Key Points
Liquid staking emerged as a dominant niche in DeFi in 2024.
This technology unlocked additional liquidity for the crypto industry without excessively minting Ethereum (ETH).
It successfully scaled the DeFi mountain, achieving a Total Value Locked (TVL) of over $60 billion.
Understanding Liquid Staking and Its Challenges
Liquid staking has gained popularity due to its potential to utilize block reward accruing assets as high-quality collateral in DeFi.
However, this technology has some unaddressed gaps that need to be recognized and eliminated for it to reach its full potential.
One of the reasons for the rapid adoption of liquid staking is that locked assets can earn returns through staking rewards for block validation.
This process is crucial for ecosystem security but can be frustrating for investors who have to sacrifice their liquidity.
Liquid Staking Tokens (LSTs) and Liquid Restaking Tokens (LRTs) function similarly to repurchase agreements in traditional finance.
They represent a tradable claim to deposited assets.
However, these tokens are also vulnerable to the same risks as their traditional finance counterparts.
The value of a liquid-staked token is backed by its collateral, which is the pooled ETH powering the validator node.
Ideally, there should be a one-to-one peg between the underlying value and the market price of a liquid-staked token.
However, various factors can cause this peg to break, leading to potential losses for investors.
For liquid staking to become more inclusive and accessible, platforms need to focus on intuitive design, simplified onboarding processes, and education.
They also need to provide users with a full picture of the risk exposure and comparable yield metrics.
The key virtue of LSTs is the constantly accruing block rewards they offer.
However, staking should not be the only option for LST use.
The industry needs a diverse range of platforms to accept LSTs and offer their users access to real yield.
Finally, standardization is crucial for the tokens themselves.
Each platform needs to maintain separate liquidity pools for each trading pair, which can be challenging and risky.
The case for a single diversified LST-derived asset is clear.
Liquid staking has the potential to bridge the gap between a powerful innovation and a tool for everyday use.
However, the DeFi community must act to eliminate the technology’s current flaws and missing pieces.
The future of liquid staking is now, but it is up to us to make it truly happen.
