Clear DefinitionsLiquid Proof-of-Stake
1 min read
Pronunciation
[lik-wid proof uhv steyk]
Analogy
Imagine you've put your money into a fixed-term savings bond (staked tokens) to earn interest (staking rewards). With Liquid Proof-of-Stake, the bank gives you a tradable certificate (a liquid staking derivative token) that represents your locked-up savings. You can't spend the original savings yet, but you can sell or use this certificate in other financial activities (DeFi) while still earning interest on your original bond.
Definition
A variation of Proof-of-Stake that allows token holders who have staked their tokens (and thus locked them up) to still access liquidity and participate in DeFi or other applications. This is typically achieved through the issuance of a derivative token that represents the staked asset.
Key Points Intro
Key Points
Allows users to stake their tokens and receive a liquid derivative token (e.g., stETH for staked ETH via Lido).
The derivative token represents the staked principal plus accruing rewards.
This derivative token can be traded, used as collateral in DeFi protocols, or otherwise utilized while the underlying assets remain staked and securing the network.
Aims to increase capital efficiency and participation in both staking and DeFi.
Can be a feature of the base PoS protocol (as in Tezos) or enabled by third-party protocols.
Example
Lido Finance allows users to stake Ethereum and receive stETH, a liquid token that represents their staked ETH. This stETH can then be used in various DeFi applications. Tezos has a form of LPoS where staking (called 'baking') allows token holders to delegate their staking rights without losing direct control or liquidity of their tokens (though this is more about delegation flexibility than derivative tokens in the Tezos context).
Technical Deep Dive
Liquid staking protocols issue a tokenized representation of the staked position. The value of this derivative token typically appreciates over time as staking rewards accrue to the underlying staked assets. Challenges include maintaining the peg (the derivative token trading at or near the value of the underlying asset), smart contract risks in the liquid staking protocol, and potential centralization risks if a few liquid staking providers become dominant.
Security Warning
Using liquid staking protocols introduces additional smart contract risk from the liquid staking provider. The security of the derivative token and its peg to the underlying asset also needs to be considered. Centralization of stake through large liquid staking pools can also be a network concern.
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