How to Unlock Capital Efficiency With Liquid Staking

Key Takeaways

• Liquid staking allows token holders to earn staking rewards while maintaining liquidity, enabling participation in DeFi activities or trading without unlocking staked assets.

• Popular networks like Ethereum, Polkadot, and the Cosmos ecosystem support liquid staking, showcasing its growing role in optimising capital efficiency and flexibility.

• Stride is a leading liquid staking provider for Cosmos, offering multichain support and high security, allowing businesses and individuals to maximise asset utility across various blockchain applications.

  
  

• Liquid staking is revolutionising how cryptocurrency stakeholders manage their assets. Enabling access to liquidity while tokens remain staked offers a more efficient way to maximise the value of these assets. This innovation has opened new possibilities for entities that require both liquidity and the ability to earn staking rewards simultaneously.

What Is Liquid Staking?

Liquid staking allows token holders to stake their assets in a Proof of Stake (PoS) blockchain network and, at the same time, engage in financial activities such as trading, borrowing, or lending. In traditional staking, assets remain locked for a predetermined period. Liquid staking introduces flexibility by generating liquid tokens, which represent the staked assets, freeing up the capital for further use while still generating staking rewards.

Prominent networks such as Ethereum, Polkadot, and Avalanche have adopted liquid staking protocols, reflecting the growing utility of this solution. It increases efficiency and flexibility, enabling staked tokens to function across multiple DeFi platforms simultaneously, enhancing both liquidity management and return on investment.

How Does Liquid Staking Work?

In a liquid staking setup, native tokens are staked through a provider, which delegates them to blockchain validators responsible for securing the network. As a result, users receive a liquid staking token—a receipt that symbolises the staked assets.

This receipt token can be traded, used as collateral, or deployed in various decentralised finance (DeFi) activities, enabling continued earnings from staked tokens. Despite the assets being locked for consensus participation, the receipt token retains the liquidity of the original asset, ensuring both staking rewards and liquidity access. This hybrid functionality makes liquid staking a valuable tool for those seeking capital efficiency without sacrificing staking incentives.

Advantages of Liquid Staking

Liquid staking brings several key advantages over traditional staking approaches, primarily in terms of liquidity and flexibility. Businesses and individuals can access the liquidity tied up in staked assets, offering more freedom to explore financial opportunities without needing to unstake their tokens.

Furthermore, liquid staking reduces opportunity costs, providing the liquidity needed without forfeiting the rewards associated with staking. This is especially advantageous for entities requiring access to their capital while maintaining a position in staking rewards and securing network participation.

Challenges of Liquid Staking

Despite its benefits, liquid staking comes with certain risks and challenges that users should be aware of before engaging in this process.

Slashing

In Proof of Stake (PoS) networks, validators can face penalties for actions that harm the network’s performance. This is referred to as ‘slashing’. If validators misbehave or fail in their responsibilities, they can be removed from the network, and part of their staked tokens can be lost. Users who stake their assets through liquid staking protocols must be cautious about choosing validators with a good reputation and reliable history.

Centralisation

Liquid staking can lead to centralisation within a blockchain network if a large portion of the network’s stake is controlled by a single protocol. For instance, Lido controls about a third of the staked Ether (ETH), which can result in a concentration of power. This level of control poses risks to the overall network security and decentralisation principles. A decentralised system of multiple liquid staking protocols would help mitigate these risks, ensuring better network resilience and fairness.

Regulatory Considerations

The regulatory landscape for cryptocurrencies is evolving rapidly. Users participating in liquid staking must remain informed about legal developments in their jurisdiction, as new regulations could impact staking practices. Compliance with local laws is essential for avoiding potential penalties or disruptions in staking activities. Learn more about general crypto regulation here.

Popular Cryptocurrencies That Support Liquid Staking

Several major blockchain networks now offer liquid staking, allowing users to maximise their crypto assets’ potential.

Ethereum

With Ethereum, users can now stake their ETH and receive rewards while retaining access to liquidity. Liquid staking protocols for Ethereum have grown, providing a straightforward way for users to both contribute to the network’s security and leverage their assets in decentralised finance (DeFi) activities.

Polkadot

Polkadot, known for its multichain framework, enables users to stake DOT tokens while maintaining access to them through liquid staking. Token holders can continue participating in the network’s governance and staking processes while keeping their assets liquid.

Liquid Staking with Stride

Stride is a leading liquid staking provider for the Cosmos ecosystem, delivering a service that allows users to stake tokens while retaining liquidity. Cosmos is a major blockchain ecosystem known for its "Internet of Blockchains" vision. It connects multiple independent blockchains, making them interoperable through its Inter-Blockchain Communication (IBC) protocol. This system enhances scalability and enables diverse projects to collaborate seamlessly, which is why it’s considered a transformative network in the blockchain space.

Stride operates as an independent blockchain within this ecosystem, offering liquid staking for cryptocurrencies like ATOM, OSMO, and JUNO. By staking these assets, users receive liquid staked tokens (LSTs) like stATOM. These LSTs can be utilised across various Decentralised Finance (DeFi) platforms, traded, or used as collateral, all while continuing to accrue staking rewards. This versatility within the Cosmos ecosystem allows stakeholders to maximise both liquidity and returns from their assets.

Key Features of Stride

Multichain Support: Stride is integrated with multiple blockchains within the Cosmos ecosystem, supporting tokens across several networks. Its goal is to offer liquid staking for all Cosmos IBC-compatible chains, enabling users to participate in the decentralised finance (DeFi) activities of multiple blockchains simultaneously.

