Staking has become a method for cryptocurrency holders to support the security and functionality of blockchain networks while earning rewards. However, traditional (native, solo) staking presents a significant drawback: assets are locked and cannot be utilized. To address this issue, liquid staking has emerged, and an advanced version known as liquid restaking is gaining attention. This article examines how staking, liquid staking, and liquid restaking operate, highlighting key projects and investment suitability.
# Native Staking: Ethereum
Native staking involves locking cryptocurrency in a specific blockchain network to earn rewards. By acting as validators, participants contribute to the network’s security and stability, receiving native tokens (main network tokens) as compensation. However, these staked assets are locked for a certain period, rendering them inaccessible. For instance, Ethereum requires a minimum of 32 ETH to become a validator, with the staked assets remaining locked until the unlock period concludes. This asset illiquidity can result in opportunity costs for investors.
# Liquid Staking: Enhancing Liquidity – Lido
Liquid staking addresses the drawbacks of native staking by issuing liquid tokens that represent the value of staked assets without locking them. These liquid tokens can be utilized in DeFi (decentralized finance) projects or traded on exchanges, thereby enhancing liquidity and reducing opportunity costs for cryptocurrency investors. Liquid staking is gaining traction as an attractive option due to its ability to maintain asset utility.
Lido Finance is a prominent project in liquid staking. According to KuCoin, Lido allows users to conduct liquid staking on various blockchain networks like Ethereum (ETH), Solana (SOL), and Polkadot (DOT). Users can earn staking rewards while participating in other DeFi projects through liquid staking tokens such as stETH.
# Liquid Restaking: Maximizing Liquidity and Blockchain Security – EigenLayer, Ether.fi
Liquid restaking is an evolved version of liquid staking that further maximizes asset liquidity. This approach involves staking liquid tokens on additional blockchain networks, enabling holders to earn extra rewards and contribute to various blockchain projects. Unlike traditional staking limited to a single network, liquid restaking opens up the possibility of engaging across multiple networks simultaneously. This unique advantage is establishing liquid restaking as a strategy to maximize asset utilization in the cryptocurrency ecosystem.
Notable liquid restaking projects include EigenLayer, Ether.fi, and Puffer Finance. EigenLayer allows users to restake existing staked ETH or liquid staking tokens (LST) to provide security for various applications and earn additional rewards. By leveraging Ethereum’s security layer, it aims to enhance the security of other projects while offering high capital efficiency.
Ether.fi is a non-custodial liquid protocol where users manage their staking keys and earn rewards, integrating with EigenLayer to offer more reward opportunities. Puffer Finance utilizes EigenLayer’s security infrastructure to provide proof-of-stake validation and restaking rewards. These protocols seek to maximize reward opportunities while maintaining liquid staking liquidity.
# Which Investment is Suitable?
Native staking is appropriate for long-term investors who prioritize stability. In contrast, those looking to enhance liquidity and asset utility might prefer liquid staking and liquid restaking. Investors eager to actively participate in DeFi projects may benefit more from liquid staking.
However, it is important to note that liquid staking can be subject to significant asset price fluctuations based on liquid staking token (LST) prices. Additionally, participating in DeFi can lead to increased management costs due to complex structures. Bybit advises through its blog that investors should choose staking methods based on their goals and strategies, considering the balance between asset liquidity and rewards.
