DEVCONFLICT 101: THE STAKING ARGUMENT
“This post is taking part in the Devconflict x Kiwi writing contest.”
Contest entry link: https://paragraph.xyz/@kiwi-updates/arena-devconflict-writing-contest
Table of Contents
Vanilla Staking VS Liquid Staking: A Staker’s Introduction
Vanilla Staking VS Liquid Staking: How They Work
Vanilla Staking VS Liquid Staking: User Benefits
Vanilla Staking VS Liquid Staking: The Challenges
Vanilla Staking VS Liquid Staking: Adoption and the Future
Vanilla Staking VS Liquid Staking: A Staker’s Introduction
In the world of Ethereum, there is always the argument of which staking method is better: the traditional vanilla staking or liquid staking. As at July of 2024, the amount of staked Ethereum had reached a whooping 33.7 million ETH, from 25 million in August 2023. Staked ETH accounts for close to a third of the total Ethereum supply. Liquid staking helps motivate higher participation in the Ethereum chain. The vanilla staking technique has been a long term staking method and it is a staking backbone on Ethereum. Today, I will be shining the light on these staking techniques, how they work, their adoption and potential in the future. Let's start with a beginner introduction to set the ball rolling, shall we?
Vanilla staking otherwise known as traditional or native staking is a simplified staking technique in which holders of cryptocurrency tokens lock up their assets for a specified period of time, during which they cannot access the locked cryptocurrency tokens. These tokens are locked up in the original blockchain network: this setup enables the holders to earn rewards in that particular token and support the operations of the blockchain network at the same time.
Liquid staking, especially on the Ethereum blockchain is quite different. Liquid staking enables holders of cryptocurrency tokens to stake their assets for a time duration and earn staking rewards. However, it solves the problem that vanilla staking has: lack of user access to assets. Liquid staking solves this problem by minting new tokens which represent claims on the underlying staked assets.The new tokens can also be traded or used as collateral in DeFi protocols, thereby unlocking the liquidity of the staked assets. Liquid staking builds upon existing staking systems by unlocking liquidity for staked tokens. Liquid staking ensures that cryptocurrency holders can stake tokens and earn rewards without having them locked.
Vanilla Staking VS Liquid Staking: How They Work
Vanilla staking involves locking cryptocurrency tokens within a network protocol to assist the operations of that given network. In the traditional staking model, tokens are delegated to network validators. These validators are then entrusted with technical tasks and staking responsibilities. At the end, the cryptocurrency holders earn staking rewards for the time duration in which the cryptocurrency tokens are locked. The staking consensus is based on the Proof of Stake(POS) and different protocols may have different rules on reward distribution. The rules vary but one thing that is a constant challenge is liquidity. Cryptocurrency tokens operating the vanilla staking method are locked in a smart contract. This means that cryptocurrency token holders cannot sell, transfer or trade any of the staked tokens until the end of the staking period.
Liquid staking enables cryptocurrency traders to use their tokens on DeFi projects while they are still staked. In the liquid staking mechanism, native tokens of a Proof-of-Stake(POS) chain are delegated to one of many validators participating in the consensus protocol. The service provider issues a synthetic token as a user receipt indicating the value of the staked token. Liquid staking ensures that token holders continue to extract utility from their staked assets and enable the use of staked assets for other projects. This means that cryptocurrency token holders earn staking rewards without giving up liquidity. In addition, investors can capitalize on market movements and secure a guaranteed APY, thus diversifying their portfolio. Liquid staking creates flexibility for efficient allocation of resources and more utility from staked assets.
Vanilla Staking VS Liquid Staking: User Benefits
Vanilla staking offers several benefits for users and the blockchain ecosystem in general. These benefits include:
High rewards: The vanilla staking set up allows investors and validators on Ethereum to earn massive rewards and increase their ETH holdings.
Reduced market exposure: Investors are given an opportunity to make profit and indirectly, in the long run the ETH market short term volatility is reduced.
Network support: The vanilla token locking setup enables the creation of a safer and more secure blockchain environment because of its contribution to the decentralization of the Ethereum network.
Governance: Stakers can vote on proposed changes to the Ethereum network. These changes include network upgrades, fee structures, as well as the creation of new tokens and ecosystems on the Ethereum ecosystem
Energy conservation: Vanilla staking uses the POS mechanism which does not need massive computing power to perform high energy transactions. This creates a lower environmental footprint for Ethereum and helps the network keep up with a higher number of transactions.
