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Earn 7.5% APY staking with Solana Compass

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Liquid Staking

Liquid staking has emerged as a groundbreaking innovation in the world of decentralized finance (DeFi), empowering cryptocurrency holders to unlock the full potential of their digital assets. In this article, we will delve into the concept, benefits, and use cases of liquid staking on Solana, a rapidly growing blockchain platform known for its unique features and offerings. Gaining traction among both seasoned crypto enthusiasts and newcomers, Solana is poised to play a significant role in the future of DeFi.

What is Liquid Staking?

Liquid staking refers to a process enabling cryptocurrency holders to earn rewards on their assets without locking them up for extended periods. By transforming staked assets into tradeable tokens, liquid staking provides users with increased liquidity, flexibility, and composability compared to traditional staking methods. As a result, users can freely trade, lend, or borrow against their staking derivatives in various DeFi applications.

Several platforms and protocols have emerged in the crypto space to support liquid staking, each with its own set of features and advantages. These platforms usually offer staking derivatives, which represent the user's staked assets and can be used just like the original tokens. As interest in liquid staking continues to grow, users can expect even more options and opportunities in this space.

Why Marinade is Our Favorite Liquid Staking Platform

Marinade Finance stands out as a prominent liquid staking platform on Solana, thanks to its strong focus on decentralization and supporting quality validators. By actively engaging with the ecosystem and fostering a vibrant community, Marinade has become a popular choice for many crypto users.

Marinade's broad range of DeFi integrations makes it an attractive option for those looking to participate in liquid staking on Solana. By offering seamless integration with other DeFi platforms, Marinade allows users to make the most of their staked assets, maximizing potential returns and opportunities in the Solana ecosystem.

Stake with Marinade >

Liquid Staking on Solana: How It Works

The liquid staking process on Solana is relatively straightforward and user-friendly. Users begin by depositing their SOL tokens (Solana's native cryptocurrency) into a smart contract associated with the liquid staking platform. In exchange, they receive staking derivatives, such as mSOL, stSOL, JitoSOL, or BlazeSOL, which represent their staked SOL tokens.

These staking tokens can then be used in various DeFi applications, giving users the ability to trade, lend, or borrow against their staked assets. This is a significant advantage over traditional staking methods, which require users to lock up their assets for extended periods, limiting their options and opportunities in DeFi.

When users want to redeem their staking tokens for the underlying SOL tokens, they simply initiate a withdrawal process through the platform. However, it's essential to be aware of the risks and potential trade-offs associated with liquid staking, such as slashing (loss of staked assets due to validator misbehavior) and smart contract vulnerabilities. While these risks are relatively low, users should still exercise caution and stay informed about the platforms they choose to use.

Benefits of Liquid Staking on Solana

Liquid staking on Solana offers an array of key benefits, including:

  1. Unlocking liquidity for staked SOL: With liquid staking, users can freely trade, lend, or borrow against their staking derivatives without waiting for the typical lock-up period associated with traditional staking. This increased liquidity means users can take advantage of new opportunities in the DeFi ecosystem without sacrificing the rewards from staking their SOL tokens.

  2. Enhancing DeFi opportunities for SOL holders: By transforming staked SOL into tradeable tokens, liquid staking allows SOL holders toparticipate in a variety of DeFi applications, such as yield farming, lending, and borrowing platforms. This not only expands the utility of SOL tokens but also enables users to potentially earn additional rewards, making their investments work harder for them.

  3. Encouraging network participation, decentralization, and security: Liquid staking reduces barriers to entry, allowing smaller participants to contribute to the Solana network and benefit from staking rewards. This democratization of access leads to a more decentralized and secure network, as a larger number of validators help maintain the blockchain's integrity.

  4. Lowering entry barriers for smaller participants: Traditional staking often requires a minimum stake, which can be prohibitive for some users. Liquid staking removes this requirement, enabling more individuals to participate in the Solana ecosystem. This fosters growth, encourages decentralization, and ultimately strengthens the overall network.

Use Cases and Applications For Liquid Staking Tokens (LSTs) on Solana

Liquid staking on Solana has numerous use cases and applications, such as:

  1. Yield farming and liquidity provision: Users can stake their tokens in liquidity pools to earn additional rewards and fees. By supplying their staking tokens to these pools, they help facilitate trades between different tokens, making the DeFi ecosystem more efficient and earning a share of the trading fees in return.

  2. Collateralization in lending/borrowing platforms: Staking tokens can be used as collateral for borrowing on lending platforms, providing extra flexibility and utility. This allows users to unlock the value of their staked assets without having to unstake them, enabling them to take advantage of additional DeFi opportunities while still earning staking rewards.

  3. Staking tokens in portfolios: Investors can include staking tokens in their portfolios, diversifying their holdings and improving overall risk management. By incorporating staking derivatives alongside other digital assets, users can create a more balanced and resilient investment strategy.

Popular Liquid Staking Protocols on Solana

Several liquid staking platforms support Solana, each offering unique features and benefits. Some of the top platforms include:

Lido: Lido is a well-known liquid staking platform that supports multiple blockchains, including Solana. Its decentralized and permissionless nature has made it a popular choice among users who value autonomy and flexibility.

Marinade Finance: As mentioned earlier, Marinade Finance is a leading liquid staking platform on Solana, boasting a strong focus on decentralization and supporting quality validators. Its active community and wide range of DeFi integrations make it an attractive option for those seeking to participate in the Solana ecosystem.

Jito: Jito is another liquid staking platform on Solana, offering users a unique set of features and benefits. Like Marinade and Lido, Jito is committed to decentralization and aims to provide users with a seamless staking experience.

