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Liquid Staking vs Validator Staking — What Are the Differences and How Do They Work?

Key Takeaways:

  • Staking and liquid staking are two different tools that allow cryptocurrency holders to earn rewards.

  • Staking involves locking in cryptocurrency to secure and validate blockchain transactions.

  • Liquid staking enhances flexibility by issuing synthetic tokens against staked assets.

  • Unlike traditional staking, users can still trade and use staked assets in decentralised finance (DeFi) projects.

  • Advantages of liquid staking include increased flexibility and reduced opportunity cost.

Validator Staking vs Liquid Staking

Validator staking, has become a staple tool for cryptocurrency users to potentially earn interest and rewards on their tokens, while liquid staking recently made an appearance. Validator staking let users lock their tokens into a blockchain to stabilise validation processes, part of the excitement with which users anticipated Ethereum’s the merge. Liquid staking, on the other hand, provides a function whereby traders may still use the tokens on decentralized finance (DeFi) projects while they are staked.


What Is Validator Staking?

Validator staking ( sometimes called Staking ) is a tool for users to potentially receive rewards from their cryptocurrency holdings. These rewards are also referred to as staking yields or interest.


Yield is a concept that exists in traditional finance (TradFi), though the mechanics of how it is earned in crypto may be wholly different. For instance, a form of yield in TradFi is when people put their money into a bank savings account to earn interest. Traditional financial assets that provide a yield could be bonds that pay a regular coupon or stocks that pay a dividend.


In the case of depositing funds in a bank savings account, the bank is able to pay yield in the form of interest typically by taking the money and lending it out to others. In contrast, for crypto staking, the cryptocurrency is locked up in order to participate in running the blockchain and maintaining its security.


How Does Validator Staking Work?

In Proof of Stake (PoS) blockchains, transactions are verified (validated) by validators, who have to stake an amount of a blockchain’s native tokens in order to participate in the verification process. In return for doing this, validators typically get rewarded in the blockchain’s token. If they engage in malicious behaviour, or fail to validate (e.g., by going offline), a portion of their stakes could be taken away. Validators need some specific computer hardware and software in order to participate. 


By staking their cryptocurrency, validators are able to help keep the PoS networks secure and potentially receive rewards while doing so. Some blockchains, such as Ethereum, which recently transitioned to PoS in a much-anticipated event called ‘The Merge’, require validators to stake quite a large amount of native tokens. In Ethereum’s case, the current minimum requirement is 32 ETH. 

What Is Liquid Staking?

In liquid staking, native coins of a PoS chain are deposited to staking service providers and delegated to one of many validators participating in the consensus protocol. The service provider then issues a ‘receipt’ in the form of a liquid synthetic token.


Liquid staking takes the validator staking model further by allowing token holders to extract utility from their staked assets and enabling use of their staked assets for other activities. In traditional staking, once tokens are staked, they are locked up and cannot be used or traded until the staking period ends. However, with liquid staking, token holders can continue enjoying the value of their staked assets while still potentially receiving staking rewards.


The innovation of liquid staking opens up a world of possibilities for users, enabling them to potentially earn staking rewards without giving up liquidity.


Is Liquid Staking the Same as Delegated Staking?

No, Delegated Proof of Stake (DPoS) is a related but different consensus mechanismfrom PoS. In DPoS, users of the network vote and elect delegates, who validate blocks. Also referred to as ‘witnesses’ or ‘block producers’, only a certain number of these delegates are permitted; and they can change, as others can be voted in instead.


With DPoS, users of the networks can pool tokens into a staking pool and vote for the particular delegate they wish. When staking, users of the network do not need to send their tokens to a particular wallet; instead, there is a staking mechanism or service provider they can operate through.


The Pros of Validator Staking


  1. There are several different ways in which users can join the staking process:


  • Become a validator: This typically involves a required staking amount of cryptocurrency (which could be sizeable), specific computer hardware and software, time, and knowledge to perform the validation tasks.

  • Join a staking pool: Some validators operate staking pools that pool together many users’ smaller stakes. This is also known as ‘liquid staking’, which involves a liquidity token that represents a user’s staked coin and the rewards it generates. The validators will do all the transaction validation work and distribute the rewards to stakers proportionally after deducting their fees.   

  • Lock up tokens with exchanges: A number of cryptocurrency exchanges offer lock-ups that also essentially pool together many users’ tokens. Users can choose which cryptocurrency and how much they want to lock-up, which will determine their share of the rewards.


  1. Staking stabilizes PoS blockchains, which means users are directly contributing to the security and functionality of the blockchain they are committed to.


The Pros of Liquid Staking


  1. Liquid staking offers several advantages over traditional staking methods. First, it provides traders with increased flexibility. By being able to use their staked assets for other financial activities, token holders can access liquidity without needing to unstake their tokens. This flexibility allows for more efficient capital allocation and the ability of holders to enjoy greater utility from their staked assets.


  1. Liquid staking may reduce the opportunity cost of staking. In traditional staking, tokens are locked up for a specific period, preventing users from unlocking their assets before that time. Liquid staking may eliminate this opportunity cost by potentially enabling token holders to enjoy value from their staked assets while still potentially earning rewards. This feature may make staking a more attractive strategy for individuals who require flexibility and access to liquidity.


  1. Liquid staking may promote the growth and adoption of cryptocurrencies. By providing a mechanism for token holders to use their staked assets as collateral, liquid staking increases the utility and value of cryptocurrencies. This additional use case attracts more participants to the ecosystem, enhancing liquidity and contributing to the overall growth of the cryptocurrency market.


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