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“Thousands of experts study overbought indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply… and they can’t predict markets with any useful consistency.” - Peter Lynch
"So invest a little bit each month into a diversified portfolio and stay focused on the long game." - Bitcoin Market Journal |
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In today's issue:No, not liquid on a steak (that's called gravy). We're talking about liquid staking.
With the unbelievable performance of liquid staking tokens like Lido and RocketPool this year, we'll deep dive into how liquid staking compares with traditional staking and discuss which is best for investors in 2023.
Liquid staking derivatives, which have the memorable acronym of LSD, are the latest crypto assets to know, understand, and maybe add to your portfolio. Read on and pass the gravy. |
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TONIGHT at 6:30 pm ET: The Rise of Blockchain Reward Programs!
Starbucks, Singapore Airlines, Burger King, Clinique, and Salesforce.
What do all these companies have in common? They've all launched reward programs built on blockchain.
Seriously, you have no idea how many companies have jumped into the world of Web3 until you see all the blockchain reward programs out there.
Join us tonight at 6:30 pm ET for a one-time-only Zoom workshop to talk about how these reward programs work, how to use them, and how to build your own in a small group setting.
Premium members can RSVP here.Bitcoin Market Journal publisher John Hargrave will be joined by Heather Lowe, senior attorney at Gravis Law, to discuss how crypto rewards work and our real-life experience building them.
Not yet a Premium member?Sign up nowto get access to our complete library of previous investor workshops, plus our BMJ Reward Tokens airdropped to your crypto wallet each month. |
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| | | Must Read Today's most important story for crypto investors. |
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In another piece of good news for crypto investors, the entire market is up about 25% this year, from a total market cap of $800 billion to recently surpassing $1 trillion.
The CMBI indexes group the performances of various sectors (DeFi tokens, Metaverse tokens, etc.). This week's report from Coin Metrics shows which sectors have led the charge: |
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Metaverse tokens and smart contract platforms are leading the way. Our analyst reports follow closely to the CMBI sectors. Click to read our analysis of Top Metaverse Tokens and Top Smart Contract Platforms.
Investor takeaway: It's too early to say the crypto winter is over, but it looks like things are thawing. As usual, the core Layer-1 platforms are providing the most value, and the market is taking notice. |
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| Liquid Staking vs. Locked Staking by Sharon Moran |
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Summary: Stake coins, earn rewards. Like earning interest on a bank deposit, staking is a way of earning cash on your crypto without having to sell it. In this article, we look at the two ways of staking: liquid staking (which you can buy and sell anytime like a savings account), and locked staking (which is locked for a period of time like a CD).
Peercoin was the first cryptocurrency to utilize a proof-of-stake blockchain in 2012. In the following years, other PoS protocols grew in popularity, culminating in Ethereum's move to PoS in 2022. With its energy efficiency, proof of stake is increasingly the way the blockchain industry is headed.
Along the way, numerous staking platforms have entered the scene. Typically, those platforms enabled traditional staking, which requires users to lock up funds in a staking pool. They lose access to those funds for a specified period of time, but in return, they receive rewards based on the amount of tokens staked.
Liquid staking is a newer concept that's increasingly being embraced by savvy crypto investors. It allows you to move in and out of staking at any time.
What is Liquid Staking?
If you don't want to lock up your crypto for a period of time, liquid staking platforms are the answer.
Users who participate in liquid staking earn a derivative token (like a receipt for your deposit) that can then be used in other DeFi applications.
For example, when users secure Solana on Marinade Finance, they earn Marinade SOL (mSol), a yield-bearing token they can use on other DeFi platforms for increased yield (like earning interest on interest).
Also, users participating in liquid staking are usually not subject to the early withdrawal penalties that tend to be common with locked staking.
If locked staking is like a 12-month CD, liquid staking is equivalent to a savings account that lets you deposit and withdraw any time.
Because the crypto market is volatile, locked staking exposes users to price fluctuations while their tokens are locked. Despite this risk, locked staking might appeal to cryptocurrency users who consider themselves long-term holders.
