Where Liquid Staking Meets Tokenization

The crypto industry is changing rapidly, and liquid staking stands at the forefront of this transformation.

AccessTimeIconSep 29, 2023 at 3:00 p.m. UTC

Liquid staking has the potential to be the building blocks that incorporate established financial norms into crypto that mainstream audiences actually trust. This is because staking resembles traditional financial (TradFi) instruments they're already familiar with, like bonds, in terms of yield opportunities and risk profile.

Liquid staking will be a catalyst to the broader mainstream adoption and market stability, which remain key objectives for the crypto ecosystem.

Danny Chong is a co-founder of Tranchess.

The power of familiarity

To understand the significance of liquid staking as a familiar comfort blanket for non-crypto-natives, it’s important to understand how it works. Liquid staking refers to the process of locking up cryptocurrency assets to support blockchain network operation while offering a level of stability and familiarity similar to conventional financial instruments. It can be seen as a more advanced form of traditional staking where users can use their locked funds for other on-chain activities while still earning rewards from their original deposits.

In the financial landscape, both liquid staking tokens and government bonds in traditional finance bear the similarity in that they serve as investment vehicles that offer a form of yield or interest over time. In the case of liquid staking tokens, users earn staking rewards, while government bonds offer periodic interest payments. Furthermore, both liquid staking tokens and certain types of government bonds can be readily traded in secondary markets, providing liquidity to investors.

Cryptocurrency investments carry high-risk profiles, which have deterred many investors from entering the space. Liquid staking mirrors government bonds in the sense that both of these instruments are often considered lower risk compared to other investment options in their respective markets. This is particularly important as it makes liquid staking a compelling alternative for risk-averse investors seeking more stability. Therefore, the ability of liquid staking to offer a risk profile that is familiar to a low-risk traditional investment instrument is a noteworthy advantage.

By merging the benefits of staking with the familiarity of traditional finance, liquid staking appeals to mainstream investors and a broader audience, reducing barriers to entry and encouraging wider adoption.

Unlocking the potential of liquid staking

Liquid staking isn't just about staking assets and earning rewards. It represents an opportunity in the cryptocurrency landscape to unlock the potential of enhancing the overall financial ecosystem.

Yield from liquid staking has the potential to form the base of structured products in the coming future due to its stable reward system. Compared to the price volatility of underlying cryptocurrencies, liquid staking rewards are relatively stable and predictable, making them a reliable source of cash flow to create structured products. For example, a financial institution may develop a yield-enhanced product that offers investors a higher yield by combining staking rewards with other income-generating strategies.

Likewise, financial derivatives can also be structured based on the expected yield from staking. These derivatives may allow investors to speculate on future staking rewards or to use the expected yield to purchase yield-enhancing structured products. While tokenization is an integral aspect of liquid staking, it isn't the sole focus of its innovation.

With liquid staking, "staking deposits" become a digital token that users can trade or sell. This means users have more control over how they use staked assets, like selling them if they need liquidity or swapping them for other digital assets. This flexibility and predictability make it easier to manage assets and make investments.

With improved transparency, reduced counterparty risk and decentralized control, liquid staking unlocks new possibilities for yield generation and empowers financial users.

The path towards mainstream trust and adoption

Liquid staking's promise lies in its ability to mimic the financial instruments that mainstream audiences are comfortable with, fostering wider adoption and reducing barriers to entry. This will introduce an influx of new participants that will fuel further expansion and diversification within the crypto market

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Danny Chong

Danny Chong is the co-founder of Tranchess, a decentralized yield-enhancing asset tracker.