I have been waiting for this moment for so long. The day, I can call myself a senior. The day when a bunch of folks have just entered the market and I know a little more about crypto then they do.
And finally, that day has come. Yay!
So, generally, a lot of people like myself enter the cryptoverse by aping into a shitcoin. Some get rekt, some make money to spark that curiosity.
For those of you who stayed, tactile learning is the best way to get your crypto muscles bussin’.
And if I have learnt anything in the past four odd years of learning, it is, QUESTION EVERYTHING.
I mean, some guy on YouTube asked you to lock your tokens somewhere in return of some extra yield and you followed it like a gospel truth.
So the question I decide to ask today, why liquid stake?
This post assumes a basic understanding of Blockchains and consensus mechanisms. Specially, Proof-of-Stake.
LFG.
Why do People Stake?
Every damn time you talk to someone in crypto, they would be speaking about how it is important to stake your assets.
Unfortunately, most of them say its because of that juicy extra yield you get.
But is that all there is to staking?
What if I told you that there’s no additional yield either.
Shocked? Let me explain.
For understanding this, let us dive deeper into how validators (specifically in Solana) operate.
Inflation:
When a block is produced, a certain amount of SOL is created as a block reward.
The exact amount depends on the current inflation rate.
Inflation started out at 8% and is designed to go down by 15% every epoch-year (The number of epochs in 365 days OR The number of times a distinct 432,000 blocks are created in an year).
It’s adjusted every epoch and will continue to fall until it hits 1.5%, which is the “terminal inflation rate.”
Currently, this is the only way tokens are created in Solana.
But then, you would think holders are getting diluted because of inflation. That’s not true.
Think of it as holders (Non-stakers) paying to the stakers.
Essentially, stakers are basically beating inflation at best. As of October 24, 2023, the real reward rate for Solana staking, adjusted for inflation, is -0.29% per year.
What? Did I just wake you up?
Let’s do that a little more.
Why Stake?
Back to the question.
So if you do not stake, you are really making a loss being a hodler.
And apart from that, it is an imperative activity for a Blockchain to function.
That is infact, the entire purpose of this game. If you want to dig deeper into the correlation between decentralization and staking, read a quickie here.
Why Liquid Staking?
Yes. So now comes the question why should we liquid stake and not just stake.
Again, for the beginners, liquid staking is the process of getting a representative token of your staked assets that can be used across the ecosystem just like the native token.
So I beat the inflation whilst securing the network. What is the point of getting a liquid token if I am just a holder?
Well, you are technically correct. Worst kind of correct.
Let us draw a parallel with traditional finance.
During the Covid, economies crashed. And to kickstart that, governments started printing more money. They do that to pump liquidity in the ecosystem.
Essentially, if I get rid of all the merits for you to save money, you will end up spending it. As a result, economy will boost.
In the same way, if all of us just hold our crypto, the ecosystem will collapse.
After all, the purpose of the money is to exchange hands.
Therefore, liquidity is a must have for blockchains to thrive.
Paper Napkin Math:
According to Dune, 26% of ETH is staked. About 39% of this is done through liquid staking.
On Solana, 67.3% is staked and only 5.1% (of the 67) is done through liquid staking.
There are many possible reasons for this, with DeFi maturity being the most cited.
The reason it’s relevant is that as DeFi begins to mature on Solana, there will be a shift from native staking to liquid staking.
This is good because two of the three biggest liquid staking protocols (Marinade and SolBlaze) actively prioritize decentralization.
In other words, as the ecosystem matures, stake spread should improve and it should reduce the initial friction for beginner validators (provided they have good uptime and decentralization).
Even Persistence, a multi-chain liquid staking player is entering Solana quite soon.
In fact, they recently announced their airdrop in the weirdest possible way.
2 responses to “Why Solana Needs Liquid Staking?”
[…] on Blockchains like Solana where there are no constraints on setting up a validator, liquid staking can be enabled by […]
[…] this section, I am going to highlight these benefits along with the projects in Solana ecosystem that stand to gain big because of […]