It has been a difficult summer for cryptocurrency, as the prices have traded in a narrow band and trading volumes are down. But one area of the market continues to grow: liquid staking protocol. Liquid Staking Protocols give investors the ability to access liquidity, while still staking funds. Staking is a method for investors to earn a yield by locking their tokens onto a network. According to DefiLlama, the total value of crypto-assets locked in liquid staking protocol, like Lido or Rocket Pool, grew 131.6% since the start of this year, to $20 billion. After a dip in DeFi (decentralized finance), the momentum began to increase after March 13. This decline coincided around the time of Silvergate Bank’s fall, whose SEN Network provided most of the liquidity on the crypto market. According to DefiLlama, in April, the value of liquid staking protocols surpassed the value of lending protocols and decentralized platforms. This was after Ethereum’s Shanghai update, which allowed investors to unlock their crypto. Investors in early crypto say that liquid staking will continue to gain popularity as traders and investors become more familiarized with different protocols. Conor Ryder is the head of research for Ethena Labs. Ethena Labs is a decentralized stablecoin built on Ethereum. Right now, traditional bonds are yielding 5% while staked Ethereum is yielding similar amounts. It’s really a no brainer for people to use U.S. Bonds as collateral. What investors should know about liquid stakes versus regular stakes. It’s liquid Staking allows investors to earn passive returns on their crypto holdings. Tokens are locked up on a Proof-of-Stake network, such as Ethereum, Solana or Polkadot, for a set period of time. Staking your crypto contributes to the system which keeps decentralized networks such as Ethereum secure and running. You are a “validator”, which means you process and verify transactions on the blockchain. The rewards vary depending on the network. However, in general, the higher the stake, the greater the reward. The “Merge”, an event that took place in September, turned Ethereum into a network that allows staking. This year, the Shanghai upgrade allowed stakers to withdraw their staked assets. According to Riad WAhby, CEO at Cubist, an infrastructure company that helps liquid staking, the problem is that staking is itself a fairly illiquid activity. However, liquid staking is a derivative product. It is a layer that overlays the blockchain where users can exchange funds in return for the promise to be able to withdraw their staked money later. Liquid staking allows you to continue earning yields on locked-up coins while gaining liquidity. Wahby explained that the staking process is designed to be slow. This is because you do not want people coming and going from the consensus protocol. You want a stable group of people watching the chain to ensure everything is running smoothly. If I later decide to take my validater offline and claim the staked money, there is a long waiting period to remove this money from protocol. Liquid staking has less risks. Like everything in crypto, there are some risks. These include technological and regulatory ones. It’s less risky because it is more liquid. It’s no longer a good idea to stake, as it is too risky. Many people are now choosing liquid staking over vanilla staking. “Liquid Staking gives you the added benefit of being able to freely move your asset around without worrying about your lock-up.” Ethena Labs Ryder explained that you can consider it a risk-free return in the cryptomarket, which is trending towards stablecoins as well as other crypto assets that are designed to compete with yield-bearing real-world assets such U.S. Treasurys. Since last year, the crypto market has been struggling to find its own yield-bearing assets, leading to a certain amount of centralization. He said that “we know the dependence on centralized stablecoins such as USDC and USDT – basically, DeFi or crypto runs on these stablecoins which internalize the yields of U.S. Treasurys.” Ryder said that liquid staking is a way to give crypto its own native yield and also an opportunity to build native crypto products which aren’t as dependent on traditional financial systems.
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