As a Crypto trader, you cannot ignore Liquid staking tokens. So what is Liquid staking and what are its advantages and disadvantages? What criteria can investors use to evaluate the project? The information below will help readers get an overview of the development potential of it in the cryptocurrency market. Let’s explore with Crypto Trading!
Learn what is Liquid staking.
Staking is understood as the act of staking assets. Liquid staking is a protocol for any asset in the Crypto market. After completing the assigned tasks, the protocol of the token project will issue to the trader a representative token (or Liquid staking token), corresponding to the staking asset at a ratio of 1:1.
In this protocol, users can bring a part of their assets (such as Bitcoin, or Altcoin ) to stake on the blockchain network. However, this part of the assets must ensure that it can maintain liquidity.
What are the advantages of Liquid staking?
The advantages of participating include:
- Unlock liquidity: Tokens generated during staking are not locked. You can flexibly switch between representative tokens and real tokens. Many traders also use representative tokens to make transactions on DeFi.
- Flexible combination in the DeFi decentralized financial market: Flexible use of assets in the DeFi ecosystem through representative tokens becomes much more convenient. Users can mortgage assets for loans, borrowing, farming, lending,…
- Investors have the opportunity to receive rewards when participating in the Liquid staking project. In addition, you can also accumulate assets and earn additional profits on various protocols.
- Contribute to the connection between traders and infrastructure: When participating in it, you can share in the staking rewards. In simple terms, even if you do not have the minimum amount of tokens (32 ETH) to become an independent validator on the Ethereum network, you still have the right to share in the block rewards.
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Some limitations of Liquid staking tokens
Besides the outstanding advantages, it protocol still has certain limitations:
- Potential risk of secondary market volatility: The trading volume of staked tokens is lower than the trading volume of the underlying asset. Therefore, sudden changes in the market can greatly affect the volatility of the staked token.
- Asset Management Risk: Users will face risks when depositing assets to the service provider. In case the operator’s private key is compromised, or the protocol has smart contract vulnerabilities, the risk of fraud is very high.
Evaluating the Potential of Liquid Staking in Crypto Trading
Before the advent of it, investors often applied two staking mechanisms: PoW – Proof of Work and PoS – Proof of Stake. Although operating on large blockchain networks (Ethereum, Sonala, Near Protocol, …), these two protocols had disadvantages in liquidity. The emergence of Liquid Staking has overcome the above limitations, bringing users the best experience.
Comparing the growth potential of Liquid staking and traditional staking
To understand the growth potential and why liquid protocols are chosen by many traders, you can refer to the comparison table below:
| Feature comparison | Liquid staking protocol | Traditional Staking |
| Asset liquidity | Liquid (Traders use representative tokens to participate in transactions and investments on the blockchain network). | No liquidity (accounts and tokens are locked until maturity). |
| Security level | Good security. | Good security. |
| Rewards and profits for traders | Staking rewards and profits when users participate in transactions on the DeFi system. | Includes staking rewards. |
| Risks | Risk from the trading system. | Liquidity risk if traders do not withdraw capital in time when there are market fluctuations. In addition, if you violate the established regulations, you will be subject to penalties. |
What are the benefits of Liquid staking in the Crypto market?
The application of the above protocol brings benefits to the participants in the Crypto market:
- Cryptocurrency investment community: Traders who apply this protocol can diversify their investment portfolio. This way, you can both earn profits from staking rewards and reinvest the representative token on DeFi. This way, it contributes to increasing the efficiency of the investment portfolio.
- Crypto Project Owners: The more investors, the more capital will flow into the project. Developers will have the incentive to make the project successful. When you use tokens from the Liquid protocol to stake, the project’s Total Value is Locked, and trading volume will increase significantly. Through this, traders can evaluate the liquidity and profitability potential of the project.
- For blockchain networks and the Crypto market: Many users staking tokens is a positive signal of market interaction. This not only creates liquidity but also increases the security and decentralization characteristic of the crypto market.
How to evaluate a Liquid staking project?
You can evaluate the quality of the project for different audiences: stakeholders, market protocols, and Crypto investors.
Liquid staking review for stalkers
When trading cryptocurrencies, investors are usually only interested in the profits they earn. However, each token project has different interest rates. High interest rates are not always a good sign.
Stakers should consider the following factors:
- Total Value Lock (TVL) Index: The higher the index, the more traders are interested in the project. The future development potential of this project is huge.
- APY, APR interest rate index: These are indexes that show the speaker’s interest rate after staking. This index also reflects the profit that the trader receives (after deducting transaction costs).
Factors for evaluating Liquid staking tokens in market protocols
There are four factors to evaluate Liquid staking in a market protocol:
- Ability to centralize and expand features on the blockchain ecosystem.
- How the project generates revenue, as well as the profit distribution ratio for each token represented.
- The ability to create liquidity for representative tokens to create applications for protocols on DeFi.
- The call for support from Market Maker or Auto Market Maker. This can stimulate the interest of the trader community, creating attractive trading pairs with liquidity.
Liquid staking project review for investors
Evaluating a project must come from the profit goals of investors. Below are the factors that you should note and apply in Crypto trading:
- Project capitalization: You should use the valuation method according to the TVL ratio multiple and market Cap to know if this project is profitable or not.
- Token Inflation and Market Maker Action: Low-cap, unproven projects are called Hidden Gems. They may be inflated but not strong enough to create momentum.
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Conclude
Above is the information about Liquid staking that we want to share with you. It can be seen that the Liquid Staking protocol brings a lot of potential for traders in the future. Applying this protocol can help you increase your profits in Crypto trading. To not miss the latest articles about the virtual currency market, don’t forget to visit Crypto Trading!
FAQs
Here are some frequently asked questions when traders learn about the liquid staking protocol.
What is Borrowing and Lending in the Crypto Market?
Borrowing is the process of an individual/organization borrowing money or assets from another individual/organization. Lending is a form of providing loans (coins, tokens, other assets) at a certain interest rate.
Which Liquid staking projects attract the most interest and participation from investors?
Some prominent projects that have received attention from the Crypto community include:
- Ether.Fi project on the Ethereum blockchain platform.
- The Lido DAO project takes place on the following networks: Ethereum, Sonala, Polkadot, Polygon, and Kusama.
- Ankr Network Project.
What are APY and APR interest rates?
APY is also known as Annual Percentage Yield. This is a method of calculating the cumulative profit over time, helping traders know exactly how much interest they will receive. APR is the Annual Percentage Rate. With this method of calculating interest, you will earn profit from the initial amount, not taking into account the impact of compound interest.