Security and Interchain Security (ICS): Stride operates as a consumer chain within the Cosmos Hub, leveraging Cosmos' Interchain Security. This partnership has significantly increased the economic security of Stride, safeguarding it from attacks and enhancing reliability. Stride’s system is audited by leading firms like Informal Systems, ensuring the highest security standards​

Non-rebasing Tokens: Stride issues non-rebasing liquid staked tokens (LSTs), meaning that these tokens automatically appreciate in value relative to the staked assets. For example, over time, 1 stATOM becomes redeemable for more ATOM as staking rewards accumulate. This gradual appreciation makes Stride’s LSTs particularly attractive for users seeking long-term gains​.

Governance and Tokenomics: Stride is governed by its native token, STRD, which plays a crucial role in governance decisions. Stride’s governance model allows token holders to influence key decisions, including validator selection, and ensure that the network remains decentralised. Furthermore, Stride’s tokenomics is designed to foster long-term sustainability by reducing STRD emissions over time and incentivising liquidity through rewards.

Why Stride Stands Out

Stride’s close integration with Cosmos and its adoption of Interchain Security set it apart from other liquid staking protocols. Its minimalist design and dedicated audits also ensure a high level of security. Additionally, Stride’s approach to non-rebasing LSTs and transparent governance model make it a flexible and secure option for users who want to both stake their assets and participate in DeFi activities​.

How Businesses Can Utilise Liquid Staking

Liquid staking presents unique opportunities for businesses to enhance their capital efficiency, reduce opportunity costs, and participate in decentralised finance (DeFi) ecosystems without compromising liquidity.

Here are several ways businesses can leverage liquid staking effectively:

Efficient Capital Management

Businesses holding significant crypto assets often need to balance staking for rewards with maintaining liquidity for operational expenses or investment opportunities. Liquid staking solves this dilemma by allowing companies to stake their assets for network security and rewards while using liquid staked tokens (LSTs) for various business functions. These LSTs can be deployed for trading, lending, or liquidity provision in DeFi markets, enabling businesses to generate multiple income streams from the same asset.

Enhanced Treasury Management

For businesses with large crypto treasuries, staking provides a way to keep assets productive. By staking tokens and receiving liquid tokens in return, companies can continue earning rewards from staking while simultaneously using their tokens as collateral or liquidity in other ventures. This ensures that the treasury remains both profitable and liquid, ready for any financial needs or opportunities that may arise​.

DeFi Integration and Yield Optimisation

Liquid staking tokens can be integrated into a variety of DeFi protocols, such as decentralised exchanges (DEXs), lending platforms, or yield farming strategies. Businesses can stake assets like ETH, ATOM, or DOT and receive liquid derivatives that can then be reinvested into high-yield opportunities across DeFi ecosystems. This allows businesses to optimise yields by participating in multiple layers of income generation while still securing the underlying blockchain.

Hedge Against Market Volatility

Liquid staking gives businesses a mechanism to manage risk in volatile markets. By holding liquid staking tokens, companies can retain the flexibility to quickly react to market changes, either by selling LSTs or using them in other financial strategies.

Incentivising Employee Compensation

For blockchain or crypto-focused firms, liquid staking can also be integrated into employee compensation packages. Businesses can stake assets on behalf of employees, providing them with LSTs that accrue value over time. These tokens can serve as a form of long-term incentive, offering employees both a stake in the business’s success and access to liquidity, which they can utilise within DeFi markets or convert when necessary​.

Conclusion

As liquid staking expands across various networks, businesses that integrate this technology can significantly reduce opportunity costs. They can participate in staking rewards, deploy assets in decentralised finance (DeFi), and keep liquidity available for other business needs. However, as the regulatory landscape evolves, it is essential for companies to conduct thorough due diligence, understanding both the risks and rewards associated with liquid staking.

With careful planning, liquid staking can be a powerful tool for businesses to optimise their crypto holdings, engage with DeFi markets, and support decentralisation. As more projects adopt this technology, the potential for further financial innovation and growth within the blockchain space becomes increasingly evident.

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FAQ's

How can liquid staking be integrated into traditional businesses’ cash flow management?

Liquid staking allows businesses to earn passive income on idle crypto assets while keeping them accessible for operational needs. By using liquid staking tokens, businesses can ensure continuous liquidity for short-term expenses, while still benefiting from staking rewards, improving cash flow efficiency.

What compliance and regulatory considerations should traditional businesses keep in mind when using liquid staking?

Businesses need to ensure they comply with local regulations around digital assets and staking activities. Regulatory uncertainty in certain jurisdictions could impact how liquid staking is classified, and companies should seek legal guidance to avoid penalties or operational disruptions.

How could businesses incorporate liquid staking into their investment portfolios?

Liquid staking offers businesses a way to diversify investment portfolios by holding crypto assets and simultaneously earning staking rewards. This strategy provides access to blockchain technology’s growth potential while reducing opportunity costs through liquidity maintenance, giving businesses a hedge against traditional market volatility.

What are the potential accounting challenges for businesses utilising liquid staking?

Liquid staking introduces complexities in accounting due to the nature of the liquid tokens representing staked assets. Businesses must track both the staked assets and their liquid derivatives, ensuring accurate reporting of rewards and asset valuations, especially in jurisdictions where crypto accounting standards are still evolving.

How can businesses use liquid staking to improve credit access or financing options?

By using liquid staking tokens as collateral, businesses can unlock new financing options in DeFi, such as crypto-backed loans. This offers an alternative to traditional banking loans and provides faster access to capital without needing to liquidate other assets, supporting business expansion or liquidity management.