The Power of Liquid Staking in DeFi

Among the DeFi developments, liquid staking has emerged as a game-changer. It offers users the best of both: earning staking rewards while maintaining liquidity and access to their assets. 

In this article, you’ll discover the concept of liquid staking, its benefits, and how it reshapes the DeFi ecosystem, empowering users to take full advantage of their crypto holdings like never before. 

Ethereum’s Transition to PoS 

PoW stands for “Proof of Work,” a consensus mechanism used in blockchain networks. In PoW, miners compete to solve complex mathematical puzzles, and the first one to solve them gets the right to add a new block to the blockchain and is rewarded with cryptocurrency. 

PoS is “Proof of Stake,” another consensus mechanism used in blockchains. In PoS, validators are chosen to create new blocks and validate transactions based on the number of coins they “stake” or hold in the network. Validators are rewarded with transaction fees and sometimes new coins for their participation. PoS is considered more energy-efficient compared to PoW. 

Initially using the energy-intensive Proof of Work (PoW) consensus mechanism, Ethereum faced challenges like slow transactions and high network fees. Moreover, as it supported more value-added services, the network struggled with soaring gas fees and high energy consumption. 

The Ethereum team took a bold step in December 2020 to overcome these issues. They introduced the Beacon Chain, a blockchain that acted as a consensus engine of Ethereum 2.0, the part that coordinates the entire system. It made the start of their transition from PoW to the more sustainable Proof of Stake (PoS) system. The migration was completed in September 2022, placing Ethereum among the ranks of PoS blockchains. 

Notably, this shift drastically reduced energy consumption, with the new PoS mechanism consuming 99.9% less energy than its predecessor. It is an impressive feat, solidifying Ethereum’s position as a trailblazer in the crypto space. 

What is a Crypto Liquid Staking? 

Liquid staking is a feature that allows users to stake their funds and, at the same time, be able to use their assets through a representative token. 

In PoS blockchains, token holders can participate in staking by locking up their tokens to support network security and consensus mechanisms. In return, they receive DeFi staking rewards. However, when staked tokens are locked up for a specific period, they cannot be easily used for other purposes. 

Liquid staking addresses this liquidity problem by allowing staked tokens to be represented as liquid assets on other DeFi platforms. Instead of holding a token directly in the native staking contract, users can receive “wrapped” tokens, often called liquid staking derivatives (LSD) or LSD tokens. These wrapped tokens represent a claim on the underlying staked asset and can be used in various DeFi protocols. 

Liquid Staking on Biswap DEX 

Liquid staking on Biswap is an implemented secure solution from Binance. Due to this feature, Biswap officially listed the WBETH token on its platform. WBETH enables liquid staking users to maintain the liquidity of their ETH while it is being staked, offering numerous benefits within the DeFi ecosystem. 

📍 WBETH, a wrapped version of ETH on the Ethereum blockchain, is a liquid staking token. By holding WBETH, users confirm their participation in the staking pool and gain the ability to engage in lending, trading, and using it as collateral in various DeFi applications. 

Perks for Liquid Stakers on Biswap 

Flexible earnings: WBETH holders can utilize the token to access services on the platform and beyond Biswap while still being eligible to earn ETH staking rewards. 

APR rewards: each WBETH token held accrues ETH staking rewards from the Ethereum network based on the daily APR. 

Increased liquidity: liquid staking allows users to access the value of their staked assets without waiting for the staking period to end. This enhanced liquidity enables users to participate in other DeFi activities, trade assets, or quickly respond to investment opportunities. 

DeFi integration: by converting staked assets into LSD tokens, users can actively participate in the DeFi ecosystem. They can lend, borrow, yield farm, and utilize their staked tokens in various DeFi protocols to earn additional liquid crypto rewards. 

Lower risk: liquid staking is often regarded as a less risky alternative to traditional staking. This is due to the enhanced accessibility of funds, allowing users to easily access their assets without being exposed to the same risks associated with locking up their cryptocurrency. 

This unique system offers a dual profit potential for users. They can earn from the price difference between WBETH and ETH while benefiting from the multiplying effect of WBETH within DeFi on-chain services. 

How does Liquid Staking Work? 

The emergence of liquid staking protocols has introduced a new opportunity for traders to expand their crypto holdings. 

These protocols enable users to stake any desired amount of an asset and later withdraw it without affecting the original deposit. This involves locking the deposits on liquid staking platforms while issuing users tokenized representations of their crypto assets. These derivative tokens maintain a one-to-one value correlation with the original assets but are often labeled with distinct emblems for identification purposes. 

A practical example of this process is demonstrated on Biswap DEX, where a user depositing 1 ETH into liquid DeFi staking pools would receive 1 WBETH token, representing the staked ETH. 

The beauty of these newly acquired tokens lies in their flexibility. They can be freely transferred from the protocol, stored in other wallets, traded, or even used for transactions without disrupting the staker’s initial deposit. 

Potential Risks of Liquid Staking 

Third-Party Risks 

Users are exposed to the risks of trusting a third-party service when engaging with a liquid staking platform. These risks include platform security, operational reliability, and potential malicious activities by the platform operator. 

Slashing Risks 

Some PoS networks have “slashing” mechanisms that penalize malicious or non-compliant behavior. If a liquid staking platform operates improperly or breaches network rules, users’ staked assets might be subject to slashing penalties. 

📍 However, conducting thorough research and exercising caution when participating in liquid staking is essential. While it can enhance liquidity and flexibility, it may introduce new risks associated with the third-party platforms and smart contracts involved in the process. 

Conclusion 

The ability of the liquid staking to combine DeFi staking rewards with asset liquidity has elevated it to a pivotal position within the DeFi ecosystem. This feature has laid the groundwork for a dynamic and prosperous future in DeFi by offering unparalleled flexibility, usability, and growth potential.