Liquidate Your Staking Assets: How to Eliminate the Risk of Price Fluctuations When Staking
As cryptocurrency and blockchain technology continues to hit the mainstream and gains global recognition, many crypto vendors are continually looking in the direction of staking as an avenue of making passive income. Though staking crypto no doubt has emerged as a highly familiarized way to earn investment income in the crypto-asset markets, it however does not go without some risks attached.
When Ethereum 2.0 was launched, a lot of users contemplated whether to stake their assets or not. As much as staking has its benefits, it is of paramount importance to note that it also comes with certain setbacks — staked assets are locked up for a stipulated period of time, say 2 months or more, which consequently means you can not use the assets for other investments. Price fluctuation and the risk of losing the staked assets are also some of the demerits.
But you need not fret, while the cons of staking seem to outweigh the pros, there are ways to go around Ethereum 2.0 staking and another staking network without losing your assets. This is called liquid staking. Liquidating your assets is a solution that helps gain full control of your funds and at the same time earn passively from it. To have a clear picture of liquid staking and how it can control price fluctuation, it is important to understand the genesis of staking.
How mining started — Proof of Work
Proof of work (PoW) was developed to manage and ensure transactions were verified without powerful intermediaries when Bitcoin was first created. It was the original consensus algorithm on the blockchain network. This system is used to confirm transactions and produce new blocks to the chain.
However, the duty of verifying transactions and arranging blocks bears on the miners through the process of mining. While PoW is a prominent concept used by many blockchains, it requires significant amounts of electricity. This makes it relatively impossible to have a huge amount of transactions pulling through. Only a limited number of transactions can be processed at the same time. Owing to this shortcoming, a new consensus algorithm has to be developed.
The Need for Staking — Proof-of-Stake
In 2012, Proof-of-Stake (PoS) was first introduced with the sole intention to find a solution to Bitcoin’s mining high-energy consumption problem. The concept of PoS states that anyone can mine or validate block transactions depending on how many coins they hold. It also rewards users for collateralizing or pooling native cryptocurrency and locking it to form a weighted consensus on a blockchain. Compared to PoW algorithms, PoS is energy-saving and more rewarding to long-term holders.
As part of the benefit of the PoS mechanism, it provides an administrative pattern for users who stake on the network. As token holders, you can therefore vote in decisions such as network upgrades, emissions adjustments, and other changes that were once restricted only to the closed development team. However, users partaking in PoS are locked into contracts for a predetermined amount of time. In unfavorable situations, users who withdraw their assets early will receive punishment, along with a waiting period before assets arrive in their wallets.
Though the downside of the PoS algorithm is apparent, there is an alternative to boycott and participate in the system.
What is Liquid Staking?
As introduced earlier, Staking is the process of holding crypto assets to support operations of a blockchain network. As an incentive for helping to secure the network, vendors are rewarded with newly minted cryptocurrency. However, it also comes with a lot of restrictions, such as having your staked funds locked up for a certain period. Fluctuations in the price of the staked token or extreme situations, a case of rug pull. This gives room to opportunity loss as the assets are limited to be invested or traded in other opportunities and Defi products and services. After the long-awaited switch from PoW to PoS in Ethereum 2.0, many stakers faced this problem.
With this problem in view, liquid staking comes into the picture to offer a solution as an innovative way of participating in the PoS algorithm. Hence, how does liquid staking work, and does it have any benefit to users?
As against locking up assets to ETH 2.0 or other staking network, users now send their tokens to StakeHound -a liquid staking services- who then creates a copy of your asset, usually called stETH. stETH is a wrapped or tokenized asset representing the original and at the same time comprising the same underlying value. StakeHound then stakes the original asset to Ethereum 2.0 through a custody partner. A user on the other hand is at freedom to use the tokenized token as they deem fit and get rewards.
In other words, staking users are empowered to access DeFi and manage their positions in a rather flexible and non-custodial manner.
Usually, as soon as the transactions are enabled, the tokenized version will be returned to the third-party issuer — in this case, StakeHound — the third party will give the user back an enabled token amount of their original stake with their rewards earned while securing the network. Alternatively, users can unstake by trading their staked assets on the open market.
The benefit of liquid staking in controlling the price fluctuation.
There is no doubt the opportunities that liquid staking offers. No wonder the high inflow and adoption of the protocol to solve staking complexities. That said, some benefits you stand to gain liquidating your assets include:
● Total control and management of assets. A profound position that favors liquid staking is the ability to use staked assets as collateral in other financial applications. Hence, it opens up so much possibility in the design space. Tokenized tokens can be integrated into other protocols instead of it being locked away. This enables users to manage their risk exposure and also earn from the state assets.
● Liquid staking networks like StaFi manage to effortlessly balance risk, reward, and сonvenience, thereby permitting users to trade staked tokens without the stringent requirements that hinder stakers on the Ethereum network.
● Liquid staking services like Lido are helpful for all types of ETH validators. Limited wallets can stake any amount of Ethereum or token they wish, with the privilege to unstake at any time. Substantial holders can use liquid staking services to hedge their funds against ETH volatility; basically, it allows for all parties to stake without the requirement of maintaining complex staking infrastructure.
● Liquid staking empowers users with all the benefits of self-staking without the associated risks and complexities — it provides a viable alternative to both self and exchange staking.
Though the downsides of PoS such as the illiquidity of assets can scare away potential investors, liquid staking allows users to get all the staking benefits without any of its restrictions. As much as we do know how volatile crypto networks can get, the goal is to promote decentralization and accessibility — while earning staking rewards as you secure a network — . Liquid staking is primed to grow in parallel with the grief Defi movement. Without mincing words, Liquid staking is defined Defi in its purest form.
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