Hi PancakeSwap Community!
Liquid Staking has been the talk of the DeFi world in 2023 as a new and innovative way to earn rewards from staking while maintaining the liquidity of your assets. This in-depth guide is designed for crypto enthusiasts who are familiar with the basics of cryptocurrencies but are still exploring the realm of staking. We'll dive deep into the world of liquid staking, touching upon its fundamentals, benefits, and the best ways to maximize your returns. We are excited to introduce and guide users through this new and rewarding staking method now available on PancakeSwap for Wrapped Beacon Ethereum (WBETH) on both Ethereum and BNB Chain.
What is Staking? Securing the Network and Earning Rewards
To fully appreciate the advantages of liquid staking, it is essential to first understand the concept of staking itself. Analogous to the traditional concept of a yield-bearing savings account, staking is a process where users lock up their crypto assets in a wallet to secure and support the operations of a blockchain network while earning staking rewards. By staking their tokens, users help maintain the network's security, validate transactions, and, in some cases, even propose new blocks. In return, they receive rewards, which can be seen as a form of interest or dividend. With this, blockchains can move away from proof-of-work computations to participate in securing the network, and staking nodes can run on relatively modest hardware using little energy. This helps to make blockchains more sustainable.
What is Ethereum Staking?
One of the more popular chains for staking is Ethereum. As of May 2023, over 18.5 million ETH has been staked on Ethereum. There are mainly three methods of staking - Solo Staking, Staking-as-a-Service, and Pooled Staking. Please visit this detailed guide for more information on all three staking options. In simplest terms, Solo Staking and Staking-as-a-Service involve depositing 32 ETH to become a validator of the Ethereum blockchain. In return for doing so, stakers receive rewards directly from the protocol for helping to keep the network secure. Pooled Staking, on the other hand, allows users with smaller amounts of ETH to obtain the 32 ETH required to activate the validator keys by pooling their ETH with other users. For the purposes of this guide, we will be focussing on the third option, Pooled Staking, as this includes what is known as “liquid staking”.
Pooled Staking (otherwise referred to as liquid staking) solutions exist for users who do not have or feel comfortable with staking 32 ETH. While it is not native to the Ethereum network, third parties have built popular pooled staking solutions to provide this to users. These pooled staking services provided by Lido, Frax, Rocket, Ankr, Coinbase and Binance offer one or more liquidity tokens, known as liquid staking derivatives (LSDs) that represent your staked ETH plus your share of the validator rewards.
Liquid Staking: A New Wave in Crypto
Liquid staking is a more flexible form of staking that allows users to earn rewards on staked assets while maintaining the liquidity of those staked assets. In traditional staking, tokens are locked up for a certain period, which means users cannot trade or use them for a period of time. Liquid staking changes this by issuing users a Liquid Staking Derivative (LSD) token that represents the staked asset, where users can use their LSDs whenever they want as the funds are highly liquid and not locked up. Therefore, users can generate multiple revenue streams by using the liquid versions of their assets, i.e. the LSDs, on other DeFi protocols to earn more on their initial deposits. Users can also stake and unstake any amount of the asset without impacting the initial deposit.
Base Function of Liquid Staking Derivative (LSD) Tokens
Using the example of Wrapped Beacon ETH (WBETH) that is available on PancakeSwap, users can stake ETH and receive WBETH to represent the ETH they have staked. While accruing ETH staking rewards on WBETH, users can still access and use WBETH to explore other DeFi use cases (swapping, yield farming, collateralization, and more) to generate multiple revenue streams.
When you stake 1 ETH into a liquid staking service, PancakeSwap in this case, you will receive 1 WBETH representing the staked ETH. The value of WBETH tokens, representing ETH, will increase as staking rewards are accrued. For example, if ETH staking APR is at 4%, the value of 1 WBETH will be approximately equivalent to 1.04 ETH at the end of 365 days of staking. Simultaneously, you can also use the WBETH across other DeFi projects and opportunities to generate more returns on the initial ETH deposited.
