Blockchains have relied on proof-of-work (PoW) validation since their inception. However, the PoW consensus has proven to be untenable, as its high power consumption and need for fast and powerful hardware create high barriers to entry. This is why blockchains are adopting Proof-of-Stake (PoS) consensus algorithms, where those who want to earn rewards do not have to compete with other miners, but can simply stake some of their crypto for a chance to be mined. elected as validators, and reap the benefits.
Everyone who owns cryptocurrencies on PoS-type blockchains must want to take advantage of the opportunities that staking offers, right? In fact, according to our report, while 56% of respondents had staked before, many of those who had not or would not stake again pointed to the same doubt: They don’t want their assets locked up in staking, they don’t when those assets could be used elsewhere. That’s why liquid staking offers the best of both worlds. It allows investors to stake their assets and at the same time use them in other projects during the lockdown.
Even though this innovation is able to lower the barriers to staking, there is still confusion about what liquid staking is and what it can offer the cryptocurrency community. What follows are some of the misconceptions about liquid staking and what the truth is about this new opportunity.
What is liquid staking?
Staking is changing the way blockchains work. It brings greater energy efficiency to blockchain validation, more flexibility to the required hardware, and faster transaction frequency. But despite its advantages, one of its biggest challenges – and what stops many from staking – is the lock-in period. The assets are inaccessible to the owner while they are staked, and those owners cannot do anything with them—such as invest in decentralized finance (DeFi)—while they are staked. It is for this sacrifice that many hesitate to bet.
However, liquid staking solves this problem. Liquid staking protocols allow holders of staked assets to obtain liquidity in the form of a derivative token that they can then use in DeFi, all while the staked assets continue to earn rewards. It’s a way to maximize your earning potential while having the best of both worlds.
The popularity of PoS is also increasing rapidly. PoS protocols account for more than half of the total cryptocurrency market capitalization, a total of $594 billion. The opportunities will only increase as Ethereum fully moves to PoS in the coming months. However, only 24% of the total market capitalization of staking platforms is locked in staking – meaning there are many who can stake but are not.
Four misconceptions about liquid staking
Despite the advantages of liquid staking, there is still confusion about how it works. Here are four common misconceptions, and how you should think about liquid staking instead.
Misconception 1: There will only be one player or protocol. One of the misconceptions about liquid staking is that there will only be one actor through which investors will be able to obtain liquidity. It may seem that way, as it is still very early days in the liquid staking space, but multiple liquid staking protocols will co-exist in the future. The number of liquid staking protocols that can co-exist may also not be limited. In fact, the higher the number of protocols, the better for the network, as it can reduce cases of centralized staking and the fear of a single point of failure.
Misconception 2: It is only limited to liquidity. Liquid staking is not just a way to get liquidity. Although liquid staking helps PoS networks to acquire staked capital that secures the network, it is not limited to that. It’s also a way to get compossibility because you can use your derivative in multiple places, which you can’t do with exchanges. Synthetic derivatives that are issued as part of liquid staking and used in supported DeFi protocols to generate more yield actually help build monetary blocks throughout the ecosystem.
Mistake 3: Liquid staking is resolved at the protocol level. People believe that liquid staking is resolved at the protocol level. But liquid staking is not just about enabling functionality at the protocol level. It is about coordinating with other protocols, providing more use cases, more functionalities and more usability. A liquid staking protocol is solely focused on developing the architecture that will facilitate the creation of synthetic derivatives and ensuring that there are DeFi protocols with which those derivatives can be integrated.
Misconception 4: Liquid staking defeats the purpose of staking in general. Some say that liquid staking defeats the purpose of staking or asset locking, but we have seen that this is not true. Liquid staking not only increases network security, but also helps achieve a crucial goal of the PoS network, which is staking. If there is a solution that issues derivatives for staked capital within the network, staked capital not only ensures the security of the PoS network, but also creates an enhanced user experience by enabling capital efficiency.
The future of PoS
Liquid staking not only solves a problem for crypto enthusiasts who want to stake by issuing tokens that they can use in DeFi while their assets are staked. An increase in those staking their assets – made easier by making liquid staking available – actually makes the blockchain more secure. By learning the truth about common misconceptions, investors will enable staking to truly become an innovative new way of achieving consensus on blockchains.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, readers should do their own research when making a decision.
The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Mohak Agarwal is the CEO of ClayStack. He is a serial entrepreneur and investor on a mission to unlock the liquidity of staking assets.
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