What is Liquid Staking

“Staking” refers to the process of locking a certain native asset on a PoS (Proof-of-Stake) blockchain for a specified period to help maintain the operation of the blockchain and earn corresponding rewards.

What is liquid staking?

Liquid staking is an alternative to traditional staking, which addresses some of the drawbacks of conventional staking to a certain extent.

In traditional staking, you need to become a validator of the blockchain network first. Taking Ethereum as an example, becoming a network validator requires preparing hardware that meets certain conditions and staking 32 $ETH , which is relatively high threshold. Once you become a validator, the staked $ETH will be locked in a smart contract and cannot be used for other purposes, locking the liquidity of $ETH .

Ethereum completed the “Merge” on September 15, 2022, transitioning from PoW to PoS consensus mechanism. However, before the Ethereum “Shanghai Upgrade” completed on April 13, 2023, Ethereum validators could not withdraw their staked $ETH. During this period, participating in traditional staking further reduced the liquidity of $ETH .

The “liquid staking platform” offers an alternative solution that lowers the barrier to participation and increases the liquidity of staked assets. Specifically, users can choose not to participate directly in traditional staking but instead provide $ETH to a liquid staking platform. The platform will collect the $ETH provided by participating users, bundle these $ETH into shares of 32 tokens each, and distribute them to eligible network validators. These validators will perform traditional staking directly, and the rewards earned from staking will be shared among users, the liquid staking platform, and the network validators. Therefore, compared to traditional staking, liquid staking has a lower entry barrier and offers lower yields.

Common liquid staking platforms include: Lido Finance, Rocket Pool, Frax Finance, etc. Click to see more liquid staking platforms.

What are liquid staking derivatives (LSD)?

When users participate in liquid staking and provide $ETH to the liquid staking platform, the platform will mint an equal amount of derivative tokens as a proof of users’ participation in liquid staking. These derivative tokens are called “Liquid Staking Derivatives” (LSDs). Since these derivatives represent the $ETH that users have staked on the liquid staking platform, they are generally considered to have slightly lower value than the original $ETH . Therefore, these derivatives can also be traded directly or used in other DeFi protocols to earn additional income.

Common liquid staking derivatives include: Lido Staked Ether from Lido Finance, Rocket Pool Ether from Rocket Pool, Frax Ether from Frax Finance, etc. **$ETH **$CELR **$ENJ **