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Introduction

It is no news that cryptocurrency offers an extensive earning mechanism that allows market participants to earn rewards on their crypto assets. While users can earn rewards by actively participating in cryptocurrency trading, airdrops and other investment options, the crypto space also boasts an attractive passive earning approachs like yield farming or crypto staking.

This article will extensively discuss liquid staking, how it works, and how it improves the traditional staking approach.

Notably, you can easily access liquid staking on Chainnodes. The leading RPC node service provider is set to introduce an extensively safe and flexible liquid staking mechanism. This innovative approach not only gives users access to ETH liquid staking, but also ensures that users can earn staking rewards on their original assets like on traditional staking platforms.

What is Staking in Crypto?

Staking is an approach several blockchains use – for instance, Ethereum – to secure the network through the Proof-of-Stake consensus mechanism. Essentially, the approach requires that network participants stake their tokens on the blockchain and validate blockchain transactions in exchange for rewards. After meeting the minimum staking requirement, a user can run a blockchain node validation in the ecosystem.

Traditional Staking

Traditional staking requires staking crypto assets in a pool for a certain period. After staking, the asset is locked for the specified period, which means the token owner cannot access or use the token during the lock-up period. Users participating in the staking pool are then rewarded depending on the amount of token staked and the specified reward percentage.

What is Liquid Staking?

Liquid staking is an innovative mechanism that allows users to participate in blockchain security without locking up tokens. Essentially, tokens are not entirely locked up by liquid staking service providers; instead, users are given a readily tradable liquid staking token to represent the underlying staked token.

Mechanisms of Liquid Staking: How Liquid Staking Works

Tokenization: Liquid staking tokens (LSTs) are issued to users who staked their crypto assets in a liquid staking protocol on a 1:1 basis. This means that by staking your cryptocurrency, you get an equivalent of it as liquid staking tokens, which is more or less a receipt issued by the staking protocol.

Liquidity: The issuance of Liquid staking tokens by these protocols ensures that users can freely trade on exchanges or invest in other Decentralized protocols.

Staking rewards: Ordinarily, staking means adding your asset to a pool used to run validation nodes on blockchains in exchange for rewards. The original token staked continues to earn rewards, which are distributed to users' wallets either in the liquid staking token or the originally staked token.

Token redemption: While users can trade the liquid staking token freely in cryptocurrency, this does not mean they cannot access the original staked token. Users can redeem the original staked token using the liquid staking token when preferred. However, this is usually subject to a waiting period specified by the staking service provider.

Case studies

If A wants to earn passive income on his crypto asset, he can stake the asset on Chainnodes. After staking, A will automatically receive Liquid Staking Tokens in his wallet. This token is tradable on several DeFi Exchanges, which means staking on Chainnodes does not deprive A of access to his token or the chance to participate in any market activities.

Aside from receiving the liquid staking tokens, A will also continue to earn rewards on his original crypto asset, and when preferred, A can proceed to unstake the original asset using the liquid staking token issued to him. Redeeming the original token is, however, subject to a specified unbonding period, usually between 2 weeks.

Pros and Cons of Liquid Staking

Pros

Passive earning: Staking in DeFi is ordinarily a passive way to earn money in the crypto space because users do not need to do anything, and rewards are automatically distributed to their wallets. For instance, several platforms offer Ethereum liquid staking service, that allow users to passively earn rewards on their ETH.

Maintains liquidity: With liquid staking, users enjoy extensive flexibility over their assets. The issuance of Liquid Staking Tokens makes it possible to perform regular market activities.

Ease of running validation node: To run node validation in the Ethereum ecosystem, participants must stake at least 32 ETH. While a solo node validator must ensure that he meets the minimum staking requirement to participate, liquid staking pulls the asset from different holders into a staking pool that is then used to run the node validation.

Cons

Slashing: Staking is generally an approach used by blockchains to reward or penalize validators. Hence, when a validator runs malicious nodes or compromises the ecosystem's security, the staked asset is slashed as punishment. Assets staked on a liquid staking platform are subject to this condition, meaning reward or punishment is shared among everyone participating in the affected staking pool.

Price volatility: The cryptocurrency market is extensively volatile, which means both the original asset staked and the liquid staking token issued are subjected to volatility.

System exploitation: Tokens deposited to a staking pool through a staking service provider are subjected to considerable risk where system security is compromised.

Conclusion

While staking remains an attractive earning mechanism in the crypto space, doing your own research before staking on any platform is a prerequisite for successive earning. Chainnodes offers simplified guides and educative material that are readily accessible to users and explains the staking process on the platform. With this, Chainnodes ensures interested participants understand the benefits and risks of liquid staking and make informed decisions.