Liquid staking: Killing the opportunity cost

Liquid staking is a DeFi innovation that allows cryptocurrency holders to stake their assets while maintaining liquidity.

Traditionally, staking locks up assets, making them unavailable for other uses. Liquid staking solves this by issuing staking derivatives, which are tokenized representations of the staked assets.

These derivatives can be freely traded or utilized in other DeFi protocols, providing flexibility while still earning staking rewards.

Protocols like Lido and StakeWise are at the forefront of liquid staking. Lido, for example, lets users stake their Ether and receive stETH (the derivative token), which can be used across various DeFi applications. StakeWise focuses on maximizing returns by integrating yield farming and lending markets with liquid staking.

Strategy example: Creating a loop with staking derivatives

One strategy involving liquid staking is using staking derivatives as collateral in lending protocols.

For instance, users can stake their Ether in Lido, receive stETH, and then use this stETH as collateral on a lending platform like Aave. By borrowing tokens against this collateral, users can then lend these borrowed tokens to earn additional interest.

With this interest, they can buy more Ether and stake them in Lido to start the loop again.

This loop works as follows:

1. Stake Ether and receive stETH.

2. Use stETH as collateral in a lending protocol to borrow stablecoins or other cryptocurrencies.

3. Lend these borrowed assets to earn interest.

4. Reinvest the earned interest into Ether and stake in Lido.

This strategy leverages the liquidity and earning potential of staking derivatives, enhancing the overall yield from the original staked assets.

Other use cases for liquid staking

Beyond the lending loop, liquid staking offers various other use cases:

-Yield farming: Staking derivatives can be used in yield farming to earn additional rewards on top of staking yields.

-Collateral for margin trading: Traders can use staking derivatives as collateral to access margin trading facilities, amplifying their trading positions.

-Liquidity provision: Staking derivatives can be added to liquidity pools on decentralized exchanges, earning fees from trading activities.

As you can see, liquid staking opens many doors at DeFi and allows you to give free rein to your imagination to create financial strategies.