Liquid staking is loved by its users because of the benefits it provides. These benefits are:
Flexibility: Liquid staking gives users control over their assets: they can benefit from staking rewards while having liquidity. Users can trade, transfer and utilize assets on the blockchain while enjoying staking rewards.This flexibility is useful in volatile markets or when investors require immediate access to their capital.
Capital efficiency: Liquid staking enables cryptocurrency token holders to optimize capital efficiency by earning staking rewards and actively participating in other investment strategies. These strategies include borrowing or providing liquidity in decentralized protocols for access to capital and great investment returns.
Lowered entry barriers: Unlike the vanilla staking mechanism where users need up to 32 ETH to be validators, liquid staking lowers the barriers to entry. With as little as 0.01 ETH, users can stake on some Liquid Staking Derivative platforms. In addition, there is no need for technical knowledge in liquid staking: the protocol handles all tasks.
Risk management: Instead of locking up your tokens and leaving them to the hands of market activities, liquid staking enables you to invest and maximize your returns. The setup enables users trade and speculate against risk from staked tokens, thus minimizing loss.
Participation and Innovation: Liquid Staking helps to promote market participation directly through lowered entry barriers and flexible options for staking and earning rewards. Liquid staking also creates new opportunities for financial products and also encourages innovation. It encourages investors to try out new innovative ways of increasing their income.
Vanilla Staking VS Liquid Staking: The Challenges
There are some challenges on vanilla staking that may have necessitated the development of liquid staking. These challenges include:
High entry barriers: Getting started on vanilla staking in Ethereum requires a minimum of 32 ETH. In addition to that lump sum, users are required to possess some technical knowledge and set up a validator model consisting of computers consistently linked to the Ethereum network.
Limited liquidity: Throughout the entire duration of the staking period, ETH is inaccessible to the holder. This means that you cannot take out, trade or swap the ETH that is staked all through the staking period.
Validator: Using a single validator may be a potential risk. This is because if the validator acts maliciously, the staking rewards and user capital may be in jeopardy.
Variable rewards: In vanilla staking, rewards vary in dollar value based on factors such as market conditions, price volatility of cryptocurrency tokens, and changes in the protocol’s reward supply.
No auto compounding: Despite the high 32 ETH entry fee, staking rules do not auto compound. However, this is unique to the Ethereum network and it may vary for other networks.
Liquid staking has proffered solutions to the problems of vanilla staking, but it has come with its own challenges. These challenges are:
Security: Platforms on liquid staking are particularly vulnerable to security hacks and smart contract vulnerabilities. These factors could result in massive losses of cryptocurrency assets.
Market: Liquid staking exposes users to market risks such as price volatility and liquidity crises. The prices of the synthetic tokens may be affected by market forces such as changes in demand or supply. These factors can result in significant losses.
Counterparty risks: Liquid staking exposes users to counterparty risks. The liquid staking platforms often rely on third party validators or node operators, which may fail to fulfill their obligations and contribute to these risks.
Smart contracts: Smart contracts are vulnerable to bugs and exploits. Liquid staking platforms utilize these smart contracts, which may result in cryptocurrency assets losses.
Regulations: The concept of liquid staking is relatively new. Different countries across the globe have different laws on blockchain activities. Liquid staking is at risk of being subject to laws and regulations that could negatively impact user adoption and the industry in general.
Vanilla Staking VS Liquid Staking: Adoption and the Future
The argument has been: between vanilla staking and liquid staking, which is the better option? The answer is: “It depends on what you are looking for on the Ethereum blockchain.” If you are looking for a high reward, user governance decentralized staking method, stick with vanilla staking. On the other hand, if you want a more flexible portfolio diversifying outcome, liquid staking is your best bet. Ethereum staking has diversified over the years: from a Proof of Work
(POW) mechanism in 2015, the network evolved to a Proof of Stake(POS) mechanism in 2022. The number of validators has also increased significantly, with active validators on Ethereum running into millions. The rewards have driven more investors into the world of Ethereum staking and it is likely that liquid staking will be more adopted in the near future because of the reduced barriers to entry.
As someone who wants more flexible cryptocurrency investment options, liquid staking is my preferred option. Generally, I believe that liquid staking presents a more versatile and inclusive approach to staking, empowering users with greater asset control and the potential to optimize their investments. Liquid staking is still a new blockchain concept: in the years to come, I believe that liquid staking will shine the light on numerous innovative projects on the blockchain, creating more opportunities for cryptocurrency investors who want to earn staking rewards and diversify their investment portfolios. These opportunities will improve user adoption of liquid staking on the Ethereum ecosystem and create a space for the integration of liquid staking on DeFi projects in the near future.
