Why Liquid Staking Is An Important Part Of PoS?

Mark Zilla
4 min readDec 21, 2022

Staking has become pretty widespread in the crypto industry. With it, holders of Proof-of-Stake (PoS) tokens can receive passive income for working as a validator or delegating their cryptocurrencies to a node operator.

How does staking work?

Instead of directing users’ energy resources to process transactions, in the case of PoS, transaction node operators use their tokens as insurance. Users who use their assets for stacking are rewarded with new tokens for all successful transactions.

The staking process itself is very similar to bank deposits, where the reward depends on the life of the deposit. But, unlike actual bank deposits, staking can in no way lead to negative interest or any additional fees and commissions.

Staking rewards can generate different passive income in different cases because the value of the asset is important. No one will argue with the fact that every dollar you earn for holding tokens without any additional movement is easy money, especially in the world of cryptocurrency. Users typically earn a few percent of their stacking amount over the course of a year.

However, once you stake your tokens, you can no longer do everything with them. Yes, you can get the token back but there is a certain unbonding period that can be up to 28 days. Liquid stacking allows crypto assets to be used even after they have been locked — by obtaining a tokenized version of the underlying asset. Thus, with liquid staking, an investor is able to both receive a reward and use the derivative tokens in DeFi-applications.

How does liquid-staking work?

Liquid steaking is a relatively new practice, widespread in a small number of DeFi projects. The most famous example is ClayStack. This protocol allows you to stake tokens and receive an equal amount of a derivative asset in return. In this way, the user receives income from the staking, but can also use the derivative token in DeFi apps. Derivative, also called csToken, can be used to get additional income or as collateral for taking a loan in stablecoins.

Each csToken is secured by an asset locked in stacking. In addition, the amount of csToken at a user’s disposal changes according to their stake rewards accrual. It is also possible to burn each csToken and get your original asset back.

So, liquid staking offers:

1. Fast access to funds, thanks to which there is no need to lock funds in staking or pay penalties for early withdrawal of your money in PoS protocols.

2. Derivatives strategies solve the incompatibility crisis between DeFi chains, allowing derivative assets in DeFi protocols to be used to generate income and staking fees. This helps unlock liquidity locked up in PoS chains.

3. Farming, through which digital asset holders can discover income opportunities with tokenized derivatives and generate income from multiple assets.

4. Loans that allow liquid staking investors not to part with their assets to access funds in fiat currency.

5. Low commissions, thanks to which liquid staking supports different protocols without high commissions, which makes it easier to find the best commissions and minimizes costs for users.

Also, the better risk-to-reward ratio of liquid staking contributes to the overall strength of the network and increases its liquidity, since the strength and security of PoS networks is directly related to the number of tokens in it. This also reduces risk, which in turn increases the number of liquidity providers participating in liquid stacking.

About ClayStack

ClayStack is a decentralized liquid staking protocol that unlocks the liquidity of staking assets in Proof-of-Stake (PoS) networks. Users can deposit tokens into ClayStack smart contracts that issue csTokens that are secured and fully interchangeable. These tokens increase in value as they receive staking rewards from the network.

Conclusion

Staking is a good way for crypto investors to make their crypto assets work, earning investment returns and passive income. Stacking can even give you access to managing and validating blockchain networks, but while it brings great benefits, it’s also important to consider setbacks before investing all of your assets. If locking your tokens and not having access to them for quite some time is something you can not or don’t want to afford, liquid staking is a perfect solution.

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Mark Zilla

Crypto-enthusiast, You-Nube blogger, social media commentator, node-runner, and crypto fan.