The advent of various staking solutions in the Ethereum network has sparked a lively debate: Are new staking options worth the exploration, or does traditional staking still hold the upper hand?
At Everstake, we recognize the evolving demands of the blockchain community and continually strive to adapt and provide inclusive staking solutions. Recently, we introduced the 0.1+ ETH staking solution, a groundbreaking initiative that substantially lowers the entry barriers for non-liquid Ethereum staking, marking it as the first non-custodial and currently the lowest threshold available for this network. This innovation opens up opportunities for a broader range of individuals to actively contribute to securing the network and receiving rewards.
Now, given that the reduced barrier for non-custodial Ethereum staking aligns with the naturally low staking thresholds of other chains like Solana, Tezos, and Polygon, a pertinent question arises: does this change make traditional staking more competitive against the liquid one? Continue reading to find out!
Keynote: In this discussion, we are not considering staking with exchanges because when staking on exchanges, you do not have ownership of your assets. We will delve deeper into that topic in an upcoming article.
What is Traditional Staking?
Traditional staking entails locking the crypto assets within a network protocol to assist its operations. When you delegate your tokens to network validators, you're entrusting them with the technical tasks and staking responsibilities, effectively having them handle the 'heavy lifting' on your behalf. In exchange, you receive rewards for the duration your assets remain staked.
You’ll find this staking consensus mechanism in networks with a Proof-of-Stake (PoS) consensus mechanism like post-merge Ethereum, Polygon, Near, etc.
While different staking protocols have varying rules regarding reward distribution, time period calculations, and other parameters, a commonality is the illiquidity of your assets. They are locked in a smart contract, prohibiting selling, transferring, or trading during the staking period.
It's worth noting that many staking protocols define these time periods as 'epochs,' which are predefined durations or sets of blocks during which specific operations, such as reward distribution, take place.
Benefits of Traditional Staking
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Ease of Setup & Management: Contrary to popular belief, staking with non-liquid providers isn't complex. At Everstake, it's 3 simple steps, and with our Instant Stake feature, it's even quicker!
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Passive Earning: Investors earn rewards without the need for active trading or asset management.
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Network Support: Locking tokens contributes to a more stable and secure network ecosystem.
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Quick Access to Funds: Traditional staking providers now offer a speedy route to your assets, bypassing lengthy unbonding periods.
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Reduced Market Exposure: Traditional staking allows investors to earn rewards while potentially mitigating some of the market's short-term volatility.
Challenges of Traditional Staking
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Variable Rewards in Dollar Value: While the number of tokens rewarded through staking is typically predefined by the protocol's rules, the dollar value of these rewards can fluctuate due to market conditions, price volatility of the cryptocurrency, and changes in the protocol's reward policy.
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Limited Liquidity: The staked assets are not easily accessible or tradable when needed.
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Validator Selection & Lack of Diversification: Committing to a single validator can be risky if the validator acts maliciously, risking loss of rewards and potentially the staked capital.
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No Autocompounding: In the context of Ethereum staking, rewards earned don't auto-compound, especially given its minimum staking requirement of 32 ETH. This characteristic may vary for other blockchain networks.
What is Liquid Staking?
Unlike traditional protocol staking, where your cryptocurrency remains locked for a predetermined period, liquid staking brings a more flexible approach to the table.
When you engage in liquid staking, your assets are deposited into a specific protocol, often through an intermediary platform or service. In return, you receive tokenized versions of your staked assets. These tokens can then be utilized across the DeFi ecosystem.
For instance, let’s assume Bob chooses to stake 1000 ETH through a liquid staking protocol. In return, the protocol will mint 1000 liquid[ETH] tokens equivalent to 1000 ETH. While Bob earns regular staking rewards from his initial 1000 ETH, he also has the liberty to use the liquid[ETH] tokens for a myriad of other financial engagements..
Benefits of Liquid Staking
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Ease of Management: Liquid staking doesn’t require technical expertise, making the staking process straightforward.
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Portfolio Diversification: While earning staking rewards, investors maintain asset liquidity, enabling them to capitalize on market movements and secure a guaranteed APY, thus diversifying their portfolio.
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Crypto-backed Loans: If needed, reshuffling your portfolio without selling any crypto assets becomes possible, allowing for more financial flexibility.
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Quick Access to Funds: Liquid staking often allows faster access to assets, however, Ethereum's unstaking period can vary based on liquid protocol setup and network conditions.
Challenges of Liquid Staking
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Deppegging Risk: The price of the derivative/staked tokens may deviate from the original price, usually due to the lower market price of the new token.
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Network Centralization Risk: Since liquid staking requires using a specific platform, it could disrupt the balance of validator shares in the network, potentially leading to undue control or centralization by powerful validators.
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Smart Contract Risk: The protocols use smart contracts to delegate user funds to validators, and smart contracts can be vulnerable to attacks. It's prudent to trust smart contracts that have been thoroughly tested before deploying funds.
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DeFi Yield Strategies: The unlocked liquid tokens can be channeled into various DeFi strategies like liquidity mining, leveraged staking, lending, covered call options, prediction markets, and more. However, these strategies come with their own set of risks and complexities.
Comparing Liquid and Traditional Staking: Key Differences
The table below provides a clear comparison across various parameters, including interest rate predictability, asset volatility, market fragmentation risk, devaluation risk, and dependency on liquid markets. Through this comparison, stakeholders can gain insights into the dynamics of each staking method, helping them make informed decisions based on their individual goals and risk tolerance.
Understanding the Current Ethereum Staking Landscape
Here's a breakdown of ETH staked by category to showcase who is in charge of staking on Ethereum.
Liquid Staking
Liquid staking is bullying, accounting for about a third of staked ETH. With nearly 10 million ETH staked by around 350 thousand users, it's a go-to for those wanting more liquidity and flexibility. You get liquid tokens that you can use across various DeFi protocols while still contributing to network security. The flip side? It adds extra smart contract layers which could lead to potential points of failure and market dependencies, bringing in some risks.
Centralized Exchanges (CEX) Staking
Centralized Exchanges (CEX) handle about 20% of staked ETH, offering custodial staking. Here, the exchange takes care of the technical side of staking for you. It's a hands-off, hassle-free option, but remember, you're trusting a third party with your assets.
Staking Pools
Staking pools are your collaborative option. Participants pool their assets to meet staking thresholds and share the rewards. It lowers the entry barrier, spreads the risks, and ensures a steady reward distribution. It's a communal way to stake without needing a hefty amount of assets.
Solo Staking
Independent staking is for the tech-savvy who prefers going solo. Here, you stake your assets independently, managing your own nodes and security. It's a bit technical but gives you full control over your staking operations.
Over to You
The comparison between liquid and traditional staking boils down to individual preferences for liquidity and predictability. Traditional staking, especially with the new 0.1+ ETH staking solution, remains a straightforward and reliable choice. It offers stable rewards at the expense of asset liquidity. In contrast, liquid staking provides liquidity through tradable tokens but introduces increased complexity and potential risks from market fluctuations.
While liquid staking exposes stakeholders to interest rate risk and market volatility, traditional staking circumvents market fragmentation and reduces dependency on external liquid markets.
At Evertake, our commitment goes beyond just Ethereum. We genuinely care about your staking journey, striving to provide clarity and transparency in a complex landscape. Our aim is to equip everyone with the knowledge they need to make informed decisions. Ready to begin a smooth staking journey, starting with as little as 0.1 ETH, alongside a trusted partner? Explore our solutions and get started with Everstake today.
