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What is Liquid Staking?

Introduction: A simple analogy​

Imagine you have some money in a savings account. You earn interest on it, but you can’t use that money for anything else until you withdraw it. Now, what if there was a way to get a certificate that represents your deposit? You could use that certificate to make purchases or invest elsewhere, all while still earning interest on your original deposit. That’s similar to what liquid staking offers in the world of cryptocurrency.

In this article, we’ll break down the concept of liquid staking, starting with the basics of staking and building up to how it works on Aptos.

What is Staking?​

Before we dive into liquid staking, let’s first understand what staking is.

Aptos is a blockchain that uses a proof-of-stake (PoS) consensus mechanism. In simple terms, this means that the network is secured by people (called validators) who stake their Aptos tokens (APT). Staking involves locking up a certain amount of APT to help validate transactions and maintain the network’s security. In return for staking their tokens, these validators earn rewards—think of it like earning interest on a savings account.

As an APT holder, you can also participate in staking by delegating your tokens to a validator. This allows you to earn a share of the rewards without having to run a validator yourself. However, traditional staking on Aptos comes with some challenges. For one, it requires a significant amount of APT—validators need a minimum of 1 million APT to participate directly, which can be a high barrier for most users. Additionally, once staked, your tokens are locked up for a fixed duration that automatically renews at expiration, meaning you can’t access them during that time. This lockup period limits your flexibility, as you can’t use your APT for other opportunities like trading or DeFi activities. Finally, if you delegate your tokens, you’re reliant on the validator’s performance—rewards depend on their success in proposing and validating transactions, which isn’t always guaranteed.

Why Liquid Staking Matters​

Liquid staking solves the "lock-up problem" of traditional staking by allowing you to:

  • Earn staking rewards on your original tokens
  • Maintain liquidity and flexibility with your assets
  • Participate in DeFi opportunities with your liquid staking tokens
  • Avoid the opportunity cost of having locked assets

For blockchain networks, liquid staking can increase overall network security by encouraging more token holders to participate in staking, as they no longer have to choose between staking rewards and liquidity.

Is Liquid Staking Right for Beginners?​

Liquid staking is actually an excellent entry point for beginners to DeFi for several reasons:

  • Simplicity: The basic concept is straightforward - stake and receive a token that represents your stake
  • Passive income: Earn staking rewards without active management
  • Lower risk: Compared to many DeFi strategies, basic liquid staking has relatively lower risk
  • Flexibility: Start with simple staking and gradually explore more advanced DeFi opportunities

A Quick Example​

Let’s say you have 100 APT tokens. You want to stake them to earn rewards, but you also see an opportunity to provide liquidity on a DEX, which could earn you extra fees.

Without Liquid Staking: You’d have to choose between staking your APT (and locking them up) or using them in the DEX. You can’t do both at the same time. With Liquid Staking: You stake your 100 APT through a liquid staking protocol and receive 100 lstAPT tokens. Now, you can use those lstAPT tokens to provide liquidity on the DEX, earning fees, while your original 100 APT are still staked and earning rewards. This way, you’re maximizing the utility of your assets.

Next Steps​

Now that you understand what liquid staking is, you might want to learn:

Beginner Tip

If you're new to cryptocurrency, make sure you understand the basics of blockchain and staking before diving into liquid staking. Start with small amounts until you're comfortable with the process.