Liquidity Staking: Optimizing Cryptocurrency Asset Strategy

The Classic Problem of Traditional Staking

When participating in staking on Proof of Stake networks, users often face an unpleasant tradeoff: locking up assets to earn rewards, but losing flexibility in usage. Ethereum and other PoS blockchains require you to deposit funds to validate transactions, but during this process, your assets are “frozen” - they cannot be traded, cannot be used as collateral for loans, and cannot participate in other earning opportunities.

Liquid Staking: Liquidity Solution

To overcome this limitation, liquid staking was born as a breakthrough. Instead of letting your assets sit idle during the staking cycle, you can tokenize them. The mechanism works as follows: you send ETH or other PoS tokens into the protocol, and receive back the corresponding liquid staking token (LST). These LSTs not only represent your underlying assets but also accumulate staking rewards over time.

What are the highlights of this approach? You can freely use your LST - trade on the exchange, use it as collateral on DeFi platforms, or even borrow money against it. Meanwhile, the underlying asset continues to earn from staking. This is the “two-way” feature that traditional staking has never been able to achieve.

EigenLayer and the Next Step: Liquid Restaking

But this technology does not stop there. EigenLayer, a decentralized restaking protocol built on Ethereum, has opened up a new world. It acts as an additional layer, connecting Ethereum with other blockchain networks.

Here, the next step is called liquid restaking. You take the LSTs you already have, send them to EigenLayer's smart contract, and receive back liquid restaking tokens (LRT). These tokens generate profit from two sources:

• Initial rewards from staking Ethereum
• Rewards from participating in restaking activities on EigenLayer

The effectiveness is that you are “staking” income - yields are stacked on top of each other.

The Differences You Need to Know

It's easy to confuse liquid staking with liquid restaking, but there is a clear difference between them:

Liquid staking is the first layer - tokenizing staked assets, unlocking liquidity. This is a step to free assets from the “locked” state.

Liquid restaking is the second layer - taking those LSTs to “stake” again on other protocols, opening up additional income streams. It is more complex but also has higher profit potential.

If we compare: liquid staking is like unlocking assets, while liquid restaking is like making those assets “work” in multiple places at the same time.

Looking Towards the Future

Liquid staking is reshaping the way users manage assets within the blockchain ecosystem. With the emergence of EigenLayer and liquid restaking, users no longer have to choose between yield safety and financial flexibility. You can have both, actively participating in staking ecosystems while still maintaining control and liquidity of your assets.

Learn more: What is Staking?