Alternatively, investors who want the opportunity to buy or sell when the market makes sudden movements could be candidates for liquid staking.
Either way, staking gives you the benefit of having your crypto work for you... "Using your money to make money." |
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Staking and the Loss of Capital Efficiency
If you think back to your high school economics class, you might remember the term "opportunity cost." Before liquid staking, crypto investors were unable to escape this fundamental economic principle.
There is an opportunity cost associated with locked staking. Funds that are locked up in a staking contract can’t be invested elsewhere, and users could potentially miss out on other opportunities during that lock-up period.
Liquid staking reduces this opportunity cost and allows users to move in and out of staking whenever they want by buying and selling derivative tokens. |
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A simplified look at liquid staking ETH on the Lido platform (courtesy Etherscan)
Liquid staking offers investors a way to improve capital efficiency.
Users have more flexibility around deciding when to withdraw their funds, though this is usually accompanied by lower APR (i.e., yield or "interest"). Many investors consider the lower APR worth the additional flexibility.
Liquid staking allows investors to react to market conditions so they can better lock in profits. It achieves this efficiency in several ways.
Liquid Staking Reduces the Risk of "Impermanent Loss"
The volatile nature of the cryptocurrency market makes impermanent loss a risk for any crypto investor. In staking, impermanent loss is the result of a decrease in token price causing an investor's share in a liquidity pool to be worth less than the value they put in. For more, read our Guide to Impermanent Loss.
Liquid staking can allow investors to benefit from improved capital efficiency because they can unstake easily compared to locked staking. If the price of a staked token goes up, investors can sell their stake and “cash out.”
With locked staking, the investor might be eagerly anticipating a price increase. If that price appreciation happens before the lock-up period ends, the investor can miss out on the opportunity to realize gains.
Yield Token Compounding
Rather than locking rewards on staked funds, users can reuse them to generate additional yield by reinvesting them.
The token that liquid staking platforms issue investors who stake on their platforms can be used to earn additional yield in other DeFi applications.
For example: Stake ETH on Coinbase Receive cbETH tokens in return Re-invest cbETH to earn additional yield
Another way to compound yield is when stakers serve as lenders. If you lend out the cbETH tokens, you could gain additional profit from the loan’s interest, increasing your returns.
Risk Considerations
Staking requires locking your funds in a smart contract. All smart contracts could be exploited if the underlying code has a security flaw in it. It's best to stick with the largest and longest-running platforms, which are better battle tested.
Unless you run your own node, you will need to trust a node operator to hold your staked funds. RocketPool, for example, simply pools ETH from users, then uses that to deploy its own validator nodes. More on RocketPool here.
Node operators can be penalized for not following proper procedures (such as a server going down for an extended period) through a process called slashing. This means some of their tokens are taken away, and stakers can lose tokens as a result.
Serving as your own node operator is something to consider, but getting started requires a lot of money, and there's a steep technical learning curve (more on running your own node here).
Liquid Staking is Growing
According to JP Morgan, staking returns will increase to $40 billion by 2025. |
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Image via Dune Analytics This $40 billion milestone is important. If staking returns reach the predicted level, institutions will take notice. This will demonstrate a greater acceptance of decentralized finance, and investments in DeFi will likely increase. The sheer amount of capital expected to flow through staking platforms can help legitimize crypto as a type of interest-bearing investment strategy.
Participation by retail investors will also increase, driven by the potential for higher returns than typical investment opportunities.
At that projected level, governments will also notice and hopefully create more clarity around regulation, which will lead to industry maturation. Greater institutional and retail participation, along with clear government guidelines, can lead to significant disruption in the world of traditional finance. We can expect crypto to be part of everyone's investment strategies, as well as an explosion of yet-to-be developed DeFi products.
Investor Takeaway Liquid staking can be a good option to generate returns on your crypto holdings. However, investors need to carefully weigh the potential risks and returns when deciding whether liquid staking makes sense for them. A diversified staking strategy could have the potential to offer exposure to the benefits of both strategies while reducing risk. |
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