Most of us are familiar with the concept of staking. It is the sustainable, energy-efficient alternative to mining. Instead of advanced computer equipment, users pledge (stake) their tokens to the blockchain to participate in the validation of new transactions. The pledged coins help maintain the security of the blockchain, and the users receive a predetermined staking reward in return. While this sounds like a win-win situation, some issues can crop up.
Firstly, staked coins need to be locked up for extended periods – it could be days, weeks or even months. This can create a liquidity issue, especially for those who devote a large number of their tokens toward staking. They cannot use the staked coins for other purposes as they are locked with the network. The second issue is that, even if you were to withdraw the staked coins, it would take days or weeks for the coins to make it back to your wallet.
In order to address these issues, a concept called liquid staking or soft staking was introduced. Let’s take a look at how it works.
What is liquid/soft staking?
With liquid staking, you can use your staked coins for other purposes. Plus, you can withdraw your tokens whenever you want, which is not the case with the traditional staking process. How does this work? Let’s find out!
Usually, staking happens directly through a wallet or a crypto exchange. For instance, if you were to stake Ether, you would need to have a minimum of 35 ETH in your wallet, which would then be locked into the network. Alternatively, you could join a staking pool through a crypto exchange. This can be helpful when blockchains like Ethereum require a large number of coins to stake directly. To bypass this minimum token threshold, several users contribute smaller amounts to a large staking pool and begin staking as a collective. The staking rewards are then distributed amongst all the members in the staking pool.
However, liquid staking usually occurs through third-party platforms that offer staking as a service (SaaS). These platforms will take your coins and stake them with the network. In exchange, they will provide you with tokenized versions of your staked coins. These tokenized coins can be transferred, stored, spent or traded like any regular tokens. You can also withdraw your staked tokens any time you like. These platforms, therefore, solve the liquidity issues associated with traditional staking. Hence the name ‘liquid staking’.
Which platforms offer soft staking, and how do they work?
Over the last couple of years, several platforms have begun offering liquid staking services. Some of the more popular options include Lido and TosDis. Many crypto exchanges, including KuCoin and Crypto.com, have also introduced this service. Let’s take the example of Lido and Ethereum staking to see how this works.
With Lido, users can stake any amount of Ether they wish to. In exchange, Lido will provide the user with an equal amount of stETH. The stETH token is pegged 1:1 with the staked Ether and can be used as lending, collateral and more. At the same time, the staked Ether still earns the user staking rewards. Parallelly, Lido also maintains a stETH-ETH liquidity pool. This allows users to return stETH and redeem their staked Ether any time they like.
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