When evaluating these platforms, users should consider factors such as decentralization, permissioned vs. permissionless access, fees, rewards, and user experience to determine which option best suits their needs and preferences.

What are the Risks of Liquid Staking?

While liquid staking provides several advantages, it also comes with a set of risks that users should consider:

  • Smart Contract Vulnerabilities: Like many DeFi protocols, liquid staking platforms are built on smart contracts. These are automated, self-executing contracts with the terms of the agreement directly written into lines of code. While this automation simplifies processes, it also exposes users to potential contract vulnerabilities and bugs. In a worst-case scenario, such vulnerabilities could be exploited, leading to loss of funds.

  • Validator Risks: When users stake their tokens, whether it's liquid or traditional staking, they are exposed to the risk of validator misbehavior. Validators are responsible for verifying transactions and maintaining the network. If a validator acts maliciously - for instance by aggressively raising commission - or fails to maintain network protocol, their staked tokens (including those of users who delegated to them) could be slashed or rewards reduced. Staking with a stake pool could actually help reduce this risk, by spreading your portfolio across a number of validators and minimizing the impact of any slashing

  • Liquidity and Redemption Risks: Despite its name, liquid staking can sometimes pose liquidity risks. The process of converting LSTs back to the original token may not always be immediate - for example if liquidity pools become depleted - and so in a black swan event you may find it takes as long to unstake as it would in native staking.

  • Regulatory Risks: As the crypto industry evolves, so does its regulatory environment. While current rules might allow for liquid staking, future changes to regulations could impact its functionality or legality. On the flip side, depending on your jurisdiction there may be tax advantages to holding a fixed number of liquid staking tokens that appreciate over a steadily increasing number of natively staked tokens.

  • Defi Risks: One of the main benefits of liquid staking is the ability to use LSTs in DeFi applications for additional yield. However, this added yield often comes with additional risks, such as smart contract vulnerabilities, impermanent loss, and liquidation risks.

  • Market Risks: Lastly, like any crypto-related investment, liquid staking is subject to market risks. The value of staked assets can fluctuate based on overall market trends and specific token dynamics.

Liquid Staking on Solana: Tokens vs. Derivatives

If you've been diving into the world of liquid staking on Solana, you might have come across different terminologies being used to describe it, such as 'Liquid Staking Tokens' (LSTs) and 'Liquid Staking Derivatives' (LSDs). But why does this matter, and why is one term preferable over the other? Let's break it down.

What is Liquid Staking?

To start, liquid staking is a technological solution that allows crypto holders to participate in a blockchain's consensus mechanism (i.e., validating and verifying transactions) without locking up their assets. In traditional staking, assets are often "locked" and cannot be accessed or traded. Liquid staking provides a way around this by issuing tokens in exchange for the staked assets. These tokens can then be traded, sold, or used in other financial activities.

So, why 'Tokens' and not 'Derivatives'?

  1. Clear Representation of Ownership: Liquid Staking Tokens (LSTs) are like a certificate or a 'document of title' that proves you've staked a particular asset. When you hold an LST, it's proof of your ownership of the staked asset. On the other hand, the term 'derivative' in finance usually represents a contract between two parties that derives its value from an underlying asset. LSTs are not contracts; they are direct proof of ownership.

  2. Avoiding Misunderstandings: Calling it a 'derivative' might give the impression that it's a speculative tool or that it's indirectly linked to the asset, which isn't the case. LSTs provide a direct link to the staked asset.

  3. Consistency with Other Assets: Historically, we've used terms like 'warehouse receipts' or 'bills of lading' to represent ownership of physical assets. Using 'Liquid Staking Tokens' aligns with this tradition of naming things for what they genuinely are.

  4. Industry Recommendations: Recent white papers and research have highlighted the importance of accurate terminology. Advocacy groups and industry experts suggest the term 'Liquid Staking Tokens' over 'Liquid Staking Derivatives' to prevent any misconceptions.

In conclusion, while the underlying technology and processes can be complex, the terminology we use shouldn't add to the confusion. For clarity and consistency, it's more appropriate to refer to these as 'Liquid Staking Tokens' when discussing liquid staking on platforms like Solana.

Liquid Staking vs Native Staking

Both liquid staking and native staking allow users to earn rewards by participating in network security. However, they differ significantly in several respects:

  • Liquidity: Native staking generally requires users to lock up their assets for a set period, during which they can't freely use or trade their tokens. Liquid staking, on the other hand, allows users to mint LSTs that can be freely traded or used in DeFi applications, providing enhanced liquidity.

  • Accessibility: Liquid staking lowers entry barriers, allowing users to participate without the need for a minimum stake. This is not always the case with native staking, which often has a minimum requirement that may exclude smaller investors.

  • Flexibility: With liquid staking, users can earn staking rewards while simultaneously leveraging their staked assets in DeFi applications such as yield farming, lending, and borrowing. This level of flexibility is typically not available in native staking.

  • Risk Exposure: While both forms of staking have risks, liquid staking can expose users to additional risks, such as smart contract vulnerabilities and liquidity issues.

  • Participation in DeFi: Liquid staking seamlessly integrates with the DeFi ecosystem, enabling participation in various DeFi applications. In contrast, native staking often limits the utility of staked tokens primarily to network participation and earning rewards.

In conclusion, the choice between liquid staking and native staking largely depends on a user's individual needs and risk tolerance. Those who value liquidity and flexibility may opt for liquid staking, while others who prefer a more straightforward approach might lean towards native staking.