What is Acala’s Liquid Staking and why is it valuable for DeFi traders?
Many crypto enthusiasts still assume that crypto is limited to Bitcoin, Ethereum, and a few other cryptocurrencies; the last few years have seen a rise of innovative projects in the Decentralized Finance space. DeFi dApps have dominated discussions about how finance, economics, and legacy systems surrounding financial activities will change in the next few years.
However, one problem that DeFi has begun to experience is staking. With staking, users commit their digital assets to earn rewards for securing the underlying network. Pending the time their assets are locked, they’re unable to access it, rendering withdrawal almost impossible until the time set by the protocols elapses. This leads to loss for investors who are unable to move their assets to more profitable ventures.
DeFi Llama reports that the entire value of locked assets has increased from only $220 million in 2019 to about $220 billion dollars at the time of writing.
Liquid staking is the solution to this problem. This allows users to make the most use of staked crypto assets in other trade or investment possibilities flexibly.
Acala, a DeFi hub and liquidity tool for Polkadot, has partnered with Blockdaemon, a Blockchain infrastructure provider, to support its liquid staking products. But this is just a first move.
What Is Liquid staking?
Ethereum has begun its shift to a proof-of-stake consensus protocol with the new release of Phase 0 of Ethereum 2.0. Validators put their ETH in the Beacon blockchain to protect the blockchain and get staking rewards proportional to the amount of staked tokens. This enables users to obtain a passive revenue stream by staking their Ethereum or running their network validator node. This means that a validator on the Beacon blockchain will have to wait until the protocol releases their staked tokens before earning their rewards.
This is cumbersome. Hence, liquid staking.
Liquid staking is an alternative to locking the stake tokens of a user: it allows users to stake any quantity of ETH without having to authorize transactions. It is done by issuing a tokenized version of the staked tokens – a kind of derivative — which can be moved, held, spent or sold in a usual way.
With liquid staking, tokenized staking positions could be linked into other protocols rather than having staked assets on a blockchain. This allows stakers to control their risk exposure and get additional revenues on their staked assets. Tokens can transfer freely across many users and chains.
Since liquidity is the lifeline of DeFi, the ability to move tokens freely instead of having them locked up, idling, is an essential innovation in creating an alternative to legacy financial systems. Acala and Blockdaemon are creating liquidity for the crypto space.
Acala and Blockdaemon: liquid staking juggernauts
The ability to increase yields from staking for stakers is important. It creates a higher degree of freedom in managing assets and also ensures that yields are optimized.
Acala is launching its liquid staking products in the Polkadot and Kusama ecosystem. Acala’s DOT and KSM Liquid Staking products are new kinds of financial products designed to compound staking liquidity and provide Defi users and developers with new scenarios of use.
According to Bitcoin Isle, over $21 billion in liquidity is staked on Polkadot and roughly $2 billion on Kusama. This is a lot of staked tokens that are illiquid. Stakers have to wait for a month, on average, to get their rewards.
Acala launched liquid products that will help start to get the full potential of their tokens. Stakers can use LKSM as collateral for a kUSD stablecoins loan, for trading within Karura Swap in an LKSM/kUSD pair, or for becoming a liquidity provider (LP) in the LKSM/KSM pool. With this staking possibility, users can stake their tokens to gain more rewards and access liquidity.
Blockdaemon is the underlying layer for the blockchain industry that lets users transact, participate and earn through nodes on a single interface with security, scalability, and reliability. The company offers +40 advanced blockchain networks, including ETH 2.0, Bitcoin, Solana, Terra, Cardano, Polkadot, Cosmos, SKALE, MobileCoin, and Lightning Network, its support layers.
Blockdaemon serves as a support layer for Acala’s liquid staking products. Blockdaemon will act as the first validator for Acala. Blockdaemon will run validators for the LKSM staking pool. Blockdaemon has four layers of risk mitigation that will help liquid staking go on without downtime and protect users from the risk of loss. This partnership will help Acala secure steady growth and ensure users stay liquid while they earn their Kusama staking rewards.
However, don’t look at the project at face value. Look at the investors in the duo.
A-list Investors believe in liquid staking
Acala and Blockdaemon have proven to be viable platforms that show a lot of potentials. The duo independent blockchain infrastructure solutions have closed several rounds of funding from their communities and reputable investors.
Acala, earlier in September, raised $61 million in contributions from over 26,000 of its community members. This is to help the platform bootstrap and be self-sustainable as it builds dApps and protocols revolutionizing DeFi.
On September 21, Blockdaemon announced that it raised $155 million in its series B funding round from A-list investment firms and one of the largest institutional banks in the world. The round was led by SoftBank Vision Fund 2, with Matrix Capital Management, Sapphire Ventures, Morgan Creek Digital, and Goldman Sachs.
“Goldman Sachs is very pleased to continue our relationship with and investment in Blockdaemon as they continue to innovate for the financial services industry. We believe Blockdaemon has a key role to play in the future of blockchain and crypto adoption,” said Oli Harris, the North American head of digital assets at Goldman Sachs.
What’s next for liquid staking?
As liquid staking gradually gains popularity, Acala is creating innovative ways for users to stake their tokens, maximize profits, and optimize their usage flexibly. Blockdaemon is helping to secure the growth of Acala liquid staking as users earn their staking rewards. With these duo handling liquid staking, users can be sure of no downtime and no loss of staked tokens or rewards.