The Evolution of Crypto Staking: From Traditional to Liquid
Staking, much like the wider crypto industry, has come a long way in a relatively short time period. Indeed, the very term was only popularized in the early 2010s with the creation of the Proof-of-Stake (PoS) consensus mechanism.
Long viewed as one of the best ways for crypto enthusiasts to earn passive rewards, staking has evolved from the early days of PoS, when it involved locking tokens into a blockchain to secure rewards. While it’s still inextricably linked to generating returns, the blossoming of DeFi has led to an expansion of staking’s footprint, and the emergence of diverse activities like liquid staking and restaking.
So, how did we get here?
From Proof-of-Work to Proof-of-Stake
The PoS consensus mechanism was developed as an alternative to Proof-of-Work (PoW), the energy-intensive system favored by Bitcoin. Its objective? To improve the security and economy of decentralized networks, replacing ‘miners’ who solved complex computational puzzles with validators selected based on their token holdings – and willingness to stake them.
The first cryptocurrency to adopt Proof-of-Stake was Peercoin in 2012, though the system was used for minting new coins rather than securing the whole network. Two years later, Ethereum announced plans to transition from PoW to PoS. Although this didn’t actually transpire until 2022, it set the stage for staking to become a cornerstone of the Ethereum ecosystem.
Many more PoS chains came online prior to the arrival of Ethereum 2.0, with some refining the system by favoring derivations like Delegated Proof of Stake (DPoS). Undoubtedly, these maturing networks helped make staking synonymous with rewards, setting the scene for the subsequent DeFi boom.
Summer of Staking
Staking’s coming of age occurred during the DeFi summer of 2020 which mostly occurred on Ethereum. During this time a seemingly endless procession of financial dApps, many offering staking services, came online and propelled TVL beyond $15 billion. Later, with Ethereum’s transition to PoS, the popularity of staking reached fresh heights.
DeFi staking platforms began popping up everywhere, offering users new opportunities to earn rewards not just from securing chains but from providing protocols with token liquidity.
Liquid Staking and Restaking: Solving the Illiquidity Problem
As staking became a DeFi mainstay, innovators started developing solutions to address the primary drawback of staking: namely, that it resulted in staked assets being inaccessible to users for long periods. Their illiquidity meant that stakers were missing out on prime earning opportunities elsewhere in DeFi.
Lido pioneered the concept of liquid staking when it launched in late 2020. Liquid staking protocols like this one and others addressed the illiquidity issue by furnishing users with Liquid Staking Tokens (LSTs) representing their stake. These tokens could, in turn, be used in other DeFi dApps, all while the original stakes kept accruing rewards.
Liquid staking was and remains prominent within Ethereum, as it allows ETH holders to access tradable tokens representing their staked ether. In the Ethereum 2.0 era millions of ETH have been converted into liquid derivatives, which has increased the utility of staked ETH by enabling its use throughout DeFi.
The evolution of staking didn’t stop at liquid staking, though. A more recent innovation, liquid restaking, builds on the concept by allowing users to stake LSTs into EigenLayer’s Actively Validated Services (AVS) to earn additional rewards. By restaking liquid assets, users can amplify their returns, effectively staking their tokens twice – first to secure the network, then to generate additional yield.
The Rise of Dedicated Staking Networks
The emergence of dedicated staking networks like ssv.network has shone a brighter spotlight on staking. SSV leverages Distributed Validator Technology (DVT) to let Ethereum validators split their validator keys into multiple KeyShares. A system that not only improves security but allows multiple operators to jointly run a validator, increasing the accessibility of staking to everyday users and reducing their set-up costs.
By democratizing Ethereum staking, SSV technology gives solo stakers, staking pools, and staking service providers the opportunity to participate in Ethereum’s burgeoning financial playground. Over 1.2 million ETH is currently staked using SSV technology, representing a Total Value Locked (TVL) of $3.3 billion. This level of participation highlights the value liquid staking and restaking can bring to the wider crypto ecosystem.
From There to Here
In the world of blockchain and cryptocurrencies, staking has become analogous to tradfi customers putting their money in a bank to earn interest. Sure, there is a steeper learning curve to contend with – but the point stands.
Moreover, with innovations like liquid staking and restaking giving rise to more opportunities for yield, and slick new protocols and technologies continuing to roll off the production line, staking is going from strength to strength. One wonders where the next innovation will come from.
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