Liquid staking is a relatively new concept in the world of cryptocurrencies. It allows stakers to earn staking rewards on their cryptocurrency holdings while still being able to trade or use assets that mirror their stake. In traditional staking, users would lock up their cryptocurrency as collateral to participate in the consensus mechanism of a blockchain network and earn rewards for helping to secure the network. However, this means the staked assets are locked and cannot be used for other purposes.
With liquid staking, users can stake their assets and receive staking rewards while still having the flexibility to use their assets for other purposes. Liquid staking is achieved through tokenized assets representing the underlying staked assets. These tokenized assets can be traded or used in other decentralized finance (DeFi) applications while still earning staking rewards.
Staking is a concept in cryptocurrency and blockchain technology. Staking emerged as an alternative to traditional proof-of-work (PoW) mining. PoW mining requires significant computational power to solve complex mathematical equations to validate transactions and produce new blocks in the blockchain.
Staking, conversely, is a consensus mechanism that allows participants to validate transactions and produce new blocks by staking their cryptocurrency holdings as collateral. In the staking model, users lock up a certain amount of cryptocurrency to guarantee their commitment to the network. Staking reduces the need for expensive computational resources and makes the network more energy-efficient.
The first project to introduce staking was Peercoin, launched in 2012. Peercoin used a hybrid consensus mechanism that combined PoW mining with staking. However, it was only with the launch of the Ethereum network in 2015 that staking gained more widespread attention.
Ethereum's transition to a proof-of-stake (PoS) consensus mechanism was one of the most anticipated events in the blockchain and cryptocurrency space. Ethereum has been using the proof-of-work (PoW) consensus mechanism since its inception in 2015, but the switch to PoS significantly improved the network.
The switch to PoS was implemented in several stages, with the launch of Ethereum 2.0 being the most significant step toward the PoS model. Ethereum 2.0 introduced new features, including beacon chain validators, shard chains, and staking derivatives. These features are designed to make the network more secure, scalable, and efficient. PoS also provides new opportunities for ETH holders to participate in the network and earn rewards.
The transition to PoS took several years but was an essential step toward the future of Ethereum and the broader blockchain ecosystem. The switch to PoS will make Ethereum more sustainable, scalable, and efficient. It also helped to attract new users and developers to the network and support the growth of decentralized finance (DeFi) and other blockchain-based applications.
Self-staking Ethereum involves running a node and staking the minimum required amount of ETH to become a validator on the network. While this approach offers more control and higher rewards than other staking methods, it also comes with some drawbacks.
One of the advantages of self-staking is that it allows users to have complete control over their funds and validator node. They can decide when to start and stop staking, upgrade their node software, and make decisions regarding network upgrades. Validators earn a portion of the transaction fees and block rewards generated by the network, which can be more substantial when staking individually. Self-staking also offers better security as validators can use their hardware and setup, reducing the risk of hacking or other security breaches.
However, self-staking also requires technical expertise and can be time-consuming. Users need to ensure their hardware is compatible, keep up with updates, and troubleshoot any issues that may arise. Self-staking also requires a significant amount of ETH, which may be out of reach for some users. The current minimum staking requirement of 32 ETH can be a barrier to entry for smaller investors. Validators can also be penalized for downtime or malicious behavior. If a validator goes offline or acts maliciously, they may lose half of their staked ETH or more.
The process of liquid staking typically involves depositing staked assets into a smart contract, which then issues tokenized staking assets in exchange. These tokenized assets are then freely tradable and can be used in DeFi applications or traded on cryptocurrency exchanges. The staking rewards earned from the original staked assets are then distributed to the token holders, usually as additional tokenized staking assets.
One of the main benefits of liquid staking is the ability to use staked funds for other purposes, such as trading or investing in other assets. Liquid staking offers greater flexibility and liquidity to users, who may need access to their funds anytime. Additionally, liquid staking may offer higher rewards than traditional staking methods, as staked funds can be used to provide liquidity in various DeFi protocols, which can generate additional rewards.
However, there are also risks associated with liquid staking. One of the main risks is the possibility of losing staked funds due to security breaches or other vulnerabilities in the network.
As staked funds are used in various DeFi protocols, they may be subject to risks, including smart contract bugs or hacks. Additionally, liquid staking may require users to trust third-party providers, which can be risky if not adequately vetted or regulated.
