All blockchains operating with the proof-of-work consensus algorithm use mining to validate and verify new blocks, an expensive and time-consuming process. Especially over the past year, there has been intense focus on the environmental impact of proof-of-work mining — according to the Cambridge Bitcoin Electricity Consumption Index, Bitcoin consumes about 136.38 terawatt-hours of electricity per year, more than entire countries like the Philippines or Belgium. Ethereum, by comparison, consumes 112.6 terawatt-hours of electricity per year.

Not all blockchains harm the environment, however — some, such as NEAR Protocol, have already achieved net-zero emissions. Meanwhile, Ethereum has been gradually moving toward Ethereum 2.0 since 2016, in which the more energy-efficient proof-of-stake will replace the inefficient proof-of-work consensus mechanism. Here, payments are processed by validators, and coins are mined using staked assets.

In this article, we'll briefly cover what staking is, why users are switching to this type of cryptocurrency mining, and what limitations are still apparent. We'll also outline the increasing options available for liquid staking, and what its advantages are over traditional staking, before covering the top three liquid staking protocols.

What Is Staking?

Staking is a consensus mechanism — an algorithm for confirming transactions on the blockchain — through which users receive passive income by simply storing cryptocurrency. This process uses the proof-of-stake algorithm, where validators provide transactions, maintain performance, and protect the blockchain from interference and data unreliability.

An important advantage of staking is that it's a complete replacement for expensive and energy-intensive mining. With staking, users can earn money on cryptocurrency without using specialized equipment.

Why Do People Stake?

When users choose a proof-of-stake blockchain and store coins in their wallets, they are rewarded, encouraging participants in the system to get involved in the staking process and ensure blockchain efficiency. Under the PoS algorithm, the larger the amount a user stores, the more blocks will be awarded to them to generate. Users are also attracted by several benefits of staking:

  • Passive income is generated, giving participants an easy way to earn income from the cryptocurrency they already own, similar to interest earned from traditional bank deposits.
  • Low barrier to entry means stakers don't need a huge amount to start with — the minimum amount varies from project to project, but is often very small, and doesn't require the outlay of hundreds of dollars on expensive equipment like traditional mining does.
  • High level of security is factored in, with staking ensuring that 51% attacks are highly unlikely and/or unprofitable for a hacker.
  • Easy asset management means there's no specific knowledge requirement — you only need to buy coins and stake them in your wallet, and the system calculates the reward on its own.

Staking Limitations

Staking has several significant limitations. Low APY (annual percentage yield) rates mean that verifying transactions on a PoS-based blockchain network doesn't generate the same revenue as yield farming — profitability of staking ranges from 5% to 15% and often doesn't exceed this limit. A locked period may also force the staker to lock their assets for a year or two, during which it's not possible to transfer, sell, or otherwise use the funds — if a bull market suddenly turns into a bear market, there's the potential to suffer losses that outweigh any gains made by staking.

Sometimes there's the option to terminate the staking process early, but a penalty applies, and it usually takes 2-4 days before your funds become available. This is where liquid staking presents a great alternative.

What Is Liquid Staking?

Liquid staking provides flexibility and liquidity to your funds. Users deposit cryptocurrency through a third-party application into a smart contract, and in return get an issued, tokenized version of their funds — a derivative or wrapped token that represents the original asset. It can be used as collateral in other financial applications and traded freely on dApps and even across blockchains for collateralization, lending, and much more. Liquid staking makes interacting with DeFi more flexible.

Liquid Staking Solutions

First and foremost, liquid staking solves a longstanding problem users face: whether to lock up their tokens or use them in dApps. The key advantage of liquid staking compared to traditional staking is the ability to withdraw your assets at any time, without a lengthy cancellation process that risks losing coins already accrued.

While liquid staking doesn't protect the underlying price of staked assets, it allows users to securely unlock liquidity on the network and take advantage of income opportunities offered by numerous decentralized applications. The main advantages of liquid staking are the ability to use the base value of locked coins, use those coins in other projects, and keep earning staking rewards from the locked coins — essentially, liquid staking offers passive income while giving accessibility to your invested funds.

Top 3 Liquid Staking Platforms

There are a number of great crypto platforms that offer liquid staking. Here's a shortlist of three of the best.

Meta Pool

Meta Pool is a NEAR-based liquid staking protocol that allows users to stake their NEAR tokens while remaining liquid. The contract distributes its delegated funds among several validators, which reduces the risk of not receiving rewards due to validator outages. Meta Pool has also partnered with several Web3 companies to allow users to use their "stNEAR" (staked NEAR) on other NEAR DeFi platforms, and platform participants and liquidity providers can receive $META governance tokens, giving them voting rights as part of Meta Pool's DAO. Other benefits include improving the efficiency of token usage, helping users support new validators, and incentivizing retail token holders.

Lido

Lido DAO (LDO) is an Ethereum staking application that allows users to stake their ETH — with no minimum deposits or infrastructure maintenance — while participating in networking activities such as lending to earn compound profits. LDO, the native utility token, is used to grant management rights to Lido DAO, manage fee parameters and distribution, and manage the addition and removal of Lido node operators. To stake ETH with Lido, a user sends ETH to a smart contract and receives stETH tokens in return, which can be stored, exchanged, or sold.

Hubble

Hubble is a decentralized finance protocol built on the Solana blockchain. Staking HBB, Hubble's native token, earns users USDH rewards for participating in the protocol, distributed in proportion to the percentage of the HBB staking pool that constitutes the user's deposit. The primary function of HBB is to provide value to Hubble users in the form of USDH rewards, and users can also participate in the protocol's decision-making process by holding and staking HBB.

Liquid Staking as a Great Alternative to Mining

Staking is a great alternative to mining cryptocurrencies — there are no high energy costs, reduced harm to the environment, and no need to buy special equipment or rig up mining farms. Liquid staking, as the next iteration of PoS, provides more flexibility and removes the long lockup periods or penalties associated with redeeming funds early, and it's supported by an increasing number of platforms, such as those we listed above.

The user just needs to select a decentralized staking pool, buy their preferred cryptocurrency on a trusted exchange, and receive dividends from the stake on DeFi. Liquid staking allows stakers to freely use their liquid crypto, without losing their rewards. By partnering with INC4, you can easily develop and launch your own decentralized application and enter the expanding DeFi ecosystem. With years of experience providing DeFi development services, we can build dApps for the success of your business — schedule a free consultation with our specialists to see current offerings with the help of a reliable partner.