LSDs are an important area. It ranks third in Total Value Locked (TVL) in the DeFi market. There are currently more than 60 active LSD projects. The most prominent of which are Lido Finance and RocketPool. Let’s learn about Liquid Staking and its uses in Learn Crypto Trading!
What is Liquid Staking?
It provides a compilation of potential projects in the field of Liquid Staking Derivatives (LSD). These projects include notable names such as Lido Finance and Rocket Pool. Moreover, along with some new but promising projects such as Yearn Finance, Frax Finance. At the same time, learned about mysterious projects like Stader Labs.
What is Liquid Staking?
Liquid Staking Derivatives is a protocol that allows users to lock coins on Blockchains. Proof of Stake is used to operate the protocol. From there, synthetic assets are created. This is a representation of the number and value of coins that have been staked.
This is a field in Derivatives, allowing investors to trade many types of products. They are based on price fluctuations without having to directly own the products. Liquid Staking Derivatives protocols help convert Staking assets into synthetic assets. Thanks to that, users can freely buy and sell or participate in other activities.
For example, with Lido Finance, users can Stake ETH and receive STETH in return. Users can also use stETH in other DeFi protocols to earn additional profits. Such as lending on Aave or participating in providing liquidity on Automated Market Makers (AMM).
Why are Crypto Staking Liquid Derivatives thriving?
First, let’s explore the Proof of Work (PoW) and Proof of Stake (PoS) consensus mechanisms.
Proof of Work (PoW) is a consensus mechanism that requires validators to use powerful miners. The purpose is to compete for the right to validate transaction blocks without having to hold the coins. This mining operation requires high operating costs and consumes a lot of resources. Especially electricity. Mined coins are often sold to cover the operating costs of mining factories.
In contrast, Blockchains using the Proof of Stake (PoS) mechanism do not require complex operations. They only require Validators to lock a certain amount of coins on the network. If the Validator cheats, they will be penalized by having their stake deducted from the amount of coins. This mechanism ensures Validators stay honest with the network and helps reduce the amount of money in circulation.
Proof of Stake (PoS) has been proven to have many outstanding advantages compared to Proof of Work (PoW). It includes faster block generation time and lower operating costs. Furthermore, it has a higher transaction processing capacity and a significantly reduced ecological impact.
Since 2020, the number of Blockchains using the PoS mechanism has increased significantly. This is the key factor promoting the strong development of the LSD segment. It’s because these protocols only work on PoS Blockchains. They cannot be deployed on the PoW Blockchain.
Ethereum is one of the notable examples of Blockchain moving from Proof of Work (PoW) to Proof of Stake (PoS). Ether (ETH) is also the highest capitalized asset staked in the LSD protocol.
See more: DEX – What is a decentralized exchange?
Benefits of Cryptocurrency Trading Using Liquid
So what specific benefits will Cryptocurrency trading using Liquid bring to participating parties? Note the content below:
Benefits of parties participating in Crypto staking
The Liquid Staking Derivatives protocol benefits many parties including:
- Users can take advantage of profit opportunities from both sources: Block rewards and incentives from DeFi protocols. This helps optimize the efficiency of their capital use.
- When users stake Tokens into the LSD Protocol, they participate in the public network. They enhance network security and strengthen its decentralization.
- Node Operators: Receive a portion of the fees when they assist Stakers in operating hardware and software. The purpose is to bet on coins on the network.
- Token Holders receive an equal share of sales. At the same time, they can participate in the governance of the project.
- Token holders in LSD projects have the opportunity to share in revenue. At the same time, they participate in project governance through Governance rights.
As demand increases, benefits for stakeholders also increase. It all creates a positive network effect.
Benefits of participating in Crypto staking for Token Holders
When investing and holding Tokens of LSD projects, holders usually enjoy two main benefits. It includes revenue sharing and participation in project governance.
- Participating in the governance of the Liquid Staking Derivatives ecosystem is an important part of Governance.
Governance is an important and almost indispensable feature when mentioning the concept of What is dex exchange. This is the ability for Token holders to propose or participate in voting. The process takes place on proposals to influence the performance of projects.
For project builders or large investors, this benefit is very important. It allows them to optimize personal benefits or contribute to positive changes. However, for Coin holders and retail traders, Governance does not seem to bring much value.
- Protocol profit sharing
Most LSD projects collect protocol fees by charging a portion of the profits earned by users. This is a reasonable fee calculation based on the principle of benefit for both parties.
The project can distribute all or part of the protocol’s fees to Token holders. Or it can be staked through various methods.
Risks Related to Crypto Staking Liquid Derivatives
Liquid Staking has great potential for both the platform and users. It increases liquidity and reduces risk for Crypto staked assets. At the same time, new investment portfolios corresponding to representative Tokens are opened. This is with profits generated from participating in protocols in the DeFi market.
Defects worth noting about Liquid Staking Token
- For protocols: Lending Protocols often face the risk of bad debt. LSD carries almost no risk. In case if there are no security-related issues in the DeFi sector.
- For users (Stakers): They will face certain risks related to Liquid Staking Derivatives assets. This usually happens because the liquidity of these Tokens is usually quite low. If sold in large volumes in a short period of time, they can lose their valuation.
