Cryptocurrency staking has grown from a small, specialized concept into a major part of how blockchain networks stay secure.
But traditional staking often comes with a major downside — your crypto gets locked up for long periods, making it unavailable for other uses.
This is where liquid staking comes in, offering a revolutionary new way for crypto users to stake their assets without losing access to them.
In this guide, we’ll break down what liquid staking is, how it functions, and why it’s transforming the decentralized finance (DeFi) space. But first, let’s quickly cover the basics of staking.
What Is Staking?
Staking is when you lock your cryptocurrency to support the security and smooth operation of a blockchain network.
It’s an essential feature for blockchains that use the Proof-of-Stake (PoS) system. In PoS, validators are selected based on how much crypto they have staked, and their job is to verify transactions and add new blocks to the blockchain. In return, they earn rewards — usually paid out in more crypto tokens.
Staking is a reliable way to earn passive income. However, the big drawback is that once your assets are locked, you can’t use them for anything else in DeFi activities like trading, lending, or farming.
This reduces their utility and flexibility in the wider crypto ecosystem.
What Is Liquid Staking in Crypto?
Liquid staking changes the game by allowing you to stake your cryptocurrency and still use it at the same time.
In the traditional method, once you stake your crypto, it becomes unavailable until the lock-up period ends. But with liquid staking protocols, you can keep earning staking rewards while still using your assets in other financial activities like trading, lending, or yield farming.
When you stake through a liquid staking platform, you receive a special token called a Liquid Staking Token (LST). This token represents your staked assets and can be moved, traded, or invested freely across DeFi platforms.
For example:
- With Ethereum liquid staking, when you stake ETH, you get stETH in return. This stETH can be used to trade, provide liquidity on decentralized exchanges (DEXs), or even to borrow funds.
- In Solana’s ecosystem, staking SOL gives you mSOL, which opens doors to multiple DeFi opportunities within the Solana network.
Liquid staking is also making staking more inclusive by removing technical barriers — now, even users without the resources to run validator nodes can easily participate and earn rewards.
What Are Liquidity Pools in Crypto?
Liquidity pools are collections of crypto assets locked in smart contracts that enable trading, lending, and other DeFi operations without needing traditional order books.
In the context of liquid staking, users can deposit their LSTs like stETH or mSOL into liquidity pools. This strategy lets users earn transaction fees and additional yields, while still benefiting from their original staking rewards — essentially, earning on two fronts at once.
Why Are Liquid Staking Tokens (LSTs) Becoming So Popular?
Liquid Staking Tokens are gaining rapid popularity because they offer the best of both worlds: the steady rewards of staking and the flexibility of liquidity.
With LSTs, users can:
- Stake their assets and earn rewards.
- Simultaneously use those assets for trading, lending, or farming in the DeFi world.
Some innovative projects even combine LSTs with NFTs, creating exciting opportunities for gamified staking, collectible ownership, and cross-platform rewards. This flexibility makes LSTs a powerful tool for anyone actively involved in DeFi.
Thanks to LSTs, DeFi ecosystems are becoming richer and more dynamic, offering users more ways to put their staked assets to work.
Liquid Staking vs. Pool Staking: What’s the Difference?
Although liquid staking and staking pools both make staking easier and more accessible, they work quite differently:
- Staking Pools: Users combine their resources to meet the minimum staking requirements of becoming a validator. However, once pooled, these assets are locked and cannot be accessed until the unstaking period is over. Staking pools are ideal for users who want to earn rewards with small amounts but are fine with their funds being frozen temporarily.
- Liquid Staking: Users stake assets but immediately receive a derivative token (like stETH or mSOL) that keeps their investment liquid. These tokens can be traded, used in lending platforms, or farmed for additional rewards — all while still earning staking returns.
Other key differences include:
- Liquidity: Pool staking locks funds, while liquid staking provides tokens that keep funds accessible.
- Flexibility: Liquid staking tokens can be used across many DeFi platforms, while assets in staking pools stay locked.
