Drawbacks of Staking

1. Staked tokens remain locked and inaccessible while staked
2. Subject to warm-up, early unstaking fees, and unbonding periods

⇒ Restrictions impose economic costs on the holders of staked assets

Enter Liquid Staking

In its simplest form, liquid staking is like the coat check at a restaurant.

1. You give the person your coat
2. They tag it and give you a paper receipt representing your coat
3. When you come back and are ready to get your coat, you give them your receipt, and you get your coat back

Liquid staking is similar, as a user stakes their asset, receives a liquid staking token as a receipt representing their staked asset, then can do as they please with their liquid staking token. Whenever they’re ready to get their original staked token back, they simply redeem their liquid staking tokens for their assets

• Act of delegating your tokens to a service that stakes for you without losing access to your funds
• Protocols that issue on-chain representations of staked assets in a decentralized network
• Aka staking derivatives and programmable staking

<aside> 📌 Liquid staking protocols allow users to get liquidity on staked assets and enable the usage of staked assets as collateral in DeFi dApps

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How does it work?

Users stake their tokens, receive back receipt tokens that evidence ownership of their staked tokens, and use those receipt tokens to participate in the broader web3 economy

1. A user would deposit their ETH into a third-party application (pSTAKE)
2. This app deposits this user’s ETH into the Ethereum deposit contract for them through the use of running their own validators
3. The app mints a representative ETH token for them (stkETH)

The funds remain in escrow, but aren’t locked and inaccessible, as they would be with PoS staking