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In 2024, liquid staking became the dominant niche of defi. Offering the opportunity to unlock extra liquidity to the crypto industry without casting excessive Ethereum (ETH), technology has risen to the top of Defi Mountain, with a $60 BLN threshold on TVL It has surpassed.
That’s almost a surprise, as the assets acquired in block rewards are the most productive assets in decentralized finance and should be used as a high quality collateral for Defi. However, despite the surge in popularity of liquid staking, no significant gaps have been reported. It is impossible to fully achieve its long-term potential without recognizing these flaws and taking action to eliminate them.
Derivative token risks
Why did liquid staking experience such a rapid and widespread adoption? Locked assets earn no returns other than staking rewards for block verification. It is an integral part of ecosystem security, but it is painful for investors who are sacrificing liquidity and are exposed to opportunity costs. In traditional finances, the problem of loans that earn nothing but interest was avoided by Repos, a repurchase agreement. A report represents a tradable claim against the accumulated assets. This is exactly what the LSTS and LRTS function.
However, LSTS and LRTs are subject to the same vulnerabilities as their TRADFI counterparts. The value of the liquid sinking token is supported by its collateral. This is a pooled ETH that supplies power to the validator node. Ideally there should be a one-to-one peg between the underlying value of the liquid sinking token and the market price. This means that once the lock period ends, buyers must wonder whether the represented ETH will ultimately be repaid.
What if not? What happens if the validator is misleading and punished by thrashing? What happens to the liquidity pool of things in a particular LST pair, unless the trader is willing to hold his position anymore? What if the protocol suffers from attacks, it often happens with defi?
Low confidence, running, and secondary hair removal – this is a sequence that has overthrew Terrarona’s infamous anchor protocol and spookedly rippled across the industry. We are only at the beginning of the rabbit hole at full-body risk. For example, a liquid repositioning token represents an assertion against a stained asset and can be used to support multiple protocol security layers at once. If correlated thrashing (now only theoretical possibilities) becomes reality, the entire defi industry could be destroyed by flames.
A variety of risk strategies, constant code auditing, and reliance on multiple tokens and platforms is required. Otherwise, the growing backbone of the defi economy will remain vulnerable forever.
Accessibility challenges
Of course, the inherent systematic risks are barriers to the long-term potential of liquid staking, but there are intimate obstacles to its widespread adoption. Liquid staking as a technology is currently limited to experienced Defi users, with regular crypto enthusiasts and newcomers in the industry still remaining behind. Complex interfaces, high gas prices, lack of onboarding, technical complexity, general mistrust of complex technologies – the list goes on. Even the richness of liquid staking and repositioning tokens is confusing, especially when users leave and leave Xyzeth back, annoyed and disappointed.
For liquid staking to be comprehensive, accessible and user-friendly, the platform must focus on intuitive design, simplified onboarding processes, and education. They should have consistent, familiar UI and collateral transparency, providing users with a complete picture of yield metrics comparable to risk exposure. Lowering the financial entry threshold through Layer 2 protocols can make small investors more accessible.
UX and UI have recently become a buzzword cliche in the industry, but it’s important to remember that you need to solve the problems below. Liquid staking can be moved from niche tools to mainstream financial solutions, but only occurs when users are satisfied.
Utility extensions and standardization
The important virtue of LSTS is the constantly occurring block rewards they offer. ETH staking is ensuring Ethereum’s economic activity through an enabled node. As long as there is transaction activity in your ETH network, you will be rewarded.
However, staking should not continue to be the only option in LST. Tens of thousands of monthly active users with billions of dollars in holdings are looking for usefulness and must meet those requirements. LST and LRT TVLs are increasing faster than the opportunity to deploy these same assets on Defi opportunities. It takes time to integrate these tokens into lending protocols, permanent transactions, and more. These require inter-business partnerships at the protocol level.
No, imagine if you are trying to integrate five different LST and LRT assets with Aave (Aave). It’s a log jam! Soon, if not already, staking will turn into speculative loans.
That in itself doesn’t have any problems. But what’s wrong is that this takes the risk of counterparty and is not recognized by users who provide liquidity. The industry needs a more diverse platform to embrace LST and provide users with access to actual yields. This should be done safely and transparently. LST and LRT-oriented platforms can reinvigorate the Defi economy. As a collateral for electricity markets, digital asset management, and even crypto-born hedge funds – as yield security, LSTS provides plenty of space for adapting existing TRADFI concepts to DEFI.
Finally, standardization of the token itself is important. In addition to the mentioned frustration and confusion they create, another discussion of token compatibility is more consequential. First, each platform must maintain a separate liquidity pool for each trading pair. Second, given the risk factors inherent to individual LSTs and the ripple effects on the overall market, it is clear in the case of a single diversified LST-derived asset when tokens collapse.
The future is now
In the early days of liquid staking, few people thought it was possible to reach the current level of TVL. And this is just the beginning too. Liquid staking can bridge the gap between powerful innovation and tools for everyday use. For this to happen, however, the Defi community must act to eliminate current flaws and fragments of the technology from systemic risks and inadequate UX to the lack of standardization and utility proposals.
The future is now – but it’s up to us to really make it happen.
