What is Liquid Staking? How does it work?

Liquid staking was pioneered by @LidoFinance back in December 2020. Using liquid staking protocols, users can participate in ETH staking without needing to lock up funds or maintain their nodes.

How it Works:

• Users can deposit a minimum of 0.01 ETH to a liquid staking protocol.
• This ETH is sent to a Staking Pool.
• The platform gives users liquid staking tokens (LSTs) representing their staked assets and the rewards they've earned. For example, Lido calls their token staked-Ether (stETH).
• LSTs are pegged to ETH, ensuring users can trade them seamlessly on DeFi platforms. Plus, users retain the option to withdraw their ETH at any point in time.
• Users can burn the liquid staking tokens (LSTs) for ETH. Liquid staking tokens (LSTs) can also be swapped for the ETH token.

Major Types of Liquid Staking Tokens:

1. Rebasing Tokens

• Simple to understand but hard to integrate.
• The exchange rate remains 1:1 (ETH:stETH), but quantity increases over time.
• Rebasing tokens like Lido’s stETH adjust their supply, giving users extra tokens as rewards without changing the value of each token. This method keeps them closely tied to Ethereum's value.
• Rebasing tokens are the most popular design among liquid staking platforms.

2. Non-Rebasing Tokens

• Harder to understand but easier to integrate compared to rebasing tokens.
• The quantity remains constant, but the value of the staked token increases with time. For example, if you stake 1 ETH at 3% APY for 1 year, the value of your 1 stETH will equal 1.03 ETH.
• Unlike rebasing tokens, non-rebasing tokens keep a fixed supply, but their value grows daily with staking rewards. Many platforms use this model. For example, @Rocket_Pool offers a non-rebasing token called rETH.

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