How Liquid Staking Can Transform Into Passive Income
So, what is liquid staking?
Imagine being able to help secure a cryptocurrency network, making it more efficient and reliable, all while earning rewards for your contribution. That's staking in a nutshell.
So there’s staking and then what we’re talking about – Liquid Staking. What’s the difference?
Traditionally, staking meant your tokens were locked up, out of reach. But here’s how liquid staking is different. It lets you stake your tokens and, in return, gives you a special kind of token that represents your staked amount. This token? It's liquid. You can trade it, use it in DeFi apps, and still earn rewards. It's like having your cake and eating it too.
Your assets are not longer frozen while they’re staked. Instead, you get these derivative tokens that you can move around, trade, or invest somewhere else. Super flexible, super east.. I guess that’s why they call it LIQUID staking.
Next is the earning potential
By staking, you’ve already started earning rewards. But with these derivative tokens, you can dive into the DeFi world and start earning even more. It’s like putting your investments to work at two jobs at the same time.
What does that mean though?
Here’s an example:
Imagine you have some cryptocurrency, let's call it Coin A, which you decide to stake. By staking, you're essentially locking up your coins to support the network's operations, like validating transactions. In return for staking your Coin A, you earn rewards, similar to earning interest in a savings account.
Now, enter liquid staking. When you liquid stake your Coin A, you receive a derivative token, let's call it dCoin A, that represents your staked Coin A. This dCoin A can be used in various ways while your original Coin A is still staked and earning rewards.
So to recap:
You’re earning rewards on your staked Coin A because you’re helping to secure the network. This is your first stream of income, kinda like a job where you invest your resources and get paid in rewards. Then, you can use your dCoin A in the decentralised ecosystem (aka Defi) For instance, you might lend dCoin A on a DeFi platform to earn interest.
Or… you could use dCoin A as collateral to borrow another asset or to earn yield in a liquidity pool. This is your second stream of income, effectively putting your assets to work in another “job”.
Don’t worry if you don’t understand it yet. You can always relisten to the podcast later but really the best way to learn is to immerse yourself in your topic. I will have more podcasts to come talking about these different topics.
How about a hard example? Let’s put some numbers to the picture
You stake 1000 Coin A and receive 1000 dCoin A as a representation of your staked coins.
From staking 1000 Coin A, you earn a 5% annual reward, which gives you 50 Coin A as staking rewards after one year.
You decide to lend your 1000 dCoin A on a DeFi platform, which offers an 8% annual interest rate. After one year, you earn 80 dCoin A as interest.
At the end of the year, you have your original 1000 Coin A (now 1050 Coin A due to staking rewards) still working for you in the staking pool, and you also have earned 80 dCoin A from the DeFi platform, increasing your total holdings in dCoin A to 1080.
This example simplifies the process, I mean obviously the market goes up and down, but illustrates how liquid staking allows you to earn from both staking rewards and DeFi activities simultaneously, leveraging the same initial investment for multiple streams of income.
I have to say though, it's not all smooth sailing. Like any investment, liquid staking comes with its risks. We're talking about things like smart contract bugs or the stability of the platforms you're using. It's essential to do your homework, understand the risks, and know what you're getting into with each platform and token.
Hey guys, thanks for coming to Crypto Innovations, a podcast about everything DeFi in easy to understand format. I’m Lauren, and until then keep innovating, keep investing, and keep exploring the possibilities.
