How Liquid Staking Can Benefit the DeFi Ecosystem?
There’s no denying that decentralized finance, or DeFi as it’s commonly called, is light years ahead of the current centralised financial sector. It has far greater integrity and stability than centralized finance, as well as a much greater ability to create profits on investments.
These are precisely the reasons why DeFi adoption has been rising steadily for the last few years.
However, there are some inherent flaws in the DeFi ecosystem as well. These flaws are ingrained in the algorithms that power the smart contract economy.
One such shortcoming is the inability to generate any returns on staked assets.
Staking in PoS protocol-based projects has traditionally entailed locking one’s assets in one project for an extended period of time in exchange for a fixed, predetermined staking payout. While it, like a bond, guarantees the return on staked assets, it also limits the DeFi ecosystem’s ability to generate higher yields on those assets.
The interoperability problem and the ‘liquid staking’ solution
Liquid staking, as the name implies, addresses the root of the issue. It allows users to stake their crypto assets into a PoS system in order to participate in consensus and governance while also releasing the bonded capital for use in additional DeFi options.
It allows you to use your staked crypto assets in additional trading or investing possibilities, giving you the best of both worlds: a reward for your staked assets as well as profits from new trading/investment opportunities you discover. It accomplishes this by tokenizing the stakes so that they may be used as collateral in other financial transactions. Tokenized stakes, also known as staking derivatives, are digital assets that may be freely transferred between people, locations, and even blockchains.
Users’ assets are often stakingd into PoS protocols for a specified period of time. In exchange, there is a defined, predetermined staking payout, with delegation times frequently being a function of consensus security.
Liquid Staking: What is it and why is it getting popular?
However, in the DeFi ecosystem, locked (semi-unproductive) capital in PoS networks restricts access to liquidity. Although staked capital earns interest through network transaction fees or emission rates, stakers on PoS networks could use tokenized derivatives to deploy a representation of their bonded assets (i.e., a claim on future cash flows) across DeFi protocols.
That is why Liquid Staking has become increasingly popular in recent months. In the DeFi ecosystem, a lot of new initiatives with this functionality are emerging, and crypto investors are taking an interest in them as a way to monetize their holdings. We’re going to talk about one such project that has recently gained a lot of traction.
Liquid staking is a useful technique in the blockchain sector, where there is pressure to transition to PoS and a growing need for innovation in DeFi to support better lending and payments-based solutions. Users can take advantage of numerous financial apps without having to unstake their assets, enhancing capital efficiency without jeopardising network security.
Stakeholders who employ liquid staking systems can use their locked assets as collateral for other trading or investing possibilities, giving them a significant edge in terms of income generation. Stakers can generate money by using liquid staking. for example PSTAKE
pSTAKE is a liquid staking protocol unlocking the liquidity of staked assets. Stakers of PoS tokens can now stake their assets while maintaining the liquidity of these assets. On staking with pSTAKE, users earn staking rewards and also receive 1:1 pegged staked representative tokens (stkTOKENs) which can be used in DeFi to generate additional yield (yield on top of staking rewards).
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