The scaling crisis of the Ethereum blockchain has been a well-documented problem since 2018. However, with the recent introduction of Ethereum 2.0 and its shift to a Proof-of-Stake consensus algorithm, this issue may soon be a thing of the past. In addition to Ethereum 2.0, there are other projects working on solutions to the scalability problem by using different consensus algorithms and sidechains. One such project is Polkadot, which uses a novel staking mechanism called Liquid Staking. In this blog post, I will explore what Liquid Staking is and how it works under a multi-chain ecosystem. I will also discuss the benefits and drawbacks of this solution and whether or not it is a viable option for Ethereum 2.0.

What is Liquid Staking?

The term “Liquid Staking” has been popping up a lot in the crypto-sphere as of late. So, what is Liquid Staking?

In the simplest of terms, Liquid Staking is a way to earn rewards on your cryptocurrency holdings without having to tie up your coins in a staking wallet. With Liquid Staking, you can earn rewards on your held coins by delegating your stake to a validator.

There are many benefits to using a Liquid Staking solution. For one, it allows you to keep your coins in a hot wallet, which is much more convenient than having to move them into a cold wallet for staking purposes. Additionally, it opens up the possibility of earning rewards on multiple chains. And lastly, it’s generally more secure since you’re not entrusting your coins to a third-party platform/service.

At the moment, there are two main platforms offering Liquid Staking solutions: Cosmos and Polkadot. Both have their own native tokens (ATOM and DOT respectively) and their own unique ecosystems.

How Does Liquid Staking Work?

When it comes to staking cryptocurrencies, there are two main types of solutions: centralized and decentralized. Centralized solutions require users to deposit their coins into a pool managed by the service provider. In return, they receive rewards based on the percentage of their stake in the pool. Decentralized solutions, on the other hand, allow users to stake their own coins directly.

Liquid staking is a type of decentralized solution that has emerged in recent years. With liquid staking, users can stake their coins without having to lock them up for a fixed period of time. Instead, they can withdraw their stake at any time without losing any rewards.

Liquid staking works by allowing users to delegate their coins to a validator. The validator then uses these delegated coins to help secure the network and earn rewards. In return, the validator shares a portion of these rewards with the delegators proportionate to their stake.

One advantage of liquid staking is that it allows users to earn rewards even if they don’t have a lot of money to invest upfront. For example, let’s say you want to buy 1 ETH worth of tokens but only have 0.1 ETH available at the moment. With liquid staking, you can still buy those tokens and delegate them to a validator. As long as you continue delegating your tokens, you will still earn rewards even though you don’t have 1 ETH worth of tokens delegated at all times.

Types of Chains that Support Liquid Staking

There are three primary types of chains that support liquid staking: public chains, private chains, and hybrid chains.

Public Chains: Public chains are decentralized and permissionless, meaning anyone can join and participate in the network. Bitcoin and Ethereum are examples of public chains. Because public chains are open to everyone, they tend to be more secure and have a higher degree of decentralization than private or hybrid chains. However, public chains also tend to be slower and more expensive to use than other types of chains.

Private Chains: Private chains are centralized and permissioned, meaning that only certain users are allowed to join and participate in the network. Private chains are often used by businesses or organizations that want to maintain control over their data and transactions. Because private chains are centrally controlled, they can be faster and cheaper to use than public chains. However, private chains tend to be less secure and less decentralized than public chains.

Hybrid Chains: Hybrid chains are a combination of public and private chains. They offer the benefits of both types of chains while also mitigating some of the drawbacks. Hybrid chains typically have a group of authorized users who can join and participate in the network, but they also allow anyone to join as an observer. This allows for a higher degree of security and decentralization than private chains while still being faster and cheaper to use than public chains.

The Risks of Liquid Staking

Liquid staking is the process of delegating one’s cryptocurrency tokens to a validator in order to earn rewards. However, there are several risks associated with liquid staking that must be considered before deciding whether or not to participate in this activity.

First and foremost, it is important to note that when delegating your tokens to a validator, you are trusting them with your funds. There is always the potential for validators to behave maliciously or dishonestly, which could lead to loss of funds. Additionally, even if a validator is honest and well-intentioned, they may still make mistakes that could result in lost funds. As such, it is important to carefully research any validator to that you are considering delegating your tokens in order to ensure that they are reputable and trustworthy.

Another risk to consider is the possibility of technical issues or bugs affecting the functionality of the liquid staking solution that you are using. These sorts of problems could lead to unexpected losses of funds, so it is important to be aware of them before participating in liquid staking. Additionally, the liquid staking landscape is still relatively new and constantly evolving, which means that there may be unforeseen risks that have not been taken into account here. For these reasons, it is generally advisable to only stake a small number of assets in a liquid staking solution until it has been thoroughly tested and vetted by the community at large.