Author: Fahad Sheikh
Note: This is a community-written piece. The views expressed within are those of the author and not necessarily those of the pSTAKE team.
To earn periodic yield rewards passively on your assets is an important adventure everyone participates in during their financial journey in the crypto space. In crypto, staking is a way people earn passively and conveniently from their tokens. Liquid staking is an improved style of staking where users delegate their coins to a validator to support a network, earn staking rewards in return, and also earn a representative token which can be used to participate in the DeFi market.
Liquid staking is just like regular staking, but has an added benefit of issuing derivative tokens which users can mint. These derivative tokens represent your underlying staked tokens. This method of staking developed as a response to numerous user complaints of having to lock up their assets without having any liquidity on them until the bonding period expires. Liquid staking has grown to be acceptable in staking communities and is gaining adoption.
There are numerous benefits to liquid staking, such as earning usual staking rewards, getting liquidity from your staked assets, and maximizing your yield potential. Liquid staking also comes with a number of cons – this article explores both sides.
Pro: Liquid Staking Offers Staking Rewards
As indicated earlier, earning periodic yield rewards is one main reason that makes many people begin staking their tokens. Liquid staking also has other benefits, such as supporting a particular blockchain. With liquid staking, stakers get the same staking rewards and provide the same benefits to their blockchain as regular staking. The staking rewards that someone can earn from liquid staking or also more or less the same as you would expect from regular staking.
These rewards are mostly paid into the stakers account on a daily basis and can be withdrawn at any time, but not all tokens have the same staking rewards. Moreover, various staking platforms or networks have diverse APYs and returns as well. Some prominent coins that are being liquid staked currently by many crypto stakers include Cosmos’s ATOM, BNB from Binance, and XPRT of Persistence One. These coins are very popular in the space, rank top in the market, and have many community members throwing immense support to them. The APY for ATOM on pSTAKE is around 13% and that of BNB and XPRT at 5.2% and 25%, respectively.
Pro: Liquid Staking Provides Liquidity to Staked Tokens
The benefits of liquid staking don’t just end at staking rewards. The liquidity associated with liquid staking is a hallmark feature that attracts user interest. Liquid staking gives you the opportunity to earn derivative tokens which users can use for further income generation. These derivative tokens are generated via the liquid staking platform and are what gives users the liquidity they want.
Regular staking ensures you earn periodic staking rewards only, but with liquid staking, you get that and the derivative tokens. These tokens have many benefits in the space. To start with, users can trade these tokens. The popularity of liquid staking has made platforms develop a market for these tokens. These stkASSETs can be traded on exchanges such as PancakeSwap and SushiSwap for other tokens. These derivative tokens can be used for movement of funds. stkASSETs are crypto backed assets and, as with any other coin, they can be transferred from one user to another over the blockchain. Liquid staking thus allows crypto stakers to continue to make transactions even with the tokens that they are staking.
Pro: Liquid Staking Allows You to Maximize Yield Farming
Choosing the option to start liquid staking is a big move to expand your yield income in the crypto market, especially for people who are only using regular staking platforms. Liquid staking allows you to earn additional yield rewards on top of your regular staking rewards with the use of derivative tokens.
Popular use cases for these derivative tokens are prominent in the DeFi market through yield farming. pSTAKE’s derivative liquid staking tokens are called stkASSETs, and these stkASSETs offer yield farming opportunities on multiple DeFi platforms. People can use their stkASSETs on SushiSwap, PancakesSwap, Beefy Finance, and Alpaca Finance to earn additional yield farming rewards as liquidity providers. Users can utilize these platforms that offer yield farming opportunities to stake into various pools and earn. There are other DeFi platforms you can use your derivative tokens on as well. Ultimately, liquid staking is a great add on to anyone’s yield farming strategy and is a means to optimize the yield rewards from your tokens.
Con: Liquid Staking has Limited Options
As with anything else, there are some disadvantages that come along with liquid staking as well. There are limited options for users who are looking to start liquid staking. Liquid staking is a novel niche market within the crypto economy and still being developed. There are few platforms that offer liquid staking as a service, and not many cryptocurrencies are supported by these platforms.
In the regular staking market, a number of platforms and projects have staking and masternode services for users to periodically earn rewards. However, not all of these platforms have liquid staking options. It is the same when one considers the tokens available for liquid staking and regular staking. There are a lot of tokens that are supported by regular staking platforms, but the amount of tokens supported by liquid staking platforms is very limited.
The lack of available options in the liquid staking market can be chalked up to the market being very new and small. As the liquid staking market grows, more tokens will be supported by liquid staking platforms and the number of liquid staking platforms will also increase.
Con: Market Fluctuations Can Make Liquid Staking Risky
Liquid staking is a great addition to the crypto staking economy but still a crypto activity, where all rules of crypto apply here. Assets that are liquid staked are subject to market sentiments and conditions, and hence fluctuations can significantly affect the value of an individual’s token holdings.
At the time this was written, most coins in the crypto market experienced a substantial reduction in prices since all-time-highs. Anyone who bought tokens to stake when they were at or around the all time highs would have recorded substantial losses. One should not consider liquid staking as a hedge against market conditions, since in many cases, the gains made from liquid staking may not be enough to offset the losses incurred by a bear market. Although liquid staking can be a part of your strategy to hedge against a bear market, it would take more than just liquid staking to properly hedge against the market though.
Con: Liquid Staking Rewards are Not Standardized
Every staking platform has its own set of protocols it operates with. This happens in regular staking, liquid staking, and even DeFi activities. Similarly, liquid stakers experience this plethora of varying offers in the crypto ecosystem. Different platforms offering liquid staking services have varying yield rewards, even for the same token. This means that certain liquid staking platforms can offer a higher yield to stake the exact same token, which is why it’s very important to choose your liquid staking platform carefully.
Some platforms provide users with better yield rewards and lower fees to be more competitive. pSTAKE, for example, chooses to offer high yields and the most competitive fees to its users. Even though the liquid staking market is not very competitive right now, pSTAKE is looking ahead and is already positioning itself in a manner that would be conducive to a more competitive market. This, of course, is also beneficial to pSTAKE’s users since it gets them better yield rewards and lower fees.
A Fair Look at Liquid Staking
Liquid staking is currently an amazing evolution in the crypto staking economy and several crypto enthusiasts are adopting it to enjoy its benefits. There are several advantages it offers to stakers, and they include regular earning of staking rewards, providing liquidity to staked assets, and maximizing yield rewards. Notwithstanding these benefits, there are some drawbacks surrounding it. The good news is, there are platforms ensuring users get the best experience in liquid staking and a prominent example is pSTAKE, a pioneer of liquid staking. Additionally, as the liquid staking market further grows and develops, many of the challenges that it is facing today will be dealt with. Although, as with all markets, new challenges and benefits will also naturally arise as the market grows.
