For stakeholders who think long term, the big question is how can I maximise my annual investment yield, Liquid and Illiquid staking may be part of the answers but what exactly is the difference between these two most interchangeable terms among stakers
Both Liquid and illiquid staking provide free money, sometimes known as staking rewards.
These rewards are given to stakeholders for participating in the security of the given network
What is Staking?
Ever since Staking has been a thing, Investors are given a big opportunity to lock up their crypto assets, Eth, Matic, Sol and many more to help provide support to the safety and functionality of their respective networks.
For instance, if you possess Sol native token, you can stake it (lock-up) on the Solana network for a particular staking tenure
In return, staking rewards are distributed among the stakers according to the weight of their native token
Where is the staking reward gotten from?
Competently, the Majority of the coin ecosystem are beginning the transition from proof of work to proof of stake, due to the hostile effect of PoW on our environment.
Crypto asset functioning on the proof of stake protocol is supported by a large batch of validators that create new blocks, verify new transactions and more importantly, ensure the crypto asset network security is protected.
For example, Polkadot, a proof of stake protocol is run by a large collection of validators also known as stakers, they are assigned the responsibility of creating new polka-dot tokens and validating new transactions into the polka-dot network.
A portion of the new token created is shared among validators/stakers based on the amount of token contributed.
In a simpler form, Staking rewards are gotten from new token created by staked assets
If a validator node goes offline for a certain period, thus unable to validate a block when selected to do so, they can/will be punished – Slash.
A slashing penalty is a condition where a portion or whole validator assets is taken away because he/she is found guilty of a malicious act. Slashing is considered as one of the major risks of staking
However, not all validators are selected to verify a given transaction, validators are picked based on the weight of their staked assets, don’t panic yet, the less weighted validators will still be given the chance to validate, but this tends to happen when the high ranked validators are engaged.
So it is ideal to say that the more crypto assets locked up the more chances to be selected, hence the more your staking reward.
This is just the basics, there is more to it but I hope this gives you a summary of what staking is and how staking reward is generated.
Have you heard of Delegated Proof of stake (dPOS), why is it important?
In a Delegated proof of stake, a modern version of proof of stake, investors entrust their crypto assets to a group of people or institutions to perform the responsibility of Validation.
Investors who can’t be online at all times and do not possess the technical expertise to carry out the validation duty are given the option to Delegate the responsibility to someone else.
In a situation, where the minimum assets required to stake is higher than what you have in your wallet, Delegating proof of stake opens the opportunity for a collective contribution of the given asset from various investors, to meet the specified requirements.
For example, on the Ethereum network, you are required to have 32 Ether to run a validator node, which is quite expensive, but Delegate proof of stake create a way not to miss out on the staking rewards.
If you do not have the minimum amount needed to participate in Eth staking, you can delegate your Eth to a validator node.
Now, you know what staking is, Here’s a comparison guide to help you decide for yourself which is better between Liquid vs Illiquid staking
Illiquidity staking is a process in which assets staked can’t be easily and readily traded or put in work during the staking tenure.
Once you choose to stake your cryptocurrency, you actively lose the right to utilise the staked assets, hence illiquid.
A practical example; Assume you stake avalanche for 90 days, with illiquidity staking, you stave off the right to do anything with the asset – Avalanche during the staking period.
Just you know, Agreed annual per yield (APY%) will be paid.
For illiquidity stakers, the process is quite easy and profitable especially when you think of getting involved for the long term.
I mean, earning 5-30 per cent of your portfolio without having to lift a finger sounds a big deal right??.
Well, not so big of a deal ever since an alternative way to stake and still utilise your staked assets is given birth to – Liquid staking.
With this type of staking, once you decide to stake your crypto assets, you are provided with the freedom to utilize your assets and still be benefiting from the staking rewards assigned to your staked assets.
Liquidity staking is labelled so because it permits your assets to be Liquid after you have wielded the validation responsibility to a particular validator meaning you staked.
Yes, we can say this is a big deal!
So how does it work?
If you pick a platform of your choice that features liquid staking, Lido, for example, a multi-chain stake provider
After completing the staking procedure, a token similar to the staked token will be awarded to you, think of it as a receipt to withdraw your deposit when you wish to unstake
This is how the receipt format will look alike; Token:stToken.
For example; if Solana, ‘Sol’ is what you staked; the receipt token that will be given to you is ‘stSol’. This format goes with any token.
So what makes this a big deal?
Staker can take their receipt token (e.g stAvax) and become a liquidity provider with it, hence receiving additional income with it.
Alternatively, they can be swapped for another token in a decentralised exchange such as Pancakeswap, Uniswap e.t.c.
It is important to take note that being a receipt, you will need it back to claim your staked assets.
Benefits and Risks of Illiquid staking?
Here are the advantages of Illiquidity staking
Low Risks Involved: Illiqud staking is tied with market volatility. For long term investors, this is even not a risk at all.
No technical knowledge needed: Nowadays, stakers do not need to solve a puzzle before they can delegate their assets to a validator node. The steps are easy and can be done with a few clicks.
Less Effort Input: I believe illiquid staking is the easiest way to earn free money on cryptocurrency. A few seconds to complete the staking process is all you need to start earning passive staking rewards.