Liquid staking has several advantages over traditional staking. Firstly, it allows users to earn staking rewards without sacrificing the liquidity of their assets. “Liquid” means that users can earn rewards while using their assets for other purposes, such as trading or borrowing. Additionally, liquid staking can help increase the overall liquidity of staked assets, as more users can participate in staking without sacrificing the liquidity of their assets.
Staking Ethereum on exchanges is a popular method of staking that allows users to earn staking rewards without having to run a validator node themselves. While this approach can be convenient, it also has advantages and disadvantages.
One of the advantages of staking Ethereum on exchanges is the ease of use. Users can simply deposit their ETH into an exchange that offers staking, and the exchange takes care of the rest. This can benefit users who do not have the technical expertise to run a validator node or do not want to deal with the setup process. Additionally, staking on exchanges can offer lower barriers to entry, as users may only need to stake a fraction of the minimum amount required for self-staking.
However, there are also some disadvantages to staking Ethereum on exchanges. One of the main disadvantages is the lack of control over one's funds. Users are essentially trusting the exchange to hold and manage their staked ETH. This can be risky if the exchange experiences a security breach or other issues. Staking on exchanges may offer lower rewards than other staking methods, as the exchange may take a portion of the staking rewards for themselves. Additionally, most exchanges do not provide a liquid staking token.
Hord provides a liquid ETH staking platform that offers stakers the highest APRs. The APR is comprised of ETH staking rewards, MEV boosts, auto-compounding, and additional Hord token rewards.
ETH stakers at Hord receive Hord’s liquid staking token, hETH, an ERC-20 token representing stakers’ ETH combined with rewards. As a liquid token, hETH can be traded on Uniswap V3 as part of an hETH/ ETH pair, sent to other wallets, or redeemed for its ETH value following the Shanghai hard fork. Hord issues hETH automatically to wallets that stake ETH.
In conclusion, liquid staking is an innovative cryptocurrency concept that offers users higher liquidity and flexibility. It allows users to earn staking rewards while accessing their assets for other purposes. While liquid staking provides several advantages, it also comes with some risks. The risks include losing staked funds due to security breaches or other vulnerabilities. Additionally, users need to consider the different staking methods available, such as self-staking, staking with exchanges, or other third-party providers, and decide which is the best for their needs.
Like any other investment or staking activity, liquid staking carries some risks. However, if done correctly and with the proper precautions, it can be a relatively safe and profitable way to earn returns on staked tokens.
To mitigate these risks, stakers need to choose reliable and trustworthy platforms for liquid staking.
One of the primary risks of liquid staking is the possibility of slashing, which occurs when a validator is penalized for violating the network’s rules. Slashing can result in a lower token rewards in the future.
Another risk associated with liquid staking is the potential for reduced staking rewards. The past performance of a liquid ETH staking pool does not guarantee future success.
There is also the risk of smart contract vulnerabilities, which can lead to the loss of staked tokens. Smart contracts can contain bugs or be subject to attacks, resulting in the loss of staked tokens or other assets.
Finally, there is a risk of market volatility, which can affect the value of staked tokens. If the value of staked tokens declines significantly, this can impact the overall returns for stakers and potentially lead to losses.
Determining if liquid staking is worthwhile depends on a person's individual investment goals and risk tolerance.
Liquid staking offers flexibility by allowing investors to trade, transfer or use their staked ETH while earning rewards, which may be attractive for those seeking quick access to their funds. Liquid staking can provide higher returns than traditional investment options, such as savings accounts or CDs. However, investors should be aware that liquid staking carries some risk.
Several platforms offer liquid ETH staking, such as Hord, Lido, and Rocket Pool. These platforms allow users to stake their ETH and earn rewards in real time while retaining the ability to trade their staked ETH anytime.
The minimum ETH required for liquid staking varies depending on the platform. Some platforms may require a minimum of 1 ETH, while others may have a higher minimum requirement. There is no required minimum amount at Hord, and stakers can stake as much ETH as they’d like.
Withdrawal policies of staked ETH depend on the issuing staking platform or pool. At Hord, stakers can withdraw their staked ETH following the Shanghai hard fork. Meanwhile, hETH holders at Hord can liquidate their position by trading their hETH to ETH on Uniswap V3.