Liquid Staking vs Native Staking: Analysis, Comparison & More
As the cryptocurrency industry develops, so does its branch, such as staking. After the first variation appeared in the form of native staking, new versions of it are being constantly developed, either solving the inconveniences of native staking or creating their own features. One of the new versions of native staking that solves its disadvantage is liquid staking. Only one question remains. Is it really better than traditional staking? In this article, we will solve this question and compare native staking vs liquid staking.
Understanding Liquid Staking vs Native Staking
The principle of staking in cryptocurrencies can be compared to the concept of yield in traditional finance (TradFi). A popular form of yield is when people invest money in a bank savings account to earn interest on their investments. Bonds and company shares are also examples of traditional financial assets.
Staking is steadily gaining popularity, attracting new investors. The difference between staking and a bank deposit is that users' invested finances are significantly involved in ensuring the network security of blockchain projects. Meanwhile, banks lend funds from deposits to other users. Of course, as with deposits, investors are rewarded for this important contribution.
On the investor's side, the process takes place in two steps.
- The investor stakes his coins, blocking them in a wallet that will be used to verify transactions.
- The second step is to receive a reward in the form of additional coins.
It is a simple mechanism that may have more steps depending on the type of staking, but these two remain the same.
From the perspective of network security, the process of storing a certain amount of cryptocurrency in a wallet plays a central role in maintaining the integrity, availability, and reliability of the blockchain network. Thus, staking is vital to the functionality of the system.
What is Native Staking?
The process of native staking is in many ways similar to the process of staking in cryptocurrencies, which we described above, as it is the basis of staking, but we offer to consider it in more detail.
In general, staking is a tool that allows users to potentially receive rewards for their cryptocurrency assets. These assets, called tokens, are blocked in the original blockchain network to support its operations, verify transactions, and most importantly, ensure network security.
The main requirement of native staking is the blocking of investor assets. As a result of this blocking, they will not have access to their invested tokens or the ability to use them. This blocks liquidity until the user receives the reward or cancels the staking.
How Does Native Staking Work?
Comparing native staking to liquid staking, the difference between traditional staking is that it is possible only in PoS (Proof-of-Stake) chains. Each of the PoS chains has its own rules; examples of such chains are Ethereum, BNB chain, and others. There are two ways of native staking that a user can benefit from.
1. Creating a validator node.
Creating a validator node is a difficult method that requires technical skills and significant assets, but the reward will be correspondingly higher. Validator nodes are needed to enable node operators to validate transaction blocks. The main requirements for creating a validator node are:
- Sufficient technical skills
- Good hardware requirements
- Uninterrupted internet connection
- Significant funds (32 ETH to start an Ethereum node and 10,000 BNB to start a BNB node)
2. Delegating to a validator node.
A much simpler option for staking is to delegate to a validator node. This method does not have such high requirements. You don't need to have significant technical skills, good hardware, and a considerable minimum amount to get started, you just delegate your finances.
When you delegate your finances to a validator node, you provide them to a third-party validator who will use them to verify transactions in a particular chain. The reward for this type of staking will be lower, as you will not own the node, but will only receive a percentage from the process that will take place in the node, which will match the amount of your investment.
Benefits and Risks of Native Staking
Native staking is the first developed variant of staking, which is why it naturally has its drawbacks. All subsequent developed staking options are designed to solve these shortcomings and limitations, but these solutions often leave them without the benefits of native staking.
Benefits of Native Staking
The main benefits of traditional staking are:
- High rewards
Traditional staking can bring higher rewards because there is no need to pay for the protocol or involve intermediaries. Currently, such a platform as Crypto.com offers more than 16% of the staking reward.
- Simplicity and user-friendliness
Native staking does not have various process complications as in other staking methods, therefore, it is usually easier to understand and execute, which makes it more suitable for beginners.
- Network support
Staking is an integral part of the security and decentralization of the blockchain network.
Risks of Native Staking
Now let's move on to the risks and disadvantages of staking.
- Lack of liquidity
The main procedure of staking is the blocking of assets for a certain period. Different versions of staking solve this issue, but in the original one, they are blocked, making them unavailable for use.
- Potential loss of profit
With the lack of availability, users lose the opportunity to use their assets for other investments or in DeFi applications while the staking is in progress.
- Inflexibility
After depositing their tokens, users cannot change the staking protocol to another one or cancel their staking before the end of the blocking period.
- Slashing
If the validator fails to confirm the transaction, slashing occurs. When slashing occurs, users lose their reward.