Opportunities with Liquid Staking Tokens
Because of its mobility and interchangeability with the native staked asset, liquid staking has introduced new opportunities for users. The use cases and opportunities are ever growing as liquid staking continues to gain popularity. Here are a few examples of the rewarding use cases for liquid staking derivative tokens:
1. Liquidity Pools
Stakers can easily lock their LSD tokens on one platform to provide additional liquidity and earn liquidity provisioning rewards. For example, users can stake WBETH tokens into PancakeSwap’s farms and provide liquidity into the WBETH/ETH pool. This unlocks another income opportunity for stakers to earn rewards from farm emissions as well as LP fees. The increasing liquidity of the WBETH token prevents any delays due to deposit lock-ups. This is just one way users can earn extra returns on top of the rewards gained from staking ETH.
2. Collateralization
Another benefit is the multiple income streams liquid staking affords. Stakers can easily lock their funds on one platform and use a tokenized version as collateral to get crypto-backed loans. These loans can then be deposited on higher yield-bearing accounts, thereby providing more turnover on one investment. For advanced DeFi investors, WBETH can be used as collateral for ETH loans on yield farming and borrowing platforms. The borrowed ETH can be used for additional staking or depositing into other strategies.
3. Yield Strategies
Liquid Staking Tokens enables yield aggregators such as Yearn or Harvest to automatically implement additional yield farming strategies. These protocols help optimize the best solutions for the highest returns on top of ETH staking rewards.
As the ecosystem expands, the Kitchen will introduce more many more use cases and strategies over the following days with support from our partners. Stay tuned!
The Costs: Fees Involved with Liquid Staking
It is important to note that there are fees involved with liquid staking. These typically include gas fees for transactions on the Ethereum network and a small service fee taken by the staking provider. For example, the staking provider Lido charges a 10% redemption fee on staking rewards.
On PancakeSwap, you can directly convert your ETH to WBETH with the lowest gas fees, and the WBETH token (created by Binance Earn) has a 5% redemption fee on staking rewards which is one of the lowest redemption fees in the industry.
Navigating the Risks of Liquid Staking
While liquid staking offers numerous benefits, it is not without risks. One of these is the ‘slashing risk’. In Proof-of-Stake networks such as Ethereum, validators who fail to keep the network secure can be 'slashed,' meaning a portion of their staked tokens can be taken away. In liquid staking, this risk is minimized and shared among all stakers in a specific pool.
Users also have to ensure that their liquid staking tokens are safe, as these LSD tokens are access to their original deposited funds. For example, in order to redeem ETH, users will need to have the equivalent amount of WBETH.
It's also important to consider smart contract risks, as with all DeFi protocols. Ensure the platform you're using has been thoroughly audited and has a proven track record.
Conclusion
Liquid staking is the newest staking method that provides users with a liquid version of their staked assets available for use in other protocols and opportunities. While users are required to stake their funds to help secure the network, it is liquid in the sense that users can access and use these funds on other DeFi protocols. This allows for an additional layer of potential rewards and passive income on top of the Ethereum staking rewards that are accrued.
Initial deposits are staked (e.g. in ETH) and users are issued tokenized versions of their assets known as LSDs (e.g. in WBETH). LSDs carry the same value and operate one to one with the original assets, and can be stored elsewhere, traded, or used without disrupting the initial deposits. Therefore, users can simultaneously earn staking rewards on the initial deposits and take advantage of additional opportunities in the DeFi space with their LSDs - such as utilizing them for collateralization, liquidity pools, and yield farming.
We look forward to continuing to provide users with the best liquid staking experience through WBETH on PancakeSwap. WBETH is available for use on both Ethereum and BNB Chain, and offers a highly competitive 5% redemption fee compared to other staking providers. As one of the many ETH staking pools, WBETH is created by Binance, one of the largest cryptocurrency exchanges.
For a detailed guide on how to start Liquid Staking on PancakeSwap, please visit our step-by-step tutorial here, official announcement post here, and get started on our website here.
Stay tuned for more details on the growing list of use cases and opportunities of WBETH with our ecosystem partners in the coming days!
Stack’em,
The Chefs 🥞