Liquid staking: how to earn in the DeFi ecosystem
Liquidity, staking, and DeFi are all confusing words for many users who are new to the world of blockchain and cryptocurrencies. In this article, we will explain how liquid staking works and why it is gaining popularity among the crypto community.
What is staking?
Staking is a way of receiving rewards in the blockchain. A reward is given to users for having some of their crypto assets locked up in their own wallets to keep the network running. Staking can be performed primarily on blockchains running on the PoS algorithm.
In the Gagarin News article “How does staking differ from mining”, you can read more about staking and how it differs from mining.
What is DeFi?
DeFi is a decentralized financial ecosystem where participants interact with each other directly, without intermediaries like banks or credit organizations. DeFi services usually represent projects with open-source code.
What is liquidity
In simple terms, liquidity in the world of finance is the ability to quickly sell existing assets at a better price. The better the liquidity of the crypto market, the easier it is to convert coins into fiat money or other digital tokens.
What is liquid staking, how does it work, and what are its benefits?
Liquid staking is the issuance of a “derivative” token backed by a cryptocurrency. This token can be used for transactions in DeFi apps and getting extra income from these processes. The advantages of liquid staking are that it allows the users to receive income from staking without losing, at the same time, the ability to manage their assets.
What do you need to do to become involved in liquid staking in the DeFi ecosystem?
As an example, let’s take Coinbase’s recently released wrapped token cbETH. If you take ether and bet on the exchange, you will get a cbETH token equivalent to your ETH. This cbETH token can be used in any DeFi protocol of the Ethereum network.
Such tokens, obtained through liquid staking, would represent both the underlying asset (in this case ETH) and the interest accrued on the staking.
While receiving passive income from staking through ETH, you will also be able to transfer cbETH to DeFi protocols and profit from farming or take credit against it in fiat currency.
What are the risks in liquid staking?
It’s worth noting that in DeFi, there may be a vulnerability in the smart contract. The code may have a vulnerability that hackers can exploit. Also, since the underlying asset has strong volatility, there is a risk that a drop in its price will lead to a chain reaction of liquidations. This happens when a derivative token is used to support an open position. There is also a risk that if there is a problem in one of the DeFi protocols, the rest of the projects could be affected.
Whether to use liquid staking and its benefits or not is up to you to decide.
