What is liquid staking, and how does it work?

Liquid staking is a mechanism in the cryptocurrency world that allows users to stake their tokens while still retaining the ability to trade or utilize them in other ways. Staking involves locking up cryptocurrency tokens in a wallet to support the operations of a blockchain network and receive rewards in return. However, traditional staking often requires users to lock up their tokens for a certain period, during which they cannot access or trade them.

Liquid staking addresses this limitation by providing users with "liquid" or tradable tokens representing their staked assets. These liquid tokens, often referred to as staked derivatives or staking derivatives, are issued to users who stake their tokens. These derivatives are typically pegged 1:1 to the underlying staked assets and can be freely traded or used in other DeFi (decentralized finance) applications while still accruing staking rewards.

Liquid staking protocols achieve this by using various mechanisms, such as issuing synthetic assets or tokenizing staked assets. This innovation allows users to enjoy the benefits of staking, such as earning rewards and supporting the security of the network, without sacrificing liquidity or the ability to engage in other financial activities within the crypto ecosystem. Overall, liquid staking plays a vital role in making staking more flexible and accessible to a broader range of cryptocurrency users.

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~ Nesaty