DeFi 2.0* brings Liquid Staking, a flexible & collateralizable investment

Audience

This series of articles is for the 95% of the population who have no precise idea of what Blockchain**, Cryptocurrency, DeFi* and CeFi are. They just know it is very risky!

Please note that this article is NOT an investment advice and its whole purchase is only to demystify complex cryptocurrency services.

Introduction

This article is about Liquid Staking, a new investment tool being developed under what we call DeFi 2.0 framework, enabling people keeping cryptocurrencies in their wallet (not the leather one) to generate passive income.

Three definitions before we start:

*** Decentralized: There is no third party like bank, broker or regulator, taking control of a unique system, because this system is maintained and secured by millions of users around the world. Therefore, there is no "one party" deciding who should be accepted or denied access to these services.

** Blockchain:  To make it simple, it is an unforgeable decentralized digital ledger, like an accounting book that would auto-correct itself if you are trying to make any fraudulous amendment in it.

* DeFi:  Decentralized Finance within the public blockchain space. This is a set of Financial Services available to people using cryptocurrencies.

Liquid Staking

For everyone’s understanding, “Staking” as putting your money in a fixed deposit account aka FD with an unregulated bank. It is supposed to be safe, but anything can happen, and you are not in control. In exchange for holding your money for a certain duration, you are getting interest.

To really appreciate what Liquid Staking is about, one should have experienced (and this was a bad one) staking DOTs on Polkadot Network and live through the 28 days cool down period. Even banks are faster to unlock fix deposit accounts!

Non Liquid Staking is ideal for investors who are 100% sure they won’t need to access their assets in a near future and if they need to access it, it will never be urgent.

Then try staking on Kraken. Staking / Unstaking are almost real time and for similar rewards (interest rate).

Would Centralized Finance win at this game?

The only fact is at this moment, DeFi 2.0 took the lead with Liquid Staking, but the race isn't over.

While Centralized Exchanges provide to ability to unstake without cool down period, Liquid Staking goes one step further. It gives the investor a synthetic token (a proof of ownership) in exchange for the staked asset.

To understand what is really happening here, let’s take a traditional bank loan example.

If you walk in your bank and ask for a loan of $500,000, your banker will ask you for collaterals. Real Estate can be used as collaterals, as well as investments, like stocks and bonds. For businesses equipment, inventory and invoices could also be used to secure your loan.

Back to liquid staking...

If you stake your asset in an exchange, it is unusable and lost to the rest of the world until you unstake it (the duration of your simili fixed deposit).

With Liquid Staking, for 1 ETH staked, you receive 1 synthetic ETH. Let’s call it stETH. While the ETH is locked, you can still use the stETH as collateral for other DeFi services like Crypto-Backed Loans or Credit Card payments, etc.

Imagine yourself staking 1 ETH, and take a Bitcoin loan with your stETH as collaterals to stake your Bitcoin and get revenue from it!

Before to proceed with the above strategy, you better read about the risks involved in Staking, Crypto-backed loans and read more about Yield Farming.

Conclusion

With DeFi 2.0, we start having a complete Financial Eco-System opening the cryptocurrency world to more people for practical use. It is much more buying a useless NFT; it is about using cryptos on a daily basis to receive your salary, invest and pay for your groceries.