Liquid staking has the potential to be the building blocks that incorporate established financial norms into crypto that mainstream audiences trust, leading to a transformative shift in the digital currency industry. Staking resembles traditional financial instruments they're familiar with, like bonds, in terms of yield opportunities and risk profile.
To understand the necessity of liquid staking as a dependable comfort blanket for non-crypto-natives, it's crucial to understand how it works. Liquid staking involves unlocking cryptocurrency assets to support blockchain network operations while offering a level of stability and familiarity similar to conventional financial instruments. It's 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.
liquid staking tokens and government bonds in traditional finance are similar in that they serve as investment vehicles that offer a form of yield or interest over time. Users receive staking rewards for liquid staking tokens, while government bonds offer periodic interest payments. Liquid staking tokens and certain types of government bonds can be easily traded in secondary markets, providing investors with liquidity.
Cryptocurrency investments have high-risk profiles, which have deterred many investors from entering the space. Liquid staking mirrors government bonds in the sense that both instruments are considered less risk compared to other investments in their respective markets. This is particularly important as liquid staking makes it a persuasive alternative for risk-averse investors seeking more stability. The ability to offer a risk profile that is familiar to a low-risk traditional investment instrument is a significant advantage of liquid staking.
The stable reward system of liquid staking is likely to lead to the creation of structured products in the future due to its Yield from liquid staking. Despite the price volatility of the underlying digital currencies, liquid staking rewards are relatively stable and predictable, providing a reliable source of cash flow for creating structured products. A financial institution may create a yield-enhanced product that provides investors with a higher yield by combining staking rewards with other income-generating strategies.
Financial derivatives can also be modeled based on the expected yield from staking. Investors may speculate on future staking benefits or use the expected yield to purchase yield-enhancing structured products. While tokenization is a crucial element of liquid staking, it is not the sole focus of its innovation.
With liquid staking, staking deposits become a digital token that users can trade or sell. Users have greater control over how they use their staked assets, including selling them if they need liquidity or swapping them for other digital assets. The flexibility and predictability of assets make it easier to manage assets and make investments.
Liquid staking's promise is that it can mimic the financial tools that mainstream audiences prefer, fostering more acceptance and reducing barriers to entry. The expansion and diversification of the cryptocurrency market will be driven by thisinflux of new participants, resulting in further expansion and diversification.