4 Reasons Liquid Staking is Gaining Traction Over Traditional Staking in DeFi.

Details on the Liquid Vs Traditional Staking debate

Like previous STON.fi articles I have covered, this would be a 3 series article as we will attempt to walk through Liquid Staking in its entirety. First, I will try to explain and give a complete walk through about liquid staking and how it differs from traditional staking.

Subsequently, I will cover instructional guides on liquid staking on STON.fi.

Intro to Staking

An acknowledged difference between decentralised technology and Centralised technology is in the process of decision-making. Decision making also called Consensus in centralised technology is straightforward and made just by a few people, mostly the owners of the protocol. Conversely, as we see with decentralised protocols, Consensus is reached by all eligible participants of the system.

To be an eligible participant for consensus, you must show support to the system, typically by committing a certain scarce resource(s) predetermined by the protocol. For the Bitcoin Network, the scarce resources are electricity and computational power. Elsewhere, Blockchain gurus have given their 2 cents on the risk of participating in Bitcoin Consensus, particularly in the area of high running cost, maintenance, and its significant carbon footprint.

However, the Ethereum Consensus Model is a little different from Bitcoin. Here, locked-up Ethereum tokens are a scarce resource instead of computational power. To expand this — assuming you want to participate in Ethereum Consensus, you will lock up a certain amount of ETH Tokens into a smart contract. Thus the process of locking up tokens into a smart contract is called Staking. A similar model is used by most L1 protocols like Cardano, Tezos, Cosmos, and Algorand.

The update from Traditional Staking to Liquid Staking

The Ethereum model is the traditional Staking model. Allowing participants to earn rewards typically as newly minted tokens or protocol transaction fees. What we have realized throughout the years of traditional staking is that.

• It immobilises assets throughout the staking period, staked tokens are not liquid i.e. they are locked up somewhere and are fully functional to the staker.
• With this lack of flexibility, it is challenging to react quickly to market changes and explore new DeFi opportunities.

Enter Liquid staking, the new offspring of traditional staking.

Liquid Staking allows us to — stake assets and preserve the liquidity of the staked assets. Sounds like a paradox?

Here’s what this means. Just like in the Ethereum model I talked about, assets are locked up in a smart contract, and additionally, in return, something called a ‘receipt token’ is given to the staker.

Similar to being given a receipt after you purchased your latest electronic device. Only that instead of just being a bland paper, you can use your ‘receipt tokens’ to further explore more DeFi features like staking in another protocol or Lending to a borrower.

Now that we have grasped the idea of liquid staking, let’s take a lens view of 4 reasons it is gaining traction over traditional staking in DeFi. From there, we will explore practically with guides how Liquid staking works on TON Blockchain with the Ston.Fi Protocol.

Liquid Staking Vs Traditional Staking

While I have given a general fund of knowledge on Liquid Staking, this article’s comparison between Liquid and Traditional Staking will be discussed with a laser focus on STON.fi, emphasizing its effort in supporting and sustaining Liquid Staking on TON Blockchain.

Let’s get to it!

1. Following the Money

I assume you know ‘follow the money’ as the phrase journalists use while they are tracking financial transactions to expose political corruption and illegal activities. To avoid misunderstanding, ‘follow the money’ here implies a strategy of aligning investments with where capital is flowing.

I have discovered over time that the common interest of on-chain users from newbies, and investors to experienced developers is to augment their portfolio. Liquid staking offers users an easy way to ‘follow the money’. So, it is easy to deduce why users care about platforms providing this service. As of 2024, Eigenlayer — a popular staking platform has a total of 79,630 Depositors and a combined $1.16 Billion in Assets under management (AUM). Source: 21co, Dune Analytics. Impressive figures in my opinion.

When you stake TON on a Liquid Staking platform like TonStakers, you receive receipt tokens — stTON or tsTON. These receipt tokens which I mentioned earlier are technically called Derivative Tokens and represent the staked TON.

Derivative tokens can then be used for farming in STON.fi and earning rewards.

👉 tsTON/USDt 🗿 Rewards: +601 TON / day.

👉 stTON/USDt🗿 Rewards: +232 TON / day

An opportunity like this is crucial in DeFi; allowing you maintain liquidity while still earning staking rewards (transaction fees and Protocol Rewards). This flexibility is particularly appealing in the dynamic DeFi ecosystem where liquidity is crucial.

2. Unlocking new Use Cases

Thanks to its flexibile model, Liquid staking offers more opportunities than just farming with derivatives assets. Farming with Derivatives is just the first of many possible use cases.

In Decentralised Lending and Borrowing; the derivative tokens from liquid staking can be used as collateral in decentralized lending platforms on TON like Evaa Protocol. This allows users to borrow against their staked assets without having to unstake them.

Furthermore, users can lend out their derivative assets to the platform and earn passive income on the supplied asset. The supplied asset on Evaa Protocol grows with every new block thanks to compounding effects. These swift features ensure there’s increased liquidity of assets on the TON blockchain.

Derivative assets can also be easily redeemed for the original staked assets or staked again into a compatible platform. The latter process is a novel use case called Restaking. Interestingly, in the coming weeks, STON.fi will be adding even more farms with additional rewards.

Brace up and get ready to double your staking rewards!

3. Diversifying your Portfolio

This comes in handy because of the sloppy nature of the crypto market. Market fluctuations and uncertainty in price action of crypto assets are ever-present drawbacks, so there’s a need to diversify to reduce the impact of such events.

To summarize the relationship between Liquid staking and portfolio diversification.

• Take this instance for an example, you stake a crypto asset at $100. If unfortunately, the asset’s value reduces by 50% i.e. from $100 to $50, you cannot exit with your asset unless the unstaking period is due.

Unstaking period varies across platforms, but the associated risks remain fairly the same. Based on the understanding of this risk, Liquid Staking is more preferable as assets capture additional value beyond just staking rewards (transaction fees and protocol rewards).

4. Hedge against Token Slashing

The way traditional staking handles protocol rules violation is by Token Slashing. Token slashing is a measure designed to ensure validators behave honestly and perform their duties correctly. Take this as an instance — if a validator violates the protocol’s rules, a portion of their staked ETH can be “slashed” or forfeited.

This penalty mechanism aims to maintain the integrity and security of the network. The disadvantage here is that this token slashing directly affects both the Validator and any other person that stakes assets under him. Undeniably, this feature is not user-friendly in any way.

A platform like STON.fi hedges against Token Slashing by

• Distributing assets among multiple staking pools. By using liquid staking services that pool assets from many users and delegate them across various validators, the risk of significant slashing is spread out. This diversification helps reduce the impact of any single validator’s failure.
• There’s a sophisticated security and monitoring system and expertise to select and manage validators. They collaborate with trusted validators and implement rigorous standards to minimize the risk of slashing. By doing so, they enhance the overall security and reliability of the staking process, thus reducing the chance of slashing incidents affecting stakers.

These features help protect stakers from the full impact of slashing penalties, making liquid staking a more resilient and user-friendly option compared to traditional staking.

Closing thoughts

Liquid staking represents a significant evolution in staking mechanisms. The efficiency of liquid staking, as exemplified by platforms like STON.fi, provide users with valuable opportunities for maximizing their DeFi engagements.

Stay tuned for our next article, where we will delve into an instructional guide on how to gain double rewards by farming tokens on STON.fi.

Get Started with STON.Fi today!

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4 Reasons Liquid Staking is Gaining Traction Over Traditional Staking in DeFi. was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.