- Significant amount of assets
If you want to stake directly by creating a validator node, you need to have a significant amount of tokens to create your own.
- Required hardware
The same direct staking process in which you launch a validator node requires advanced hardware, uninterrupted power supply, and internet.
- Selecting a validator
You must choose a validator yourself. The problem with choosing a validator is that it might be fraudulent, and you might lose not only your reward but your finances altogether.
- Non-compounding
Your rewards for native staking will not be compounded and summarized automatically.
Native Staking Platforms
There are many platforms in the cryptocurrency market that perform not only traditional staking but also different types of staking in general. Some may provide several types in one platform, while others focus only on improving a particular type. We have selected some native staking-only platforms for you, which you can also find on our website:
What is Liquid Staking?
Liquid staking is a type of staking that emerged as a response to traditional one, solving its main drawback, the lack of liquidity. It appeared in 2020 as a new innovative approach. Thanks to protocols of this kind of staking, you not only receive a reward for your investment but also receive it’s tokens in exchange for the invested funds. These tokens, or LSTs, allow you to use them for trading, lending, or investing in DeFi applications.
A perfect example of a platform that provides liquid staking is Ethereum, which allows users to invest their ETH, giving them stETH in return.
How Does Liquid Staking Work?
The process of liquid staking vs. native staking may be hard for beginners, but we would say that it is rather more complex and contains more steps due to the greater opportunities. For native staking, we gave an example of two possible staking ways, but here we will give one basic step-by-step process.
1. Deposit and exchange of coins.
The user deposits assets in the form of tokens into the liquid staking protocol. After depositing the funds, the protocol mints the corresponding LSTs in an equal ratio to the deposited assets.
2. Staking of the deposited assets in validators.
While the minting process is underway, the deposited assets are already considered staked on behalf of the user and distributed among validators to reduce risks.
3. Reward receiving and accumulation.
The reward for liquid staking is paid in a slightly different way than in traditional staking. It may be automatically collected, but it is reflected in the LST value.
Benefits and Risks of Liquid Staking
The development of staking and the creation of its new versions are structured to fix its own disadvantages. In the case of staking vs. liquid staking, the latter solves the problem of the former, but this solution requires new processes that create new risks. Let's analyze the benefits and its particular risks.
Benefits of Liquid Staking
Let's now start with the specific benefits.
- Available liquidity
Liquid staking does not block your assets by providing you with LST. It preserves the underlying value and availability of your initial tokens, allowing their use in various DeFi protocols.
- Multiple DeFi protocols
LST can integrate with a wide range of DeFi ecosystem protocols, such as lending pools and prediction markets. Thanks to these features, users have access to many operations, including yield farming and lending.
- Better rewards for staking
Thanks to the unlocked availability, users of liquid staking platforms receive more than just the staking reward. LSTs provide additional opportunities for profitability thanks to DeFi protocols.
- Lower investment requirements
Liquid staking does not require significant investments from users and allows them to participate with fewer tokens.
- Diversification
Users get a more balanced and diversified crypto portfolio.
Risks of Liquid Staking
Although liquid staking is considered an upgrade and an innovative solution, it still carries risks. Some of these risks occur precisely because of its main advantage, unlocked liquidity. It also involves slightly higher security risks, which you can find out below.
- Slashing
Involvement in liquid staking consists of delegating the work of the validator node to intermediaries. Intermediaries can be unreliable or, even worse, fraudulent, which can lead to a complete loss of funds.
- Increased volatility of LST
The only thing that liquid staking tokens are not equal to staked tokens is increased volatility. It arises due to the lower trading volumes of LST. This implies an increased dependence on liquidity crisis and market distress, which leads to the risk of LST value falling below the price of the underlying token.
- Unreliable validators
When choosing a platform, you need to carefully analyze its validators. Poorly performing or fraudulent validators may receive penalties from the network, which can negatively affect the total staking reward.
Liquid Staking Platforms
Among the liquid staking platforms that offer unique features, support different blockchain networks, and provide different LSTs, we have collected the most popular ones for you:
Lido
Lido is the largest platform among others. It provides the most popular and profitable cryptocurrencies. Among them are Ethereum, Solana, Polygon, and many others, to which corresponding LSTs are also provided.
Rocket Pool
Rocket Pool is exactly the liquid staking platform that users who are most interested in Ethereum need. The platform focuses on it and is also known for its decentralized approach and community-driven model.
