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Thursday, December 1, 2022

The truth behind the misconceptions holding liquid staking back

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Blockchains have relied on proof-of-work (PoW) validation since their inception. Yet the PoW consensus proved to be unsustainable with its excessive power utilization and its want for quick, highly effective {hardware} creating excessive boundaries to entry. That’s why blockchains are adopting proof-of-stake consensus algorithms (PoS), the place these desirous to earn rewards don’t should compete towards different miners, however can merely stake a part of their crypto for an opportunity to be chosen to be a validator — and reap the returns.

Everyone who owns crypto on PoS blockchains should need to make the most of the alternatives staking gives, proper? Actually, in accordance with our report, whereas 56% of these surveyed had staked earlier than, many who hadn’t staked or wouldn’t stake once more pointed towards the similar hesitation: They don’t need their belongings locked up in staking, not when these belongings might be put to make use of elsewhere. This is why liquid staking gives the better of each worlds. It permits buyers to stake their belongings whereas additionally permitting them to make use of these belongings in different initiatives throughout lock-up.

Despite the undeniable fact that this innovation is ready to decrease boundaries to staking, there’s nonetheless confusion about what liquid staking is and what it could actually provide to the crypto neighborhood. What follows are a few of the misconceptions about liquid staking and what the truth is about this new alternative.

Related: The many layers of crypto staking in the DeFi ecosystem

What is liquid staking?

Staking is altering the approach blockchains operate. It brings higher power effectivity to blockchain validation, extra flexibility to the {hardware} wanted and faster transaction frequency. But regardless of its advantages, certainly one of its largest challenges — and what’s holding many back from staking — is the lock-up interval. Assets are inaccessible to the holder whereas being staked, and people house owners can’t do something with them — like put money into decentralized finance (DeFi) — whereas they’re being staked. It’s due to this sacrifice that many are hesitant to stake.

However, liquid staking solves this difficulty. Liquid staking protocols enable holders of staked belongings to get liquidity in the type of a by-product token that they’ll then use in DeFi — all whereas the staked belongings proceed to earn rewards. It’s a method to maximize incomes potential whereas having the better of each worlds.

PoS can be swiftly rising in reputation. PoS protocols account for over half of crypto’s complete market cap, a complete of $594 billion. The alternatives will solely enhance as Ethereum strikes absolutely to PoS in the coming months. However, solely 24% of the complete market capitalization of staking platforms is locked in staking — which means there are various who can stake however aren’t doing so.

Related: The pros and cons of staking cryptocurrency

Four misconceptions of liquid staking

Despite the advantages of liquid staking, there’s nonetheless confusion about the way it features. Here are 4 frequent misconceptions, and the way you need to be fascinated by liquid staking as an alternative.

Misconception 1: Only one participant or protocol will exist. One of the misconceptions about liquid staking is that just one participant will exist by means of which buyers can achieve liquidity. It could seem that approach because it’s nonetheless so early in the liquid staking area, however in the future, a number of liquid staking protocols will coexist. There may additionally be no capping to the variety of liquid staking protocols that may coexist, both. In reality, the extra the variety of protocols, the higher it’s for the community, as it could actually scale back cases of stake centralization and fears of a single level of failure.

Misconception 2: It’s solely restricted to liquidity. Liquid staking isn’t only a method to get liquidity. While liquid staking does assist PoS networks purchase staked capital that secures the community, it isn’t simply restricted to that. It’s additionally a method to get composability as a result of you should utilize your by-product in a number of locations, which you’ll be able to’t do with an alternate. The artificial derivatives which can be issued as a part of liquid staking and utilized in supported DeFi protocols for producing extra yield truly assist in developing financial constructing blocks throughout the ecosystem.

Misconception 3: Liquid staking is solved at the protocol degree. People assume liquid staking can be solved at the protocol degree itself. But liquid staking isn’t nearly enabling performance at a protocol degree. It’s about coordinating with different protocols, bringing extra use circumstances, extra options and extra usability. A liquid staking protocol is solely centered on growing the structure that can facilitate the creation of artificial derivatives and making certain that there are DeFi protocols with which these derivatives may be built-in.

Misconception 4: Liquid staking defeats the goal of staking total. Some say liquid staking defeats the goal of staking or locking up belongings, however we’ve seen that’s not true. Liquid staking not solely will increase community safety but additionally helps obtain a vital goal of the PoS community, which is staking. If there’s a resolution that points derivatives for staked capital inside the community, then not solely is the staked capital making certain that the PoS community is safe, however additionally it is creating an enhanced expertise for the person by enabling capital effectivity.

The way forward for PoS

Liquid staking not solely solves an issue for crypto fanatics who need to stake by issuing tokens they’ll use in DeFi whereas their belongings are staked. An enhance in these staking their belongings — which is made simpler by making liquid staking obtainable — truly makes the blockchain safer. By studying the truth about frequent misconceptions, buyers will allow staking to really grow to be an progressive new approach for blockchains to realize consensus.

This article doesn’t comprise funding recommendation or suggestions. Every funding and buying and selling transfer entails threat, and readers ought to conduct their very own analysis when making a call.

The views, ideas and opinions expressed listed below are the creator’s alone and don’t essentially mirror or signify the views and opinions of Cointelegraph.

Mohak Agarwal is the CEO of ClayStack. He is a serial entrepreneur and investor on a mission to unlock the liquidity of staked belongings.