For example: In June 2022, when the cryptocurrency market was experiencing a sharp decline. The objective is to reduce the risk position associated with illiquid assets. Including stETH – Token LSD, Alameda sold a large part and accepted a small loss. Thereby, they changed stETH to ETH on the Curve Finance platform. The large sell-off by Alameda Research reduced the stETH/ETH exchange rate to 0.94. Instead of level 1 as usual.
The token mentioned above is stETH, a Liquid Token created by Lido Finance. It has a capitalization of about 5 billion USD and a 24-hour trading volume of 26 million USD. However, the market still has many other Tokens like ankles. They have a capitalization of only 50 million USD and a 24-hour trading volume of only 100 thousand USD. This creates a fairly high risk for users if the Token loses its valuation.
Will de-peg be threatened and fail as UST did in the past?
UST is an algorithmic Stablecoin backed by the value of LUNA at a 1:1 ratio. This means that UST is fully guaranteed by LUNA. If LUNA’s capitalization is higher than UST’s capitalization.
However, in the context of a bearish market, LUNA’s price dropped significantly. UST faces the situation of not having enough collateral assets. At that time, UST holders lost confidence and massive selling pressure pushed UST and LUNA down.
The loss of valuation and collapse of UST stemmed from the risk of insufficient collateral assets. However, for Liquid Staking Tokens, loss of valuation is a common problem due to low liquidity. However, they will not experience collapse. Because they are secured by assets clearly locked in the Smart Contract.
If you have staked and held Liquid crypto-staking Tokens, think carefully before selling. Because when you sell Liquid Staking Token. You also agree to sell the staked Tokens along with the interest accumulated over time.
In the specific case of Alameda Research, they were forced to sell stETH because of the ETH Staking process. What is considered non-refundable?
See more: Bybit exchange: Instruction for opening account
Notable Liquid Staking Derivatives projects
There are over 60 different DeFi LSD projects on the market. Below are four outstanding projects that you can participate in.
Crypto Staking Lido Finance
Lido is considered the most rapidly growing LSD protocol in the DeFi sector. It has an overwhelming Total Value Locked (TVL) compared to other projects. Lido currently supports 5 networks, including Ethereum, Solana, Polygon, Polkadot, and Kusama. In the future, Lido Finance will expand to Layer 2 solutions such as Optimism and Arbitrum.
Lido Finance has leading investors such as a16z, Coinbase, Paradigm, Dragonfly,… One of the important factors contributing to the strong development of Lido Finance is the support from strong partners. They accept the use of Synthetic Tokens that they create. Especially stETH. Currently, Seth is used on platforms such as Uniswap, Balancer, Curve, and Convex,…
Rocket Pool
Rocket Pool is one of the second largest Liquid Staking Derivatives platforms in the DeFi market. However, they are only focused on supporting ETH assets and have no plans yet. The special thing about Rocket Pool is that they allow Node Operators to start with a lower amount of ETH. We only need 16 ETH instead of 32 ETH like other projects.
Consensys Ventures and KR1 are the investors behind Rocket Pool.
Stader Labs trade Crypto
Stader Labs is a Liquid Staking Derivatives network with support for 7 different networks. These include Ethereum, BNB Chain, Near, Terra 2.0, Fantom, Hedera, and Polygon. In the future, they are planning to expand further to support Avalanche and Solana.
Stader Labs receives support from investors such as Pantera, Coinbase, Jump Capital, Blockchain.com,…
Ankr Crypto Staking Liquid
Initially, Ankr was a platform that aggregated tools for developers. It helps them build products in the DeFi sector. After that, Ankr expanded into many other areas. For example, AppChain, Gaming SDK, and API, before the Liquid Staking Derivatives segment was officially launched.
Currently, Ankr supports eight different Blockchains. Including Ankr, Gnosis, Ethereum, Polygon, BNB Chain, Fantom, Avalanche, and Polkadot. Ankr’s investors include Binance Labs, NGC Ventures, OK Blockchain Capital, JD Capital,…
Some Liquid Staking Derivatives you can refer to
The leading Liquid Staking Derivatives projects on the market not only support many Blockchain Platforms. It also focuses on select PoS Blockchains. Therefore, some coins will have development projects dedicated to them.
For example, Aptos uses Tortuga, Near uses Metapool, Algo uses Algo Liquid Governance, etc. You can refer to the DefiLlama page for more information. The purpose is to find Liquid Staking Derivatives projects suitable for the coin you are interested in.
summary
Liquid Staking is becoming an important trend in optimizing benefits for all parties involved. LSD protocols are built on suitable ecosystems and have strong network effects. This will have a great advantage in this. That’s what we want to give you about Liquid Staking . Follow Learn Crypto Trading to learn more new things about the investment market!
Related questions about liquid Staking How does Crypto staking affect the Blockchain network?
LSD can help increase the decentralization and security of the Blockchain network by creating more user participation and increasing the amount of Tokens Locked (Stake).
Which Liquid Staking projects stand out?
Some prominent Liquid Staking projects include Lido, Staked, Rocket Pool, and Ankr.
What are the benefits of Liquid Staking compared to traditional Staking?
Liquid Staking allows users to use Staked Tokens in DeFi applications without releasing the Staking position, increasing flexibility and the ability to generate interest on capital.
