Introduction
A Binance spokesperson highlighted that there are things to be wary of when liquid staking, including smart contract vulnerabilities, slashing risks, and price fluctuations.
Understanding Liquid Staking
Liquid staking is a decentralized finance (DeFi) subsector that allows users to earn yield by staking their tokens without losing their liquidity. It has emerged as the biggest DeFi sector in terms of total value locked (TVL), as mentioned in crypto exchange Binance’s Half-Year Report 2023.
Liquid Staking Overtakes Decentralized Exchanges (DEXs)
According to the report, liquid staking has dethroned decentralized exchanges (DEXs) as the top-ranking DeFi category by TVL as of April 2023.
Staking Mechanism and its Impact on ETH
The staking mechanism played a crucial role before the Ethereum Shanghai upgrade, during which users were unable to freely unstake their Ether (ETH). Liquid staking tokens (LSTs) provided users with liquidity while they continued to earn yield with their staked ETH. The price of ETH ticked down to $1,895 before the upgrade.
Post-Shanghai Growth
On April 13, the Shanghai update went live on the Ethereum mainnet, allowing users to withdraw their staked ETH. However, the Binance report highlighted that liquid staking continued to experience substantial growth even after the upgrade. It became the most common way for users to stake their ETH.
Introduction of LSTfi (LSDfi)
The Binance report also noted the emergence of the term “LSTfi” or sometimes referred to as “LSDfi.” This term combines liquid staking and DeFi, encompassing projects like yield-trading protocols, indexing services, and platforms that allow users to mint stablecoins using LSTs as collateral, all categorized as LSTfi protocols.
Conclusion
Liquid staking has become a significant subsector within the DeFi space, offering users the opportunity to earn yield while maintaining liquidity. However, it is essential for users to be cautious about potential risks such as smart contract vulnerabilities, slashing, and price fluctuations.
References
- Source: Binance Half-Year Report 2023
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