Analogy: "Cryptocurrency liquid staking is like a group of people saving up to buy a house together. Just like in this scenario, each person contributes a certain amount of money towards the goal of purchasing the house. The more money each person contributes, the greater their stake in the house will be.
In cryptocurrency liquid staking, each participant contributes a certain amount of cryptocurrency towards the goal of earning a reward for validating transactions on a blockchain network. The more cryptocurrency a participant contributes, the greater their stake in the network will be.
Just as the group of people in the house buying scenario share in the ownership of the house based on their contribution, participants in a cryptocurrency liquid staking pool share in the rewards earned from validating transactions on the blockchain network based on their contribution.
The house in this analogy represents the blockchain network and the money contributed by each person represents the cryptocurrency that is staked. Just as the group of people work together to achieve the goal of buying a house, the participants in a cryptocurrency liquid staking pool work together to validate transactions and earn rewards on the blockchain network."
Applications of blockchain technology are evolving. Each new application is overcoming the current challenges faced by applications. Currently, while staking your crypto assets, users require a particular account of tokens to stake; these tokens are locked for a specific time and are illiquid. This is where liquid staking comes in to solve the problems stated above.
Staking is a type of consensus mechanism that allows users to secure the network.
So then, what exactly is liquid staking?
Liquid Staking in a Nutshell
Liquid staking is a way to keep the benefits of normal staking while maintaining the flexibility to use your assets. Besides, stakers receive liquid staking derivatives in exchange for staking their assets, representing their claim on the underlying stake pool and its yield.
In contrast to traditional staking, liquid staking improves capital efficiency. As such, stakers can use staked assets in the ecosystem for lending, trading, and as collateral, thereby lowering the opportunity cost of locking assets up for staking.
One of the risks is the potential for the underlying asset's value to decline. If the asset's value falls, your returns from liquid staking may also decrease.
We can use delta-neutral positions to overcome this risk. We are interested in the PoS chains, which allow the unstaking and claiming of your assets. For instance, Ethereum does not fit as the stakers cannot redeem the principal until the future chain upgrade.
A Real-life Use Case of Liquid Staking in Cryptocurrency
For example, OKCNetwork has launched liquid staking of the OKT token - stOKT. OKX Chain is an EVM, and IBC-compatible L1 built on Cosmos.
stOKT represents the account's share of the total amount of OKT staked on OKT Liquid Staking. The yield comes from redistributing the validator block rewards and depends on the number of tokens staked on the network and network activity.
The most important for the delta-neutral strategy is that stakers can claim back the principal token. In the case of stOKT, you will need to wait 14-28 days before being able to claim your funds.
To utilize the DN strategy, we need to short or borrow the OKT token and liquid-stake it to get the rewards without having price exposure to the underlying token.
There are currently no perpetual markets for OKT tokens, and very few lending markets on the OKX chain allow borrowing OKT. I expect there will be more options in the near future.
The final yield is 19.71%, with delta-neutral price exposure and a relatively safe 50% LTV. Additionally, you are holding stOKT, which you might be able to use elsewhere in DeFi to increase the yield, provide as collateral or add liquidity.
Final Thoughts
Liquid staking brings stakers the benefits of immediate liquidity, composability of staked assets, and distribution of stake across multiple validators. However, the market's liquidity for liquid staking tokens is limited, and stakers take on custody risk or smart contract risk, depending on their choice between a centralized or decentralized provider.
For Ethereum, the benefits of liquid staking have encouraged more of the supply to become staked at the possible expense of decentralization. The benefits of liquid staking extend to many blockchains, however, and the growth of liquid staking pools is an ongoing trend.
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