What is Liquid Staking? Low-risk passive income with crypto

It’s perfectly possible to put your coins to work for you. One of the ways to do this is “stake” (deposit and block) your cryptocurrencies for a certain period, gaining some rewards in exchange. But now it’s also possible to deposit without blocking, practicing the Liquid Staking in crypto to earn passive income.

Liquid Staking is basically the same thing as staking, but with the possibility to use your funds at any moment. So, we can say it’s a low-risk way to earn rewards. Let’s explore this concept further.

Staking vs. Liquid Staking in Crypto

The staking is available (and needed) in Proof-of-Stake (PoS) blockchains. In these systems, the figure of the “miner” is replaced by the “validator”. This validator, which can be anybody who wants to, won’t need energy or machines (like 在Bitcoin中). Instead, they’ll lock a certain number of native tokens (previously acquired) inside a special wallet. That way, they’ll get the right to verify transactions and mint new coins, almost automatically.

Validators will be rewarded for it, as a passive income. For example, in the new PoS Ethereum, validators must deposit and block (stake) at least 32 ETH. To withdraw them, it’s necessary to pass a notification process and wait over 24 hours. There are also monetary punishments for stopping running the validator node. In exchange, an Annual Percentage Yield (APY) of over 4% is 提供 as a passive income from your crypto.

On the other hand, Liquid Staking is more flexible. The required amounts for deposits are fewer, and your funds are available to be moved anytime while still receiving rewards. That’s possible because the original coins are, indeed, locked inside the Liquid Staking protocol, while an equivalent number of usable tokenized coins is delivered to the user.

Making Liquid Staking with ETH

Let’s work with another example in ETH. Some DeFi platforms offer Liquid Staking with this crypto as well. So, after doing your own research (迪奥) about it, and picking one, the process begins. You connect your wallet to the DeFi protocol and choose the currency you want to stake —ETH, in this case. Select the amount of ETH you want to stake (it could be any), and then receive the equivalent in stETH tokens.

Those stETH crypto tokens can be used in other DeFi 平台 to earn more passive income as well (to make 流动性挖掘, for instance), or as collateral for a crypto loan. In any case, the user will be still receiving rewards from the Liquid Staking platform until they decide to withdraw the original coins —and return the stETH. It’s also possible to sell the stETH, though.

Liquid Staking or “Soft Staking” is available not only for Ethereum, but also for coins like 索拉纳, Polygon, 卡尔达诺, Binance Coin, Polkadot, and Kusama. The offered APY for the users varies from platform to platform and coin to coin —from around 3% to 25%.

Passive income with crypto: possible risks

We must remember that all DeFi platforms are (still) risky by nature. They’re very new, and it’s still relatively easy for black hat hackers to find bugs and back doors. Only in July 2022, around 27 DeFi platforms were attacked, causing losses of over $31.9 million [DeFiYield]. A scenario like the one 泰拉 (LUNA) suffered is also possible here: all the assets may be sold and liquidated by the bears, causing losses.

As the Moralis Academy explains:

“Liquid staking protocols require collateral underpinning the liquid token with different loan-to-collateralization ratios depending upon the protocol. If a black swan event occurs, resulting in a drastic bear turn in the markets, the asset value may drop below the necessary requirements for collateralization. As a result, this may end in the liquidation of all assets.”

A “black swan event” is something awful and unpredictable. In this case, it could be a remarkable failure in the selected coin, a major hack, a catastrophic recession, or even a bank run on the platform. At least, the great advantage of Liquid Staking in crypto is that you can quickly withdraw your funds to save what’s left, in the case of any big issue.

Some Liquid Staking platforms

We can’t recommend using any specific platform (DYOR), but we can mention some of them and their general characteristics. Lately, Lido DAO (LDO) has been very popular. According to its 官方网页, they have over $7.4 billion in staked assets, 172,956 stakers, and $212.1 million in paid rewards.  

They support several crypto for Liquid Staking and offer different APYs: Ethereum (3.9%), Solana (5.4%), Polygon (6.3%), Polkadot (16.5%), and Kusama (15.2%). It’s necessary to have a web3 wallet (like MetaMask or Trust Wallet) with funds to connect the app. In the last 30 days, its native token LDO has increased by over 100%.

A similar platform is pSTAKE. This one offers a bridge to transfer value between the supported chains. They also have several crypto coins and APYs available for Liquid Staking: Binance Coin (5.2%), Ethereum (4.05%), Cosmos (13.5%), Persistence (25%), and coming soon Solana and Avalanche.

Other names we can include here are Marinade (Solana), Stafi (PoS tokens like Polkadot, Cosmos, Binance Coin, and Solana), Meta Pool (NEAR), and Blockdaemon (ETH for institutional investors). They can be an attractive way to earn passive income with crypto, but don’t forget to make your own readings and conclusions.

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