Liquid staking is a revolutionary and innovative protocol that’s one of the most recent inventions of decentralized finance (DeFi). Before we get into the good stuff, let’s take a quick look at what liquid staking is, and why it’s worth considering into your investment strategy if you wish to leverage your capital with low risk.

Btw, none of this constitutes financial advice. I am a moron who is half-asleep behind the computer wheel, who’s got too much time and a little bit of liquidity on his hands.

Let’s go.

Let’s quickly assume you know what staking is. You stake something like a token or an NFT, and you get rewards. For staking tokens, you’re helping secure the network by putting up your investment as proof. As a reward, you receive tokens, usually in kind.

For staking NFTs, you receive not governance tokens, but more like casino tokens. We can call them ecosystem tokens, I suppose. But let’s talk about that in another piece. For now, know that you stake something, you get rewards.

Say you stake your SOL, which you can do directly from inside your Phantom wallet. What do you receive? 4%? 5%? 6% if you’re lucky? Sure, if you’re a millionaire, 5% on your SOL is pretty sweet, even during a bear market.

But what if you could net 20%+, by taking on a little more risk?

The potential gains vs. the risk seems well worth it. And it’s possible with liquid staking. So what is it?

Liquid staking is a novel form of staking where you lock your stake into a smart contract, and in return you receive a tokenized version of your collateral… right away (in this case, stSOL, where the “st” stands for “staked”).

So let’s say you have 100 SOL. You stake 50 for roughly 5%, and in return you receive a little less stSOL (e.g., 48), because the tokenized version is worth less than your actual SOL. Then you take that to a liquidity pool and farm the stSOL–SOL pair for another 15% to 20%+. In total, that’s roughly a quarter percentage boost per annum. (Amazing.)

Let’s see how this simple two-protocol methodology looks like in practice with actual steps.

Before we start, I should mention that liquid staking protocols native to Solana are available. (Ex: Mercurial Finance). Mercurial Finance is a good option if you want to minimize your risk even further, and you’re happy with a little over 5% (at the time of writing). Problem is, when you go farm mSOL/SOL, the APY is incredibly low.

That’s why we’ll be using Lido for our example here. Lido is a liquidity staking protocol that started out with ETH, and has since become the largest liquidity staking protocol on Ethereum. In fact, stETH, its tokenized version of ETH, is in the Top 200 based on market cap. It also offers stSOL for Solana.

Let’s get started.

Step 1: Go to Lido Finance. Click on “Stake Now”, where you’ll be taken to “Supported Networks”. Below, you’ll find Solana. Click on “Stake Now” again.

Step 2. Connect your wallet. Once you accept the terms and conditions in the popup, pick your Solana wallet. (If you don’t have a Solana wallet yet, I recommend Phantom wallet. Full disclosure: They’re a client, but only because Phantom is totally awesome.)

Step 3. Input the amount you want to stake. As we discussed before, take the total amount you want to stake, and put in roughly 50%. Click submit and approve the transaction in Phantom.

Step 4. Visit the Solana DeFi page on Lido. You’ll have to go through each one to identify your stSOL–SOL pair. Have a look, pick one that looks right for you in terms of risk vs. reward, and go from there.

My personal favorite is Orca, which is a decentralized exchange running on Solana. Orca offers tons of degen pairs, in addition to “Whirlpool”, which offers higher yields, albeit by assuming greater risk. It also provides two options for liquidity providers:

1. Passive, which obviously comes with lower yields; and

2. Active, which affords a much greater yield potential, but like the name implies, requires the liquidity provider to farm actively.

❗ Important ❗ All these high farming rates are floating rates, meaning that they change over time, based on how much liquidity is in the pool (i.e., more liquidity = lower returns, and vice versa).

So if you want to sustain those high yields, the rates warrant regular checks. It’s also worth keeping tabs on other pools so you can unstake and switch should a more profitable play come along.

Three risks I can think of:

1. stSOL–SOL decoupling. stSOL (or whatever tokenized form you receive your SOL in) can experience some price decreases. Some people call it a depegging, but this is a misnomer, since technically your stSOL isn’t pegged to SOL; it’s just a derivative version of it.

2. A hack! Literally just happened. Crema Finance, a liquid staking protocol on Solana, was hacked. The hacker was gracious enough to return most of the funds, and chose to keep a cool 1.6 million for themselves. 😂

3. Impermanent loss. The boogeyman of liquidity pools, when you go 50/50 with your tokens (in this case, stSOL–SOL), there’s no guarantee that when you exit the pool, you’ll receive 50/50. Depending on the balance of the pool, it could be 60/40, 70/30, and so on.

   The issue? The price of one token could drop much further than that of the other, and there’s a chance you could get stuck with the cheaper token for your major pair.

   It’s called impermanent loss because the loss only becomes permanent if you trade for less. It also accounts for cost of capital, as in if you hadn’t provided the pool with those funds, you might have enjoyed greater returns elsewhere.

   I see this as being a more egregious issue when it concerns widely different pairings, like BTT–BNB. I could be wrong, but the balance between SOL and a tokenized form of it should be relatively stable, short of some black swan event messing up the protocol.

Liquid staking has granted investors and blockchain users the ability to sustain active liquidity that can be used to enhance capital efficiency and seize further opportunities. When it comes to staking, no longer do we need to consider the cost of capital.

We can stake and we can play.

If we play it right, we can recover our stake, and in turn, enjoy our staking rewards, all the while using our funds freely across the chain.