Liquid staking is a method that allows token holders to maintain the liquidity of their staked assets by using substitute tokens to earn additional returns through DeFi platforms. It solves the issues associated with traditional staking, where assets become illiquid.
Difference Between Delegated Staking and Liquid Staking
In delegated proof-of-stake (DPoS), network users elect delegates, while liquid staking helps stakers bypass minimum staking thresholds and locked assets requirements. DPoS involves electing witnesses or block producers, while liquid staking aims to lower barriers to entry.
Staking-as-a-Service
Staking-as-a-service acts as a connection between a blockchain's consensus mechanism and users who want to participate in staking. It can be custodial or noncustodial, offering users the ability to delegate their assets to third parties for staking.
Functioning of Liquid Staking
Staking pools allow users to combine their stakes through smart contracts, receiving liquid tokens representing their share. This system eliminates the need for a minimum staking threshold and allows holders to earn profits from both staked and liquid tokens.
Risks Associated with Liquid Staking Platforms
Technical risks include protocol vulnerabilities, while market risks involve losses during market downturns. To mitigate these risks, liquid staking platforms should be open-sourced, audited, and have bug bounty programs. Conducting thorough due diligence before investing is essential.
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