Cryptocurrency staking has emerged as a fascinating method to grow passive income from crypto holdings, but it comes with a limitation. Traditional staking locks your funds and liquidity for a specific period, making your crypto assets inaccessible for any trading or transaction.
The solution? Liquid Staking.
Liquid staking is a new and innovative concept that overcomes this limitation and revolutionizes the process of staking by providing more flexibility to stakeholders. It is an attractive way to grow earnings, especially in developing economies like India, where traditional financial instruments offer low returns and are largely accessed by high-income groups.
So, what is liquid staking in India, and how does it benefit stakeholders? Keep reading as we delve into the core concept, how it works, and its benefits.
Understanding Staking
New to staking? Here is an easy explanation:
Staking is quite similar to traditional bank investments in India, like a fixed deposit or a savings account. When you deposit your money for a certain period, the bank uses that money for various financial investments. In return, the bank incentivizes you with interest.
Similarly, in crypto staking, your funds are bonded for a specific time (lock-up period). The blockchain network uses this fund to validate transactions and secure the network. Stakeholders are incentivized with staking rewards for services rendered.
Blockchain networks like Ethereum (ETH), TRON (TRX), Cardano (CAD), and Solana (SOL) are based on the Proof-of-Stake (PoS) consensus mechanism that offer staking services.
How does staking work?
In staking, validators are chosen by the amount of their crypto holdings they are willing to stake as collateral and the duration. The longer the duration and the more tokens you stake, the greater your chances of being selected as a validator. After successful completion of the validation process, the validator earns staking rewards.
There are mainly 3 types of staking:
- Solo staking: You run the node and have complete control over the funds and the staking process. This requires comprehensive technical knowledge.
- Delegated Proof-of-Stake (DPoS): You delegate your staking power to a trusted validator who handles the staking process on your behalf. You do not have complete control over your staked funds.
- Staking pools: It pools the funds from different stakeholders to complete the staking process. The entry barrier is low, and rewards are distributed among stakeholders.
What is Liquid Staking?
Liquid staking is a game-changer that has completely transformed the process of conventional staking. It has introduced strategies that enable you to stake and earn rewards without losing liquidity or locking your assets.
Traditionally, when you stake your assets, they become inaccessible until the lock-up period is complete. In liquid staking, you can use the crypto assets for trading, other decentralized applications (dApps), or lending.
How does liquid staking work?
A common approach in liquid staking is issuing LSTs (Liquid Staking Tokens). LSTs represent your staked assets and are generated during the staking process, while your original crypto holdings remain locked.
The liquidity staking protocol continues to generate staking rewards. At the same time, you get access to LSTs representing staked assets that can be used for digital transactions or trading.
What is a liquid staking protocol?
A liquid staking protocol is a platform that performs the liquid staking process on your behalf in exchange for a small protocol fee. You receive tradable tokens or LSTs. Each platform has a different incentive structure. The fees can vary between 5-15%, and are usually deducted from the staking reward. The protocol allows you to unstake or redeem LSTs for the original crypto asset.
Step-by-step process:
- Deposit funds: You deposit the crypto assets you want to stake in the liquid staking protocol.
- Minting process: The liquid staking protocol mints an equal amount of LSTs in a 1:1 ratio for the staked assets. For example, if you are staking ETH (Ethereum), it will issue stETH tokens.
- Liquid staking: The protocol stakes the tokens on your behalf. The protocol selects vetted validators who validate blocks.
- Reward distribution: Smart contracts track and distribute rewards. The rewards are calculated based on the staked amount minus the liquid staking platform charges and validator fees.
- LST utilization: LSTs can be freely accessed and used for various activities like lending, trading, etc.
- Redeem LSTs: You can redeem your LSTs to retrieve the underlying original assets, like stETH for ETH, and withdraw them along with staking rewards.
Liquid staking interface of the RocketPool staking platform:
Image Source: RocketPool
How to Calculate Staking Rewards?
Staking reward is the earnings generated after completion of the staking process.
The staking rewards depend on factors like:
- Protocol specifics: The rewards depend on the platform fees, staking rates, etc.
- Staking length: The duration you hold and stake your crypto assets influences the rewards. Staking for a few months or even a year allows the rewards to accumulate and grow significantly than if you decide to withdraw them within a week.
Here is a simple formula to calculate your staking rewards:
Determine the staking rate. Multiply the total amount staked by the staking rate. For example, if the staking rate is 10% and you have invested 100 tokens, then the staking reward is 10 tokens. Remember, the actual reward is calculated after deducting the protocol and validator fees.
If you find the process of calculating rewards challenging, several online applications like The Staking Calculator, Bison, or Datawallet provide staking calculators that can be helpful. Digital wallets like Trust Wallet or Gem Wallet also have an in-built staking calculator feature.
Also Read: Lazy to Trade? Earn Passive Crypto Income with these 5 Proven Ways
Image Source: Gem Wallet
Liquid Staking Vs. Traditional Staking
Liquidity
Traditional staking: The assets are locked for a specific time and cannot be accessed. This also locks the liquidity.
