Liquid staking has become a popular choice for crypto investors who want to earn rewards while keeping their digital assets liquid. However, many still wonder if it's truly a safe option.
In the sections below, we'll walk you through what liquid staking is, the risks involved, and how some liquid staking tokens (LSTs) like Origin Ether (OETH) minimize those risks to provide a safer experience. We’ll also compare liquid stakings pros and cons to other DeFi options.
The concept of liquid staking is that it allows you to stake your crypto and earn rewards while keeping your capital liquid.
When you stake your tokens using traditional methods, they are locked up, meaning you can't use them for anything else. Liquid staking protocols change that by giving you a "liquid" token that represents your staked asset. You can trade, lend, or use these liquid tokens in other decentralized finance (DeFi) activities while still earning staking rewards.
For example, if you stake ETH using a liquid staking protocol, you receive a liquid staking token (LST) like OETH in return. You continue to earn rewards from Ethereum staking, and you can use your OETH across DeFi platforms without needing to forgo staking rewards.
Using a liquid staking platform offers flexibility, but it comes with its own set of risks from smart contract vulnerabilities to volatility. One of the biggest risks is the possibility that liquid staking tokens could lose their peg to the underlying asset. This is known as de-pegging, or peg stability risk.
For example, if a liquid staking token loses its 1:1 peg with ETH, it might not be able to hold 100% of its ETH value. Peg stability can also be affected by market demand or extreme conditions in the DeFi space.
However, some tokens like OETH minimize this risk by offering instant liquidity and maintaining a strong peg with 100% ETH collateral backing it.
Liquidity is another important factor. If there aren’t enough buyers or sellers in the market for a liquid staking token, it could become hard to trade or sell it. This is especially concerning in times of high market volatility.
OETH ensures deep liquidity through its Curve pool, where users can swap OETH and ETH easily, reducing liquidity concerns. Direct redemptions through the Origin Dapp are also supported, assuring users they can redeem OETH for its underlying collateral. Lastly, it’s worth mentioning that in proof-of-stake networks, validators can lose a portion of their staked assets if they act against the network's rules. This is a process known as "slashing."
When slashing occurs, liquid staking token holders can be affected because their staked assets might be reduced. OETH helps minimize this risk by using Distributed Validator Technology (DVT). OETH’s DVT spreads the responsibility across multiple validators, making slashing events far less likely.
Overall, the risks of liquid staking tokens are generally considered low, especially when compared to other DeFi investments. However, the risks associated with liquid staking tokens also vary depending on the specific tokens and DeFi protocols you choose.
For example, both OETH and Lido's stETH are viewed as low-risk options due to their strong infrastructure, deep liquidity, and measures in place to minimize slashing and peg stability risks.
OETH, in particular, stands out for its 1:1 backing by ETH, instant liquidity on the Curve pool, and use of DVT. These features make it a secure option for anyone interested in liquid staking.
Liquid staking has its pros and cons. But you should know that it’s not the only way to earn rewards in the DeFi space. Here’s how it compares to other DeFi strategies:
Liquid staking and yield farming are both popular ways to earn rewards in DeFi, but they operate quite differently. Liquid staking involves securing a network by staking tokens and earning rewards as a part of the network's security mechanism.
In contrast, yield farming involves providing liquidity to decentralized exchanges (DEXs) or lending protocols, where rewards come from transaction fees and token incentives. While yield farming can sometimes offer higher rewards, it can carry risks like impermanent loss, where the value of your staked tokens changes unfavorably due to price volatility.
Plus, yield farmers are often exposed to more frequent market fluctuations, making it less stable than liquid staking. Liquid staking, on the other hand, generally provides more consistent returns, as rewards are tied to network activity rather than market conditions.
In DeFi lending, you earn interest by loaning out your assets to borrowers, who then pay interest on the borrowed funds. Lending can be appealing because of the stable returns it offers, particularly when lending out stablecoins.
However, lending also involves smart contract risk; if the code can be exploited, you may not get your full investment back. Liquid staking, by contrast, allows you to earn staking rewards without significant smart contract risk, which gives you greater flexibility to withdraw or move your assets if necessary.
Additionally, liquid staking generally offers network-based rewards, making it less reliant on borrower behavior and providing a more predictable income stream.
Trading is a more active strategy in DeFi, where users aim to profit from market fluctuations by buying low and selling high. While trading can potentially yield quick profits, it requires continuous market monitoring, and there is a high risk of loss due to volatility.
Liquid staking, however, offers a passive income stream by earning rewards tied to network security, which are less impacted by daily market swings.
Another key advantage of liquid staking is that it keeps your funds accessible, allowing you to take advantage of new opportunities in DeFi applications without needing to trade actively. This flexibility and reduced exposure to market risk make liquid staking a more attractive option for users seeking consistent returns over time.
Participating in liquid staking can be an excellent choice for many investors, especially those who want to earn rewards without locking up their assets for long periods. However, everyone needs to stay informed and do their own due diligence to make sure they understand how liquid staking works, and whether it’s right for their risk tolerance.
Investments like liquid staking include some risks, but choosing a trusted platform like Origin Ether (OETH) can help minimize those risks. With strong peg stability, deep liquidity, and protection against slashing events, OETH offers a safe and flexible way to take advantage of staking rewards.
Bottom line? By understanding the risks and opting for secure platforms and blockchain networks, you can enjoy the benefits of staking without sacrificing the flexibility of your crypto assets.
How Can I Tell if A Liquid Staking Token Is Safe?
To determine if a liquid staking token is safe, check the liquidity, total value locked (TVL), and whether it has undergone security audits. Liquid staking enables users to stake assets while maintaining flexibility, but ensuring that node operators and protocols are secure can help minimize risks.
Is Direct Staking Safer than Liquid Staking?
Direct staking, or traditional staking, might seem safer since it reduces counterparty risk, but liquid staking offers more flexibility. Both methods use proof of stake (PoS) networks, and with proper precautions, liquid staking can be just as secure.
What are the main risks of liquid staking?
The main risks of liquid staking include peg stability, liquidity, and slashing. Peg stability issues arise if a liquid staking token (LST) loses its 1:1 value with the underlying asset, which could affect its redeemability. Choosing a secure LST like Origin Ether (OETH), which provides strong peg stability, deep liquidity, and slashing protection through Distributed Validator Technology (DVT), can help minimize these risks.
Is liquid staking better than yield farming or lending?
Liquid staking offers consistent rewards based on network security, while yield farming and lending can sometimes offer higher returns but come with added risks, like impermanent loss in farming or borrower default in lending. Unlike lending, where funds are tied up in loans, liquid staking keeps your tokens accessible, allowing you to participate in other DeFi opportunities. These benefits of liquid staking make it an attractive option for those seeking steady returns and flexibility without the high volatility of trading or the risks of yield farming.
