Chainlink-enabled Liquid Staking: Unlocking Liquidity in DeFi with Lido and Rocket Pool

  • Liquid staking beats traditional staking in many different ways, as it helps to solve liquidity problems that typically limit staking on POS networks. 
  • Chainlink-enabled liquid staking remains significant to Web3 as price feeds enable secure DeFi markets around LSTs.

Staking has become one of the most lucrative activities in the crypto ecosystem over the past years. Despite rising concerns from industry players on the future of staking, stakers are still very much active on platforms such as Ethereum.

However, staking like many other practices in the crypto industry has its own downsides, risks, and potential flaws.

Staking has proven to be essential for securing proof-of-stake (POS) blockchains like Ethereum. However, it becomes risky for stakes using a Software as a Service (Saas) platform to carry out staking safely, as solo node operators would. Using a SaaS provider can endanger stakers.

This is where liquid staking service comes in. Liquid staking service providers create a solution for the problem of liquidity by minting new tokens. These can either be traded or deposited in DeFi protocols. This way, liquid staking builds upon the already existing staking systems through the process of unlocking liquidity for staked tokens.

As Chainlink detailed in a blog post :

Liquid staking providers take user deposits, stake those tokens on behalf of users, and provide them with a receipt in the form of a new token, which is redeemable for the tokens they staked (plus/minus a share of rewards and penalties). This new token can also be traded or used as collateral in DeFi protocols, thereby unlocking the liquidity of the staked assets.

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Unlike traditional staking, liquid staking contributes to crypto-economic security and offers liquidity.
Although traditional staking offers three different methods, liquid staking only offers one; liquid as a service. It also offers staking rewards and the opportunity to earn additional yield in DeFi, and risks are only limited to penalties and additional smart contract risk.

Chainlink plays a massive role in providing necessary data for liquid staking tokens

Notably, Chainlink serves a major purpose in the liquid staking market and brings balance to the Web3 ecosystem in its own unique form. Chainlink’s price feeds enable secure DeFi markets around liquid staking tokens (LSTs). This then goes on to allow DeFi protocols to easily accept them as collateral. The blogpost further read;

Chainlink Price Feeds publish highly accurate and reliable data for various liquid staking tokens (LSTs), which enables DeFi protocols to accept them as collateral. For example, there are various stETH/USD and stETH/ETH Price Feeds across Arbitrum, Ethereum, and Optimism. Ultimately this is critical for deepening the liquidity of LSTs…

This also helps to secure the protocols that liquid staking tokens are traded on. This makes Chainlink a very critical infrastructure in the market, that is well-positioned to pioneer liquid staking within the entire Web3 ecosystem.

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About Author

Olivia Brooke has been writing about cryptocurrencies since 2018. She’s currently fascinated by NFTs, and she remains committed to learning and writing about the broader cryptocurrency industry.

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