Staking is a fundamental component of any proof-of-stake blockchain’s ecosystem and economic security. Staking is the mechanism that allows peers on the network to participate in the network’s consensus process and earn rewards in return. Traditionally, staking required users to manage their infrastructure, lock up their tokens, and endure long staking and unstaking periods. But liquid staking changed all of that.

The Oasis Network is excited to support builders who are bringing liquid staking to the Oasis ecosystem. In this article, readers will find a comprehensive introduction to liquid staking, an overview of why it matters for Oasis, and a preview of the teams building liquid staking on the Oasis Network.

What Is Liquid Staking?

Liquid staking is a simple concept. Network participants can stake their assets while retaining liquidity to use in applications running on the network, which removes a significant opportunity cost. Unlike traditional staking, where assets tend to be locked for long periods, stakers get a liquid staking token (LST) representative of their staked assets.
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This token acts as a receipt, and it is issued programmatically by the liquid staking protocol. This entire process runs via smart contracts, and the receipt token is typically issued at a 1:1 ratio with the staked asset. Liquid staking tokens are redeemable for the staked tokens minus any associated fees. The token can then be traded, lent, or used with other applications, all while tracking the price of the underlying asset and accruing interest. 

In this way, LSTs unlock dormant capital for further yield generation opportunities, which, as it turns out, is a very in-demand service with tens of billions of dollars held in liquid staking applications. 

What Are The Benefits of Liquid Staking? 

The primary benefit of liquid staking is in the name: liquidity. 

Liquid staking turns capital that would otherwise be stuck inside staking contracts into freely useable and fungible tokens. These staking tokens make it possible to collect network rewards while executing trading strategies and responding quickly to market conditions. The financial flexibility from liquid staking plus dual or multi-earning mechanisms provides a better staking experience for all types of users. 

Liquid staking is also a new and important primitive in the landscape of decentralized finance. Liquid staking can help Web3 realize novel use cases and collaborations for crypto-native assets. LSTs can easily integrate with existing DeFi platforms, tools, and services, which allows them to be leveraged for a wide range of possibilities like stablecoin collateral, fixed-rate yield strategies, and more. 

Liquid Staking Protocols on Oasis 

Liquid staking is an important part of every DeFi ecosystem, and some early steps are being taken to bring this feature to the Oasis ecosystem. For example, earlier this month, the Accumulated Finance team launched their protocol on Sapphire. Other liquid staking projects are in development also, and their launches will be announced in the coming months.

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Risks and Limitations

Liquid staking carries all the risks of both direct and delegated staking. Liquid staking is effectively outsourcing the running of a validator, which can incur some counterparty risk or potential slashing penalties if the validator does anything malicious or is unreliable. 

Liquid staking also carries smart contract risk. Because liquid staking relies on smart contracts, it comes with all the possible downsides associated with bugs or exploits of those contracts. If a vulnerability is discovered, it could lead to losses and the devaluation of the token. Liquid staking users need to research whether the application they use has passed rigorous security audits before depositing funds.

Liquid staking tokens can also fluctuate based on market conditions, and this volatility can create losses during market downturns or liquidity crunches. Sometimes, these value fluctuations can be so extreme as to cause de-pegging events, which means the value of the token deviates and is no longer equivalent to the staked asset.

The Future of Oasis and Liquid Staking

Bringing liquid staking to Oasis adds increased liquidity and capital efficiency to the entire ecosystem while lowering the barrier to direct participation in network security. As a result, the entire Oasis community will enjoy a better onchain experience, which could directly benefit network activity across a multitude of different important metrics. With liquid staking, the future of the Oasis Network is bright. 

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