- Risk Profile: Pool staking primarily carries network risks (like validator slashing), whereas liquid staking also brings smart contract risks from DeFi integrations.
Overall, liquid staking offers more flexibility, although users must carefully consider both the added benefits and the added risks.
How Does Liquid Staking Work?
Liquid staking combines smart blockchain technology with creative DeFi structures to allow users to maximize their crypto’s earning potential.
Here’s a step-by-step overview:
- Validators: Professional node operators manage the staking process, keeping your funds safe while earning staking rewards.
- Consensus Mechanisms: Liquid staking operates on PoS blockchains, where validators are selected based on the assets staked, keeping the network secure and decentralized.
- Liquid Staking Tokens (LSTs): Once you stake, you receive an LST like stETH or mSOL, representing your staked crypto. You can use these tokens freely across DeFi platforms.
- Liquid Staking Derivatives (LSDs): Some advanced protocols go further by offering derivatives that represent fractional ownership of the staking rewards, giving sophisticated users even more ways to diversify and earn.
What Is Restaking?
Restaking is when you take the liquid staking token you received (like stETH) and stake it again on a secondary platform to earn even more rewards.
This layered strategy can maximize profits but comes with its own risks:
- Complexity: Managing multiple layers of staking can get complicated.
- Smart Contract Risks: Each additional platform introduces new technical risks and potential vulnerabilities.
Despite the challenges, restaking is becoming increasingly popular among advanced DeFi users looking to boost their returns.
What Are the Advantages of Liquid Staking?
Liquid staking offers several compelling benefits:
- Unlocked Liquidity: Unlike traditional staking, your assets stay usable. You can trade, lend, or invest them while still earning staking rewards.
- Multiple DeFi Opportunities: Your LSTs can be integrated into DeFi platforms like Aave, Uniswap, or Curve, opening up opportunities for yield farming, lending, and more.
- Continuous Rewards: You keep earning consistent staking rewards even while using your assets elsewhere.
These benefits make liquid staking an attractive option for users who want flexibility without sacrificing earning potential.
What Are the Disadvantages of Liquid Staking?
Even though liquid staking is powerful, it’s not without risks. Some of the main drawbacks include:
- Slashing Risks: If validators behave badly (e.g., downtime or misconduct), penalties can reduce your returns.
- Smart Contract Vulnerabilities: DeFi protocols depend on smart contracts, which can be exploited if bugs or vulnerabilities exist.
- Yield Volatility: Rewards from staking may fluctuate based on changing market conditions, affecting your total earnings.
As always, users should research thoroughly before committing their assets to any platform.
How Does Liquid Staking Work Across Different Blockchains?
While the basic idea behind liquid staking remains the same — maintaining liquidity while earning rewards — its exact implementation can vary depending on the blockchain:
- Ethereum: Users stake ETH and receive stETH, allowing them to earn staking rewards while participating in DeFi.
- Solana: Users stake SOL and receive mSOL, usable across Solana’s many DeFi protocols.
- Polygon and Others: Platforms like Polygon are also embracing liquid staking to boost activity and give users more options.
Each blockchain tailors liquid staking to suit its ecosystem, but the goal is always to increase accessibility and utility.
Stake Your Crypto Assets With Gemini
Gemini offers a secure and user-friendly platform for traditional staking, allowing you to earn rewards by committing your crypto assets like ETH and SOL.
While Gemini doesn’t yet offer liquid staking options, it still provides a reliable way to grow your portfolio through standard staking mechanisms where your assets are locked for a fixed period.
The Bottom Line
Liquid staking is changing the crypto world by offering a smarter, more flexible alternative to traditional staking. Instead of locking up your crypto for months, you can now earn rewards and stay active in the DeFi space — trading, lending, and investing at the same time.
Although it’s important to be aware of risks like smart contract vulnerabilities and market volatility, liquid staking opens up exciting new possibilities for anyone serious about growing their crypto assets.
Stake smarter. Earn more. Expand your crypto journey!
Consider platforms like Gemini to start staking today and take your investments to the next level.
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