In the realm of cryptocurrencies, the term "staking" is frequently encountered, originally implying the locking away of your digital currencies to uphold the security and operation of blockchain networks like Ethereum. Today, however, we delve into a more advanced concept—liquid staking—that introduces flexibility and dynamism to this process.
Envision traditional staking as depositing money in a fixed-term bank account, inaccessible until the term ends. By contrast, liquid staking is akin to receiving a passbook that can be exchanged for cash at any time, all while your principal continues to accrue interest.
What is Liquid Staking ?
In a nutshell, liquid staking converts your staked assets into freely tradable tokens. This way, even with your original cryptocurrency locked in staking, you can still engage in market activities by holding these new tokens representing your assets. These are commonly referred to as liquid staking tokens (LSTs).
The Staking Process
Under basic staking models, users lock up their cryptocurrencies (e.g., Ethereum) for a period, validating transactions and maintaining blockchain stability. However, this renders your assets less "liquid" during this time.
The Emergence of Liquid Staking
To tackle the liquidity issue inherent in traditional staking, liquid staking was born. Here's how it works: when you stake your crypto, in return, you receive LSTs equivalent to your staked assets. These tokens stand for your staked assets and encompass anticipated staking rewards. Crucially, you can instantly use these LSTs for trading, engaging in decentralized finance (DeFi) applications, or even as collateral for other transactions, bypassing lengthy unlocking periods.
EigenLayer: A Decentralized Re-Staking Protocol
Speaking of innovations in liquid staking, EigenLayer cannot be overlooked. It's a decentralized re-staking protocol on the Ethereum network, functioning as a bridge allowing seamless staking and re-staking of assets between Ethereum and other blockchains. EigenLayer introduces a new staking model, significantly enhancing user flexibility and participation.
Liquid Re-Staking
Liquid re-staking is an additional feature proposed by EigenLayer. In this process, you place your LSTs into EigenLayer's smart contract and receive liquid re-staking tokens (LRTs) in return. LRTs not only embody the staked assets and staking rewards but also incorporate extra rewards from participating in EigenLayer operations.
Differentiating Liquid Staking from Liquid Re-Staking
While both enhance liquidity, they have distinct characteristics. Liquid staking primarily turns staked assets into tradable tokens, instantly providing liquidity. Liquid re-staking goes further, offering not just fundamental staking returns but an additional layer of rewards through engagement in EigenLayer activities.