Ankr
With Ankr, you will receive the most highly liquid staking tokens with significant value. The platform mainly supports Ethereum, Avalanche, and Binance Smart Chain blockchains.
Why Compare Liquid vs. Native Staking?
Comparing liquid staking vs. native staking is important not only in theory but also in practice. Before choosing a type of staking, it is important for blockchain enthusiasts and investors to find out which type is best for them.
Staking mechanisms are becoming increasingly popular among blockchain networks. Therefore, having an understanding of these methods now will significantly affect the performance of your crypto portfolio. Regardless of the user experience, understanding the key differences between staking types will help you maximize profits and avoid risks.
Native Staking vs Liquid Staking: Final Comparison
Now that we have deeply explored each type of staking separately, let's move on to a thorough comparison. Having studied all their features, we have collected the key differences and demonstrated them to you below.
| Feature | Liquid Staking | Native Staking |
| Liquidity | Derivative tokens, i.e., LSTs, such as stETH, stSOL, stkATOM, and others, provide liquidity. It allows users to continue to receive rewards while holding the tradeable token. | Lack of liquidity. Users' assets are locked in the protocol. Different blockchains offer different lock-in periods during which funds remain illiquid. |
| Accessibility | Low requirements for entry due to no need to run a validator or deposit a significant fixed amount. Most protocols such as Lido allow you to deposit any amount of ETH through a simple deposit in a smart contract. | High requirements in case of launching a native validator, requiring significant investments and technical customization. However, there is another way in which users should delegate authority through wallets or exchanges. |
| Potential profit | More opportunities to profit with availability. The user receives the same reward for staking the network, excluding protocol fees. However, users have the opportunity to earn additional income through LST. | Receive full revenue from staking, excluding the validator's fee. Native stakeholders (independent or delegated) receive the entire consensus reward, with no additional protocol fees. |
| Slashing | The invested funds in the blockchain remain vulnerable to slashing. If the validators' work is improper, there is a risk of losing up to 100% of the invested funds. LSD providers mitigate this risk by distributing a share among many validators and keeping the insurance fund from commissions. | The risk of receiving direct slashing. Running a validator or delegation exposes you to network penalties for errors. There is no special insurance, meaning that all losses are covered by stakeholders. |
| Flexibility | A staking exit process is still required for withdrawals, but LSTs are highly flexible and can be used and transferred immediately. Some new mechanisms can completely eliminate the wait for unlocking. | Limited flexibility. Withdrawals are made in accordance with the rules of a particular chain. Deposited tokens cannot be used as collateral or traded until they are unlocked. |
| Decentralization & security | Lowering barriers of entry can increase the overall stake, which contributes to higher security, but large liquid pools can centralize control. Liquid staking adds risk at the smart contract level in addition to PoS chain security. | Depends on the distribution of validators. Many independent validators maximize decentralization. However, if staking is dominated by a few organizations, it can centralize control, which affects security. Native staking has no additional protocol layer. |
| Integration with DeFi & protocols | High level of integration. LSTs are widely used in DeFi. For example, stETH is used in Curve, Aave, Yearn, Sushi, Maker, etc. This allows staking to be used as collateral, liquidity provision, and yield farming using staking assets. | Lack of integration. Blocked stakes are not used in DeFi. To participate, you need to convert the staking to liquid form or use a centralized product. Native staking alone does not provide DeFi compatibility. |
Liquid Staking vs. Native Staking: Which to Choose?
Each of the stacking options is good in its own way, and although liquid stacking is superior to native stacking, it is also preferred by many investors. Choosing the right option depends on your investment goals, the scale of your investment, and your risk perception.
If you want to create your own validator node and have all the necessary significant resources, you will receive a much higher reward and can avoid risks because it will all depend on you. This is the opportunity provided by native staking.
If you don't have a lot of resources and are a beginner in this field, liquid staking will be a good choice for you. Thanks to decentralized protocols, the risks are lower than with native staking.
If you want to dive into the staking process and not just provide your finances, liquid staking will be a good choice for you because you will not only receive rewards but also increase your profit due to liquidity.
Conclusion
Although we have noted that native staking is still essential for some approaches, liquid staking is a promising innovation in the blockchain industry. It provides such an important opportunity as liquidity. The interest in it is still growing, with more and more projects implementing it, which increases its efficiency and security.
If you have already decided which staking to invest in, we offer you TheCoinEarn as an important essential tool for the analytics of either staking or coins in general.
