Liquid staking has the potential to be the building blocks that incorporate established financial norms into crypto that mainstream audiences actually trust. This is because staking resembles traditional financial (TradFi) instruments they’re already familiar with, like bonds, in terms of yield opportunities and risk profile.
Liquid staking will be a catalyst to the broader mainstream adoption and market stability, which remain key objectives for the crypto ecosystem.
Danny Chong is a co-founder of Tranchess.
The power of familiarity
To understand the significance of liquid staking as a familiar comfort blanket for non-crypto-natives, it’s important to understand how it works. Liquid staking refers to the process of locking up cryptocurrency assets to support blockchain network operation while offering a level of stability and familiarity similar to conventional financial instruments. It can be seen as a more advanced form of traditional staking where users can use their locked funds for other on-chain activities while still earning rewards from their original deposits.
In the financial landscape, both liquid staking tokens and government bonds in traditional finance bear the similarity in that they serve as investment vehicles that offer a form of yield or interest over time. In the case of liquid staking tokens, users earn staking rewards, while government bonds offer periodic interest payments. Furthermore, both liquid staking tokens and certain types of government bonds can be readily traded in secondary markets, providing liquidity to investors.
Cryptocurrency investments carry high-risk profiles, which have deterred many investors from entering the space. Liquid staking mirrors government bonds in the sense that both of these instruments are often considered lower risk compared to other investment options in their respective markets. This is particularly important as it makes liquid staking a compelling alternative for risk-averse investors seeking more stability. Therefore, the ability of liquid staking to offer a risk profile that is familiar to a low-risk traditional investment instrument is a noteworthy advantage.
By merging the benefits of staking with the familiarity of traditional finance, liquid staking appeals to mainstream investors and a broader audience, reducing…
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