Liquid staking: It offers immediate liquidity through LSTs. While the original crypto assets are locked and staked, users can carry out crypto-related activities using LSTs.
Rewards
Traditional staking: Rewards are fixed depending on the staking rate and staking period.
Liquid staking: Besides staking rewards, you can earn extra by utilizing LSTs for other DeFi activities.
Technicalities
Traditional staking: It is simple and does not require technical expertise. You can solo stake or delegate the validating power to a trusted validator who can perform the staking process on your behalf.
Liquid staking: It is a bit more complex, and you must know how to use LSTs on different DeFi platforms to optimize crypto gains.
Flexibility
Traditional staking: It has limitations as the staked assets are bound by a specific lockup period. Funds can be accessed only after the lockup period ends.
Liquid staking: More flexible, as you have some control over your assets. Even though the original assets are being locked and staked, you can always use the LSTs to trade or carry out other crypto activities and multiply crypto earnings.
Risks
Traditional staking: Low risk, as you can directly participate in the staking process and have control over your funds.
Liquid staking: Involves counterparty risks where protocol platforms carry out the staking process.
Comparison Chart: Liquid Staking Vs. Traditional Staking
How to do Liquid Staking in India?
Though the crypto regulatory structure in India is still evolving, some leading Indian and global staking platforms allow liquid staking.
Steps:
- Choose a staking platform: There are several platforms like Rocket Pool, Marinade Finance, Lido, Jito, or centralized exchanges like Binance that offer staking services.
- Buy crypto: Buy crypto from reputed Indian exchanges like CoinDCX, WazirX, CoinSwitch, or Mudrex through a trusted wallet like MetaMask or Trust Wallet.
- Connect wallet: Link your compatible wallet with the liquid staking platform like Rocket Pool or Lido to start staking.
- Stake tokens: Choose the amount you want to stake. The protocol will transform the staked crypto to LSTs.
- Utilize LSTs: You may utilize the LSTs on other crypto activities like trading, buying, selling, or in DeFi applications.
- Earn rewards: You will continue to earn staking rewards that will reflect on the value of the LSTs.
- Unstake and withdraw: You may choose to unstake and withdraw the staked assets at any time. The LSTs will be converted into the original cryptocurrency and returned to your wallet address along with the staking rewards.
Are there any Tax Implications for Liquid Staking in India?
Yes, in India, liquid staking rewards are considered income and taxable.
The Reserve Bank of India has classified cryptocurrency under Virtual Digital Assets (VDAs).
Taxation works in two ways:
- Staking rewards: All staking rewards are considered as income, irrespective of their size, and are taxable at fair market value (FMV). The taxation is applied when you gain access to your rewards and at the current income tax slab rate.
- Capital gains/losses: An additional tax is levied on the capital gains or losses generated from selling or trading the staked rewards.
How can Liquid Staking in India Boost Your Passive Income?
- Minimum deposits: In India, crypto staking is more accessible than investing in traditional banks, as it requires minimal deposits. You do not need a hefty capital to invest in liquid staking.
- Global accessibility: Many people in India still have no access to traditional banking services. Since crypto liquid staking is largely unregulated, it removes the entry barrier. You do not need a bank account for staking.
- Higher yields: The yields are much higher. It offers a steady source of passive income without day-to-day asset monitoring and active trading.
- Technical expertise: Anyone can participate in liquid staking. It does not require high technical expertise, and is especially beneficial for people new to digital asset investments.
- Flexibility: Liquid staking gives flexibility as there is no fixed lock-up period. Stakeholders can unstake and withdraw funds at any time. The LSTs can be utilized in other crypto activities and earn potential gains.
What are the Risks of Liquid Staking?
- Slashing: PoS networks penalize validators for technical glitches or malicious behaviour. This may diminish the staking rewards.
- Smart contract risks: Liquid staking is powered by smart contracts. Any vulnerability, bugs, or malicious attacks can compromise smart contracts and lead to fund loss.
- Market volatility: The LST value is subject to price fluctuations and economic downturns. This can impact the staking rewards.
- Counterparty vulnerabilities: Liquidity staking protocols that work with third-party validators can pose risks if they fail to perform their duties properly.
Final Thoughts
As the digital asset market is rapidly evolving, liquid staking plays a pivotal role in reshaping crypto investments, attracting new investors and crypto enthusiasts into the industry.
Liquid staking in India is still at its nascent stage and broadly unregulated. As responsible investors, we must stay updated, take precautions to mitigate risks, and optimize our crypto earnings.
Taniya is a Content Writer with over 6 years of experience in the industry, specializing in Web3, crypto, Blockchain, Tokenization, and Decentralized Finance. She is passionate about creating compelling and well-researched narratives, navigating readers through the emerging trends and dynamic world of Web3 and Decentralized Finance.
