examples of other liquid staking opportunities:
Lido is the number one liquid staking provider on Ethereum with over $5.3bn in ETH which has amounted to 21,978 ETH ($84.6m) being paid out in staking rewards.
The process for staking ETH and being given stETH is exactly the same as that of the Solana example above. But the stETH-ETH LP opportunities are different.
Curve Finance offers the potential for users to deposit their stETH along with ETH to become a liquidity provider for this pair.
You can even take it one step further from there and once you receive your stETH-ETH LP tokens for depositing, head to yearn Finance and deposit your LP tokens there to earn a yield on top of yield.
- Simple to use
- Operates out of MetaMask
- Gas fees are high and can eat into rewards
LUNA is the native cryptocurrency of the Terra ecosystem and with Anchor protocol, a borrowing and lending platform that allows users to deposit LUNA and in return receive bLUNA (bonded LUNA), a similar strategy to the one described above can be carried out.
A full detailed explanation of bLUNA and Anchor protocol from Staking Rewards can be found HERE.
In short, TerraSwap offers the ability for LUNA and users bonding LUNA in anchor protocol to provide both tokens as liquidity and earn double-digit APR returns. Users earn bonding rewards and can then also take their bLUNA to earn additional rewards by pairing with LUNA in an LP.
- Earn extra yield and build a bigger LUNA position by becoming a liquidity provider.
- LUNA redemption using bLUNA can take up to 3 weeks. This may seem a bad thing but with the increased liquidity, users are incentivised to trade their bLUNA for LUNA instead of waiting 3 weeks and hence there are a larger number of trades between this pair and consequently high LP rewards.
- Very limited impermanent loss due to bLUNA: LUNA being close to 1:1.
- This is quite a difficult and long process for the average user
- You miss out on LUNA staking airdrops
- APYs could reduce with the new Columbus-5 update about to be released
Exploring the Cosmos ecosystem for liquid staking opportunities there appears to be one main protocol that allows ATOM holders to support their network.
Persistence with PStake allows ATOM holders to stake their ATOM and earn staking rewards.
In return, users will receive stkATOM which is then able to be used across multiple different DeFi protocols.
- Earn up to 7% APR on one of the highest cross-chain interoperability projects in crypto.
- Simple staking through MetaMask.
- Native ATOM staking on Persistence will go live soon.
- Currently, it is only available on ERC20 ATOM.
- Gas fees are relatively high to stake as you need to first wrap ATOM to pATOM and then stake pATOM for stkATOM
Polkadot with the recent announcement of the highly anticipated para chain auctions going live on November 11th has begun to pick up the pace and is seeing some great on-chain adoption metrics.
One of the best liquid staking opportunities in the Polkadot ecosystem is through StaFi Protocol. StaFi allows users to stake their DOT earn staking rewards whilst also having the ability to earn additional rewards with their rDOT by utilising different Polkadot DeFi protocols and also pairing with DOT in an LP.
With a 28 day waiting period to unstake DOT, users no longer have to wait to access their DOT if and when they want to unstake. Users can simply trade rDOT for DOT on the open market.
Because of this, there is a great opportunity to be an rDOT-DOT LP. Those who need access to their DOT immediately or don’t have the patience to wait 28 days to unstake will inevitably have to trade rDOT for DOT and hence there will be a large number of trading fees which translates to LP rewards.
- Some of the best APRs across all major blockchains
- Strong momentum and development happening at present in the Polkadot ecosystem
- Immediately trade rDOT for DOT instead of waiting 28 days to unstake.
- StaFi also offers rATOM, rETH, rSOL if you want to keep everything in one place.
- Requires an additional Polkadottjs wallet
- May be difficult for beginners.
The development of liquid staking is a very innovative and great addition to the crypto space. On the other hand, this may be a step too far for the average user. If this is true then regular delegated staking providers are also an option.
It is always best practice to provide your tokens to a validator node or another staking provider, in my opinion. Staking rewards contribute towards token inflation over time and to outpace the annualised emissions from these discussed projects, it is always a good idea to be earning the staking rewards to offset this. Besides, who doesn’t love staking rewards?
I like the simplicity of EVM compatible staking with Ethereum but I am also put off by high gas fees. Solana is great for fees and transaction time but requires an additional wallet (Phantom) to perform this. That being said, you can delegate to a validator node directly out of the Phantom wallet.
All in all, I believe that there are benefits and drawbacks to both liquid and illiquid staking. Adding additional counterparty risk with liquid staking is always a concern, particularly if you are operating through 3 or even 4 protocols to achieve maximum yield. On the other hand, the rewards are greater if you are comfortable with the increased risk.
The only other concern I have for liquid staking providers is the convergence to centralisation. By this I mean if there are larger validator nodes that draw in an awful lot of capital, then the network itself tends to favourably select this particular node to validate because of its increasing amount of tokens staked on it.
I can imagine with more and more liquid staking products and providers that come on to the market the competition will inevitably lead to further decentralisation based on higher yields and incentives to delegate to such providers.
Illiquid staking is great for those who don’t want to have to think about what their tokens are up to and know they will be constantly earning their rewards over the next year or more. They tend to be a simple process, particularly for Ethereum, Solana and Terra.
The process is a little more complex for ATOM and DOT but I can imagine this will become a lot easier going forward.
To summarise, it is completely up to your personal preference. So yield farmers like to optimise for yield coupled with increased counterparty risk whilst others just like to be safe and sound in an illiquid staking position. Both are great in my opinion and a mixture of both is also an option.
Understanding the risks of slashing, third-party and smart contract risk are the biggest factors for those wish to be a liquid staker or illiquid staker too. It would always be best practice to factor in lockup times and also take the validators history and performance into consideration.
Understanding a protocol’s slashing penalties would also be a major consideration of mine before delegating. How likely are you to lose a proportion of your fees based on downtime and other factors? These are all considerations I would take before choosing either liquid or illiquid staking for my hard-earned tokens.