Over the past two years, liquid staking tokens (LSTs) have emerged as an important narrative in decentralized finance (DeFi).
These assets are freeing up liquidity while securing the network, making DeFi more versatile for traders and projects alike.
In this blog post, we delve into the realm of liquid staking tokens and show how they are reshaping the DeFi landscape and Solana in particular.
Demystifying Liquid Staking Tokens
Liquid staking is a method of staking where holders get liquidity in the form of a derivative token while the staked assets continue to earn rewards.
Unlike conventional staking, LSTs allow you to secure the network through staking all while enjoying the freedom to deploy your derivative tokens in DeFi protocols, trade them on exchanges, or transfer them as you see fit.
The Mechanics Behind Liquid Staking Tokens
Liquid staking tokens are derived from proof-of-stake (PoS) blockchains, such as Solana, Ethereum, Cosmos, or Aptos.
When you stake your tokens in a PoS network you contribute to network security and, in return, receive staking rewards, generated by the activity on the network (gas fees paid during a transaction) and sometimes more traditional inflation. However, this often results in a temporary lockup of your assets, which means you can’t use them elsewhere.
Enter LSTs which are a one-to-one representation of your staked tokens. These representations, often referred to as "staking derivatives" or "liquid tokens," are backed by the underlying staked tokens and can be freely traded, lent, or used in a wide array of DeFi applications.
Unlocking the Benefits of Liquid Staking Tokens
There are four primary benefits of liquid staking tokens:
- Flexibility: Users can stake their assets for rewards while retaining the flexibility to engage in trading, lending, or providing liquidity within DeFi ecosystems.
- Liquidity: Liquid staking tokens can be effortlessly traded on decentralized exchanges, enhancing overall liquidity within the ecosystem.
- Diversification: Liquid staking tokens enable users to diversify their holdings and explore various DeFi strategies without sacrificing the rewards generated through staking.
Navigating Liquid Staking Risks
As with any new innovation, liquid staking tokens are not without their risks. Users should be aware of the following considerations:
Smart Contract Risk
Liquid staking tokens rely on smart contracts which add another layer of vulnerability to DeFi positions. Due diligence and cautious exploration of reputable platforms are essential to mitigate this risk.
De-Pegging Risk
Liquid staking tokens, like all pegged assets, can be influenced by market forces and can deviate from their pegged value. Fortunately, these tokens can still be redeemed for the correct amount of their underlying asset, offering a safety net in case of de-pegging.
The Solana Liquid Staking Ecosystem
Marinade (mSOL)
Marinade offers a simplified Solana staking experience with its automated strategy. Users can choose to stake SOL natively or opt for liquid staking with mSOL, all within a pool of 100+ high-performing validators. Additionally, native staking requires no smart contract interaction and offers automated delegation strategies.
As of today, mSOL has a market cap of $10M+.
Stay informed about mSOL's market movements and value with Pyth's mSOL/USD feed.
LIDO (stSOL)
'Lido on Solana' presents a Lido-DAO-governed liquid staking protocol designed for Solana. Users can stake their SOL tokens and instantly receive stSOL. Users can enjoy liquidity, one-click staking, and decentralized security with assets spread across leading validators chosen by the Lido DAO.
Additionally, Lido is the most successful ETH-staked product and stSOL has a market cap of $80M.
Explore Pyth's stSOL/USD feed to track stSOL's value and market dynamics.
JITO (JitoSOL)
Jito is a unique liquid staking service that offers more than just traditional staking rewards. JitoSOL holders benefit from staking and also receive MEV rewards thanks to its exclusive partnership with top-performing validators.
Monitor JitoSOL's price and developments through Pyth's JITOSOL/USD feed.
Liquid staking assets on Solana represent an exciting development in the Solana DeFi space. Indeed, LSTs offer a perfect blend of staking rewards and liquidity. As the Solana ecosystem continues to evolve, these assets will play a pivotal role in shaping the future of decentralized finance. With Pyth Network's reliable price feeds, DeFi developers and traders can harness liquid staking assets for a seamless DeFi financial experience.
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