Liquid Staking 101

What Is Staking?

Staking is locking one's tokens as collateral for a long time to help secure the network or smart contracts, and expecting a fixed, predetermined staking reward in return.

Most broadly, staking is a cryptoeconomic primitive that incentivizes the correct behavior of network participants using penalties and rewards in order to strengthen its underlying security. It is used by a range of Web3 protocols, including proof-of-stake blockchain networks like Ethereum and individual DeFi applications. Aleo also natively adopts staking as part of the network validation.

What Is Liquid Staking?

Liquid staking provides all the benefits of native staking while unlocking the value of staked assets for use as collateral across the DeFi/ZeFi ecosystem.

Liquid staking providers take user deposits, stake those tokens on behalf of users, and provide them with a receipt in the form of a new token, which is redeemable for the tokens they staked (plus/minus a share of rewards and penalties). This new token can also be traded or used as collateral in DeFi/ZeFi protocols, thereby unlocking the liquidity of the staked assets.

Aleo Native Staking vs. Liquid Staking

	Aleo Native Staking	Liquid Staking
Contributes to consensus and security	Yes	Yes
Method	Stake to a validator or run a validator node	Stake to protocol
Required Credits	>= 10,000 Credits for stakers >= 10,000,000 Credits for validators	> 0 Credits
Liquidity	No (locked Credtis)	Yes (stCredits)
Lockup Period	360 blocks	around 360 blocks but the opportunity to unstake instantly
Rewards	Staking rewards	Staking rewards and the opportunity to earn additional yield in ZeFi
Fee (Commission)	Vary for different validators	Protocol fee determined by Governance
Risk	Downtime and penalties	Less downtime but additional program risk

Benefits of Liquid Staking

Unlocked Liquidity

Tokens staked in a network such as Ethereum are locked and cannot be traded or used as collateral. Liquid staking tokens unlock the inherent value that staked tokens hold and enable them to be traded and used as collateral in DeFi/ZeFi protocols.

Composability in DeFi/ZeFi

By representing receipts for staked assets as tokens, they can be used across the DeFi/ZeFi ecosystem in a wide variety of protocols, such as lending pools and prediction markets.

Reward Opportunities

Native staking provides users with the opportunity to receive rewards for validating the network. Liquid staking enables users to continue receiving these rewards while also earning additional yield across various DeFi/ZeFi protocols.

Outsource Infrastructure Requirements

Liquid staking providers enable anyone to share in the rewards of staking without having to maintain complex staking infrastructure. For example, even if a user doesn't have the minimum 10,000,000 Credits required to be a solo validator in the Aleo network, liquid staking enables them to still share in block rewards.

Boosted Yields

Liquid Staking addresses the capital inefficiency problem of (Nominated) Proof-of-stake networks, thus allowing for the earning of additional rewards on your staked Aleo. This in turn enables new yield farming strategies. The main components of Aleo Liquid Staking include:

• Liquidity Mining Opportunities: By providing liquidity for pools in decentralized exchanges, liquidity mining opportunities are enabled.

• Farming Rewards for Liquidity Providers. Liquid Staking offers several yield farming strategies, enabling users to contribute to liquidity pools and earn a share of the trading fees and governance tokens. The resultant LP tokens can then be used to generate another layer of earnings.

• Staking Rewards on Farmed Tokens. After employing yield farming strategies, users can reinvest their farmed LP tokens into additional staking opportunities. This process is highly repeatable, as layers of rewards from farming and staking quickly accumulate.

• Yield Aggregators/Vaults. These can automate yield farming rewards and enable compounding returns with minimal effort from users. This is an excellent strategy for maximizing your passive income.

• Trading Opportunities. The elastic supply nature of stCredits allows for more trading opportunities. This implies you could potentially buy stCredits at a discounted price on a Decentralized Exchange and redeem it (unstake it) on AleoStaking to reclaim its fair value within 360 blocks (the AleoStaking unbonding period).

No Technical Knowledge Required

Liquid Staking simplifies the staking process, making it as easy as a swap. You can exchange your Aleo Credits for the reward-bearing stCredits without needing any technical knowledge.

Enhanced Decentralization

You can read more about how we select our validators in AleoStaking Operator.

Contribute to the Security of the Aleo Network

By staking with AleoStaking, you're playing a crucial role in enhancing the network’s security. AleoStaking's staking system intelligently distributes staked tokens across the Aleo ecosystem to help the network achieve optimal decentralization.