Liquid Staking Explained Like You’re Five
Understanding the new way of staking that’s taking the cryptocurrency world by storm.
In the early days of crypto staking, people could set aside coins (or tokens) in a special wallet to show their support for a project, earning earn small token rewards for doing so. Some stakers would go on to perform jobs for the project, like managing transactions and protecting the crypto system.
The coins that people stake are called cryptocurrencies. They’re a kind of money that can only be used through a cell phone or other kind of computer. There are hundreds of different kinds of cryptocurrencies, all with a different goal in mind.
There are no actual coins that you can toss in the air or put in your pocket — instead, crypto coins go inside a digital wallet — a place on the internet or a device to store your digital coins.
Cryptocurrencies that are staked can be easily counted by anyone with a cell phone or computer. So others can see how much people are staking on any one coin.
Coins that have a lot of stakers may become more popular, with more stakers joining in. When a coin has a lot of transactions, such as people buying, selling, and staking it, it has more “Liquidity”. This means that the coin is easier to use and has value because many other people are interested in using it. It is liquid.
Staking became so popular that by 2021, crypto users could stake different crypto coins right on most cryptocurrency exchanges. A crypto exchange is an online marketplace (like Amazon) that specializes in the buying, selling, and trading of crypto.
In the beginning, when people staked their crypto, they had to keep them locked up in a digital wallet. The coins sat around doing nothing while the person who owned them earned rewards for holding the coins there. Coins that do nothing are definitely not liquid!
But soon, staked coins got a new way to be useful. A company called Uniswap made it easy to stake “Liquidity Tokens”. You could stake crypto to earn rewards but the staked tokens could be used for other things at the same time — so they were more liquid. The only problem was that there was a higher chance you could lose some (or even all) of your tokens.
People who staked this way became “Liquidity Providers” (or LPs) who could pool their staked tokens together to add liquidity for rewards. They were the pioneers of liquid staking.
Everything we’ve talked about so far can also be called PoS staking, or Proof-of-Stake. Originally, people “proved” they had a “stake” in the project by locking up their crypto tokens. But a cryptocurrency called Ethereum took the idea of liquid staking to a whole new level!
Things really started to change when Ethereum first switched from a Proof-of-Work to a Proof-of-Stake system in 2022. The change came about to help Ethereum handle more transactions and use less electricity.
Ethereum also wanted to be safer than all the Proof-of-Stake cryptos in history. So the many people involved decided to require everyone to stake 32 ETH (Ethereum’s in-house cryptocurrency) if they wanted to be an Ethereum staker.
Now 32 Ether is a lot of money today — over $67,000 at this time of writing! In the past, if you wanted to stake an old crypto token, you usually only needed a few dollars worth of crypto. But now you had to come up with a lot of money to stake ETH.
Ethereum 7-day price chart from CoinGecko
The big reason for cryptos in the first place was to make money more available to everyone! And Ethereum was the 2nd most popular cryptocurrency in the world.
A few people put their heads together and figured out a way for the common guy to also be able to stake ETH — without having to come up with $67,000! And that, my friends, was when Liquid Staking took off like a rocket!
Lido DAO is an example of a crypto business that lets people stake any amount of Ethereum (and some other coins, too!). Once a person stakes tokens, they are given an equal amount of “st” tokens, or staked tokens, like stETH. Now you can use your stETH in different ways, such as loaning it out to others to earn fees — while your ETH is staked and you get rewards for that, too!
The chart below shows how much stETH has been staked on Lido DAO for the last 7 days. Ethereum just went through a big upgrade, called Shanghai, that let new ETH stakers withdraw whenever they wanted (before they were locked up for a period of time). You can see the jump in stETH on Lido as this upgrade was completed just recently.
Image: CoinMarketCap — 7-day chart showing how many stETH tokens are staked
Liquid staking not only adds liquidity to staked tokens, but also helps secure Ethereum (and other cryptocurrencies) as its own system of money so that everyone involved benefits.
Things are growing rapidly in the liquid staking industry, with Ethereum leading the way. We look forward to seeing how the future of liquid staking plays out!