DEVCONFLICT 101: THE STAKING ARGUMENT
DEVCONFLICT 101: THE STAKING ARGUMENT
“This post is taking part in the Devconflict x Kiwi writing contest.”
Contest entry link: https://paragraph.xyz/@kiwi-updates/arena-devconflict-writing-contest
Table of Contents
Vanilla Staking VS Liquid Staking: A Staker’s Introduction
Vanilla Staking VS Liquid Staking: How They Work
Vanilla Staking VS Liquid Staking: User Benefits
Vanilla Staking VS Liquid Staking: The Challenges
Vanilla Staking VS Liquid Staking: Adoption and the Future
Vanilla Staking VS Liquid Staking: A Staker’s Introduction
In the world of Ethereum, there is always the argument of which staking method is better: the traditional vanilla staking or liquid staking. As at July of 2024, the amount of staked Ethereum had reached a whooping 33.7 million ETH, from 25 million in August 2023. Staked ETH accounts for close to a third of the total Ethereum supply. Liquid staking helps motivate higher participation in the Ethereum chain. The vanilla staking technique has been a long term staking method and it is a staking backbone on Ethereum. Today, I will be shining the light on these staking techniques, how they work, their adoption and potential in the future. Let's start with a beginner introduction to set the ball rolling, shall we?
Vanilla staking otherwise known as traditional or native staking is a simplified staking technique in which holders of cryptocurrency tokens lock up their assets for a specified period of time, during which they cannot access the locked cryptocurrency tokens. These tokens are locked up in the original blockchain network: this setup enables the holders to earn rewards in that particular token and support the operations of the blockchain network at the same time.
Liquid staking, especially on the Ethereum blockchain is quite different. Liquid staking enables holders of cryptocurrency tokens to stake their assets for a time duration and earn staking rewards. However, it solves the problem that vanilla staking has: lack of user access to assets. Liquid staking solves this problem by minting new tokens which represent claims on the underlying staked assets.The new tokens can also be traded or used as collateral in DeFi protocols, thereby unlocking the liquidity of the staked assets. Liquid staking builds upon existing staking systems by unlocking liquidity for staked tokens. Liquid staking ensures that cryptocurrency holders can stake tokens and earn rewards without having them locked.
Vanilla Staking VS Liquid Staking: How They Work
Vanilla staking involves locking cryptocurrency tokens within a network protocol to assist the operations of that given network. In the traditional staking model, tokens are delegated to network validators. These validators are then entrusted with technical tasks and staking responsibilities. At the end, the cryptocurrency holders earn staking rewards for the time duration in which the cryptocurrency tokens are locked. The staking consensus is based on the Proof of Stake(POS) and different protocols may have different rules on reward distribution. The rules vary but one thing that is a constant challenge is liquidity. Cryptocurrency tokens operating the vanilla staking method are locked in a smart contract. This means that cryptocurrency token holders cannot sell, transfer or trade any of the staked tokens until the end of the staking period.
Liquid staking enables cryptocurrency traders to use their tokens on DeFi projects while they are still staked. In the liquid staking mechanism, native tokens of a Proof-of-Stake(POS) chain are delegated to one of many validators participating in the consensus protocol. The service provider issues a synthetic token as a user receipt indicating the value of the staked token. Liquid staking ensures that token holders continue to extract utility from their staked assets and enable the use of staked assets for other projects. This means that cryptocurrency token holders earn staking rewards without giving up liquidity. In addition, investors can capitalize on market movements and secure a guaranteed APY, thus diversifying their portfolio. Liquid staking creates flexibility for efficient allocation of resources and more utility from staked assets.
Vanilla Staking VS Liquid Staking: User Benefits
Vanilla staking offers several benefits for users and the blockchain ecosystem in general. These benefits include:
High rewards: The vanilla staking set up allows investors and validators on Ethereum to earn massive rewards and increase their ETH holdings.
Reduced market exposure: Investors are given an opportunity to make profit and indirectly, in the long run the ETH market short term volatility is reduced.
Network support: The vanilla token locking setup enables the creation of a safer and more secure blockchain environment because of its contribution to the decentralization of the Ethereum network.
Governance: Stakers can vote on proposed changes to the Ethereum network. These changes include network upgrades, fee structures, as well as the creation of new tokens and ecosystems on the Ethereum ecosystem
Energy conservation: Vanilla staking uses the POS mechanism which does not need massive computing power to perform high energy transactions. This creates a lower environmental footprint for Ethereum and helps the network keep up with a higher number of transactions.
