Liquid staking gives more value to anyone who stakes their tokens in a proof-of-stake (PoS) network like Polkadot or Kusama. Before we talk more about what liquid staking is, let’s look at what staking is in the context of crypto.
This article goes over some of the options available for liquid staking on Polkadot.
What is crypto staking?
Proof-of-stake networks like Polkadot, Kusama, and Astar use staking to keep the network safe. Validators trade their tokens for the chance to check blocks of transactions on the network. If a validator is chosen to confirm a block, they get a block reward for doing so. If the validators confirm bad blocks, their staked tokens are taken away as punishment. People who own tokens but can’t run a node to verify transactions can give their tokens to validators who can do that for them. When a validator checks a block of transactions, the people who put up these tokens get paid for doing so. When a validator checks a bad block, its tokens are also taken away. The staked tokens can’t be used as cash again, and they have to “unbond” for a while before they can be traded or moved. Polkadot’s unbonding time is 28 days, while Kusama’s is only 7 days. On the Astar Network, unstaking staked tokens takes ten ERAs, or about ten days. Also, no rewards are given for staked tokens during the unbonding period, no matter how long it is.
What is liquid staking?
Traditional staking locks up liquidity, but liquid staking releases it.
In a nutshell, users can get the usual rewards for staking and use the liquidity from their staked tokens to look for more returns in DeFi.
How exactly does it work?
When you stake a token on a liquid staking platform, you get a synthetic derivative token. The synthetic derivative is usually of equal value to the tokens staked.
To stay liquid, the staker can either reinvest the derivative in DeFi in the hopes of making a profit or sell it.
For example, the nASTR token is awarded to those who wager on Algem on the Astar Network, while the LDOT token is awarded to those who wager on Acala.
When staked tokens are unbound, the synthetic derivatives are returned with the staked tokens and rewards.
Liquid staking provides immediate liquidity for stakers; there are no unbonding periods, and stakers earn yields during unbonding periods.
Liquid staking takes away the bad parts of traditional staking for stakers, so they can look for other ways to make money or just sell synthetic derivatives when they need cash quickly.
Liquid staking platforms on Dotsama
Different platforms in the Dotsama ecosystem offer liquid staking options for tokens. They include:
On Polkadot, you’ll find the DeFi network suite known as Acala. Liquid DOT staking is an option made available by Acala. Stakers are rewarded in LDOT, a synthetic derivative of DOT tokens that can be used to speculate on future gains.
- Using your LDOT as collateral, you can mint aUSD, a stablecoin that can be used for lending, swapping, or any other purpose.
- If you want to earn more rewards, you can stake your LDOT by clicking the “collateral staking” button in the “Earn” section of the menu. Minting aUSD is made possible through collateral staking, though it is not required to earn rewards.
- Trade: utilize Acala’s swap feature to trade in an LDOT/aUSD pair. Other DEX may also support LDOT trading pairs as their utility increases beyond Acala.
- Provide Liquidity (LP): LDOT holders can become liquidity providers in the LDOT/DOT pool.
- Earn more with Tapio’s tDOT: Upon the upcoming launch of the Tapio stableswap protocol on Acala, users can contribute their LDOT tokens to the tDOT pool to get more rewards from Tapio swap fees and TAP token incentives.
- Lending: Users will soon be able to lend their LDOT on money markets on Acala or other parachains
- HODL: Users can hold LDOT to enjoy staking without having income events triggered on-chain while staking
Tokens in the DOT ecosystem that have been staked typically unbond after a period of about 28 days. By not having to wait for the unbonding period, users of Acala’s LDOT can keep their funds liquid and spend their tokens whenever they need to.
This option for liquid staking is also available on Kusama, which is part of Acala’s Canary network, Karura. When you liquid stake on Karura, you get the LKSM derivative, which can be used for any of the LDOT functions listed above.
If you’re interested in doing some liquid staking with DOTs, Lido Finance is here for you. When people stake DOTs, they receive the derivative asset stDOT as a reward. Lido uses Moonbeam, a Polkadot parachain, to make this happen. Before you can stake DOT tokens on Lido Finance, you must first send them to Moonbeam in the form of XC-DOT. Due to its status as a rebase token, staking rewards are added daily without any intervention from the user. Users then can use the stDOT to seek out additional profits across Polkadot’s DeFi landscape.
With liquid staking on Parallel Finance, DOT and KSM holders can get more use out of their tokens. Stakers receive sDOT equivalent in value to the staked DOT. As staking rewards are earned, the value of the staked DOT goes up compared to the staked DOT. sDOT received can be used for the following on Parallel Finance:
- Supplying sDOT to the money market to earn extra interest
- Use sDOT as collateral to borrow other assets
- Trade sDOT for other assets with Parallel Swap
Parallel Finance offers you the opportunity to do more with your DOT tokens.
For those interested in liquid staking on the Astar Network, Algem is the place to go. Token holders can stake their Astar tokens on Algem instead of the Astar dapp to earn the synthetic derivative nASTR. The nASTR can be sold at any time or used to pursue higher yields. Algem has teamed up with several DeFi projects, such as Sirius Finance, Kagla Finance, Arthswap, SiO2 Finance, and Starlay Finance. Borrowing funds from SiO2 and Starlay Finance can be secured with nASTR. You can also get SRS on Sirius Finance and Kagla tokens on Kagla Finance by using nASTR-ASTR in a liquidity pool. Algem also enables Astar token holders to increase their returns by staking their Astar tokens. Additionally, the seven-day unbonding period of tokens staked on a dapp on Astar is removed, allowing users of Algem to freely trade the nASTR tokens on any of the partnered decentralized exchanges.
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Algem is a decentralized application built on the Astar Network and offers two main features: liquid staking and liquid lending. As their names suggest, these two options let ASTR holders keep their assets liquid while putting them to work. Also, the liquid staking and lending solutions let users use Algem’s liquid nASTR tokens across Astar’s Defi ecosystem to earn staking rewards and make more money. In doing so, Algem supports other Defi protocols by providing liquidity and creating a sustainable and cooperative ecosystem on the Astar Network and Polkadot.