Liquid Staking Explained: How they help YOU

Understanding Proof of Stake (PoS) vs Proof of Work (Pow)

For those who know how how Bitcoin works behind the scenes, you may have come across the term 'proof of work' (PoW) before.

Proof of Work is the backbone of the original method of securing blockchains, it’s a consensus algorithm, in which miners compete to solve a complex mathematical problems. The solutions to these problems are used to both validate transactions and create new blocks.

However PoW (is usually argued to be) very energy intensive, meaning blockchain architects have been dreaming of new ways to secure blockchains for a while.

The most popular alternative for layer 1's has in recent years been 'proof of stake'.

Even Ethereum, BTC's famous second in the tops of crypto markets, recently publicised its switch to proof of stake from the old, GPU intensive 'proof of work' system.

Proof of Stake, at its core, works to dis-incentivise network attacks by requiring would-be attackers to control the majority of tokens on the blockchain, an impossible feat.

To achieve this security, those who want to secure the network by verifying transactions (and be rewarded for doing so) must 'stake' their tokens into a validator. This means, while those tokens are staked, they are essentially 'at work'.

This means token owners cannot do anything with these tokens while they are working to secure the network. Another word for tokens locked into a node, therefore not able to be traded or transferred, isilliquid.

As well as this, investors who wanted network rewards, but did not have technical knowledge to run validators, simply wouldn't.

This is because, with Proof of Stake; if a node runner messes up or tries to do anything naughty - their token collateral is penalized and some tokens are taken. This is known as 'slashing'.

In Come Node Operators

Dedicated node operating services quickly sprang up in order to provide a service for those wanting to receive network rewards, with good technical teams and a low probability of slashing.

These companies continually monitor and optimise nodes on the networks they work with, as well as provide the infrastructure needed for holders who aren't tech savvy enough to receive protocol rewards on their own.

The Liquid Evolution of Staking

This is all well and good, but in such a system, problems still arrive when network participants needed to draw tokens out quickly. They still suffer from the problems inherent in tokens being locked and illiquid.

Often, withdrawing tokens involves directly contacting the third party service one is staking with and waiting for a response, before eventually - often by a manual un-stake and send - receiving your tokens back.

Some nodes require as much as a 6 week lock up period before tokens are available again, too.

Not very web 3.0.

This is a pain point for network participants of all shapes and sizes, even using node running services, unless there happens to be LSDs, orLiquid Staking Derivatives built on top of the network.

Liquid Staking automates this entire process, as well as has a host of other benefits.

Most importantly, it allows one to earn protocol rewards they otherwise would from locking up their tokens, all while still having a token that is now 'liquid', i.e: freely tradeable.

Of course, such tokens still need infrastructure providers behind them who enable liquid staking by running nodes on the network and staking tokens on behalf of users.

Are Liquid Staking Derivatives for you?

Well, operating validators can be complicated.

Those who are highly technical, with the ability to run validators with near zero downtime as well as adequate collateral bases, might still choose to run validators themselves.

However, for most non highly technical network participants, liquid staking is a great option. LSD users get the benefits of running a node with none of the technical hassle of doing so.

As well as being immediately liquid and available for trade, LSDs open up a whole host of other possibilities within defi in general. LSDs allow people to get very creative, some choose to get additional rewards from liquidity pooling on top of the protocol rewards they're currently getting from just holding. Some lend their LSDs as collateral into other protocols, too.

In essence, LSDs can enable savvy network participants to benefit from both staking incentives as well as other defi incentives, all at the same time. LSDs have had a proliferation in other ecosystems as well.

Over 42% of Ethereum is now staked through LSDs, plus, there's $1.8 billion in the stETH-ETH Curve pool as of writing.

stETH has significant deposits in Aave and other lending protocols where users are 'loop borrowing' for leveraged rewards

(Okay now we are getting pretty degen. Do at your own risk. NFA. we're just telling you because it's cool, etc).

The stETH/ETH price is currently at .997 ETH per stETH. This means you could sell your stETH for ETH now and receive 99.7% of the eth back. This is remarkable since staked ETH anywhere else can't even be unstaked until the Shanghai upgrade - which has only just become a reality.

Whats with the name? Derivative!?

Although these types of tokens are commonly known as 'Liquid Staking Derivatives,' we at Thunderhead like to call them 'Liquid Staking Representative Tokens.' LSRTs are not derivatives in the traditional sense - as those come with a connotation of speculation and leverage. In reality, LSRTs are merely transparent 1:1 representations of existing tokens that are staked in validators and earning protocol rewards. Simple and clean. Full transparency and no complications.

How Do LSRTs Benefit Nascent Ecosystems?

Most application specific blockchains require a large collateral base in order to build an operator set capable to carrying out the network's intended purpose. LSRTs grow the network's total stake by offering a super simple onboarding route for prospective stakers that diminishes illiquidity, offers high performance, and supports the network's end goals.

What LSRTs should you trust?

At Thunderhead, we like to build LSRTs for nascent ecosystems. We will be announcing a new one on July 7th. We're thunderifically excited for it, and you should be too.

Our goal is to make it as easy as possible for holders to access the infrastructure that supports their network. We have a wealth of experience operating complex blockchain infrastructure. Let us handle the hard parts for you.

Stay tuned - you're going to like it!

⚡ The Thunderhead Team ⚡

P.S. To learn more about our previous work, head over to thunderhead.xyz- and for the latest news, subscribe to this blog for announcements of the ecosystems we are working with. If you are a nascent ecosystem looking to reach its full potential, contact us at addison@thunderhead.xyz.