What Is Liquid Staking and How Does It Work?

What is liquid staking, how does it work?

David Akilo
By David Akilo
Marcel Deer
Edited by Marcel Deer

Published June 6, 2022.

Liquid staking entails outsourcing your tokens to a service that stakes them on your behalf without the risk of losing funds. When you make use of a liquid staking service like Lido staking, you don't lose access to your funds even while they are staked. This is the main difference between this and regular staking: the staked funds are not locked up or inaccessible.

Instead, liquid staking platforms use an escrow to hold the funds. You can remove your assets from the protocol anytime you please or sell them if you wish. Both of these options are unavailable with regular DeFi staking. With liquidity staking, users can enjoy the benefits of staking cryptocurrency at a lower risk level since they can still control their assets.

How Does Liquid Staking Work?

By delegating the staking process via liquid staking, users can avoid most pitfalls associated with regular staking, such as centralization, illiquidity, and complexity. When you stake on a liquid staking protocol, you receive a derivative token or a tokenized version of your staked asset. For instance, you may deposit ETH into a smart contract via a third-party application (deposit contract).

In exchange, you will be given a tokenized version of Ethereum or wrapped ETH. This freshly created token stands in place of your ETH. It may now be moved, saved, spent, or exchanged just as you would any other "free" token.

With this approach to staking, the wrapped token allows the user to maintain their token's liquidity with the freedom of transferring it as they please while earning the token's staking rewards all at once. The liquid staking strategy creates a fair balance between staking risks, rewards, and ease.