Liquid staking is loved by its users because of the benefits it provides. These benefits are:
Flexibility: Liquid staking gives users control over their assets: they can benefit from staking rewards while having liquidity. Users can trade, transfer and utilize assets on the blockchain while enjoying staking rewards.This flexibility is useful in volatile markets or when investors require immediate access to their capital.
Capital efficiency: Liquid staking enables cryptocurrency token holders to optimize capital efficiency by earning staking rewards and actively participating in other investment strategies. These strategies include borrowing or providing liquidity in decentralized protocols for access to capital and great investment returns.
Lowered entry barriers: Unlike the vanilla staking mechanism where users need up to 32 ETH to be validators, liquid staking lowers the barriers to entry. With as little as 0.01 ETH, users can stake on some Liquid Staking Derivative platforms. In addition, there is no need for technical knowledge in liquid staking: the protocol handles all tasks.
Risk management: Instead of locking up your tokens and leaving them to the hands of market activities, liquid staking enables you to invest and maximize your returns. The setup enables users trade and speculate against risk from staked tokens, thus minimizing loss.
Participation and Innovation: Liquid Staking helps to promote market participation directly through lowered entry barriers and flexible options for staking and earning rewards. Liquid staking also creates new opportunities for financial products and also encourages innovation. It encourages investors to try out new innovative ways of increasing their income.
Vanilla Staking VS Liquid Staking: The Challenges
There are some challenges on vanilla staking that may have necessitated the development of liquid staking. These challenges include:
High entry barriers: Getting started on vanilla staking in Ethereum requires a minimum of 32 ETH. In addition to that lump sum, users are required to possess some technical knowledge and set up a validator model consisting of computers consistently linked to the Ethereum network.
Limited liquidity: Throughout the entire duration of the staking period, ETH is inaccessible to the holder. This means that you cannot take out, trade or swap the ETH that is staked all through the staking period.
Validator: Using a single validator may be a potential risk. This is because if the validator acts maliciously, the staking rewards and user capital may be in jeopardy.
Variable rewards: In vanilla staking, rewards vary in dollar value based on factors such as market conditions, price volatility of cryptocurrency tokens, and changes in the protocol’s reward supply.
No auto compounding: Despite the high 32 ETH entry fee, staking rules do not auto compound. However, this is unique to the Ethereum network and it may vary for other networks.
Liquid staking has proffered solutions to the problems of vanilla staking, but it has come with its own challenges. These challenges are:
Security: Platforms on liquid staking are particularly vulnerable to security hacks and smart contract vulnerabilities. These factors could result in massive losses of cryptocurrency assets.
Market: Liquid staking exposes users to market risks such as price volatility and liquidity crises. The prices of the synthetic tokens may be affected by market forces such as changes in demand or supply. These factors can result in significant losses.
Counterparty risks: Liquid staking exposes users to counterparty risks. The liquid staking platforms often rely on third party validators or node operators, which may fail to fulfill their obligations and contribute to these risks.
Smart contracts: Smart contracts are vulnerable to bugs and exploits. Liquid staking platforms utilize these smart contracts, which may result in cryptocurrency assets losses.
Regulations: The concept of liquid staking is relatively new. Different countries across the globe have different laws on blockchain activities. Liquid staking is at risk of being subject to laws and regulations that could negatively impact user adoption and the industry in general.
Vanilla Staking VS Liquid Staking: Adoption and the Future
The argument has been: between vanilla staking and liquid staking, which is the better option? The answer is: “It depends on what you are looking for on the Ethereum blockchain.” If you are looking for a high reward, user governance decentralized staking method, stick with vanilla staking. On the other hand, if you want a more flexible portfolio diversifying outcome, liquid staking is your best bet. Ethereum staking has diversified over the years: from a Proof of Work
(POW) mechanism in 2015, the network evolved to a Proof of Stake(POS) mechanism in 2022. The number of validators has also increased significantly, with active validators on Ethereum running into millions. The rewards have driven more investors into the world of Ethereum staking and it is likely that liquid staking will be more adopted in the near future because of the reduced barriers to entry.
As someone who wants more flexible cryptocurrency investment options, liquid staking is my preferred option. Generally, I believe that liquid staking presents a more versatile and inclusive approach to staking, empowering users with greater asset control and the potential to optimize their investments. Liquid staking is still a new blockchain concept: in the years to come, I believe that liquid staking will shine the light on numerous innovative projects on the blockchain, creating more opportunities for cryptocurrency investors who want to earn staking rewards and diversify their investment portfolios. These opportunities will improve user adoption of liquid staking on the Ethereum ecosystem and create a space for the integration of liquid staking on DeFi projects in the near future.
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