Why Ankr pioneered liquid staking, its role in recent market news, benefits, risks & more.
By Kevin Dwyer of Ankr & Kadeem Clarke, The Crypto Illuminati Creator & Head of Labs at the Momentum 6 fund
While recent market turbulence surrounding large entities such as Celsius and Three Arrows Capital has unsettled investors and shaken confidence in DeFi products, the benefits provided by Ankr liquid staking deserve your attention. The ability for your funds to remain liquid with liquid staking is an unbelievably powerful tool in the DeFi landscape, doing away with the limitations of “capital inefficiency.”
Liquid staking allows you to earn multiple layers of rewards on DeFi platforms through access to liquidity mining opportunities, LP farming rewards, staking rewards on farmed tokens as well as the powerful opportunities provided by access to yield aggregators & vaults and borrowing & lending protocols. Ankr makes staking simple, all while enhancing security and decentralization for the greater ecosystem. By familiarizing yourself with the risks and benefits, you will be able to make informed decisions regarding participating in the revolutionary world of decentralized finance, where power is placed directly in the hands of the user.
As you may know, staking is one of the most popular ways to earn rewards with your coins like ETH that you would otherwise be hodling. However, staking your assets on a Proof-of-Stake (PoS) network used to entail locking them up for a period of time during which you can’t trade, withdraw, or sell your funds, or deploy them with other earning strategies. So while you’re supporting the PoS network and earning staking rewards, your funds are also illiquid.
Staking is a great way to earn passive income with your crypto, but the downside is that you will need to lock your crypto up for long periods of time. This is oftentimes not ideal because many people would like to be able to earn other additional rewards on their assets in DeFi protocols like SushiSwap or Curve.
This unavailability of funds is what we call in finance, “capital inefficiency.”
Liquid staking, however, enables you to stake your assets and support PoS networks in the same way, but also gives you liquid staking tokens which you can trade, withdraw, sell, or deploy with other DeFi earning strategies. With liquid staking, your funds remain liquid. This way, you can earn additional DeFi rewards simultaneously from yield farming on top of your staking rewards, compounding your earning potential. Where token holders used to have to choose how to use their assets between staking and earning in DeFi, they can now do both with liquid staking.
There has been concern in the crypto industry this week after the recent news from Celcius and Three Arrows Capital, particularly surrounding their holdings in staked ETH (stETH) from Lido Finance. Celsius and 3AC depend on stETH to generate a large share of their returns for users and investors. And now, the price of stETH has shown signs of moving further away from its loose peg to ETH in a situation that is eerily reminiscent of the recent Terra crisis.
When users stake ETH with Lido, they receive stETH tokens in return — derivative tokens which represent their staked ETH and the rewards that accumulate over time. You can trade stETH for ETH by selling it on the open market. However, no one is able to unstake the actual ETH until the ETH 2.0 merge. Since there are not many looking to buy stETH at this time, lack of demand could affect the price of stETH significantly. And if stETH loses its peg drastically, it could mean that those who need to sell their stETH to get back liquidity will lose some of the original value of the ETH that they’ve staked (unless they can hang on until the Merge is successful).
As you can see from this tweet below, the fair value of stETH should always be 1:1 with ETH as eventually it can be redeemed for ETH at that rate after the merge. However, those who need to exit their position before that time may be hurt by a lower market price of stETH.
Ethereum liquid staking and Lido are not to blame for this situation. When used correctly, liquid staking provides several advantages over normal staking, allowing users to make the most of their crypto funds.
Ankr was the first company to launch liquid staking for Ethereum when ETH 2.0 was announced (followed shortly by Lido Finance). Because of this, they were able to spend a great deal of time perfecting it.
When users choose to stake their ETH (or several other tokens) with Ankr Staking, they are able to choose between claiming either aETHb or aETHc tokens that they can use to trade, lend, or participate in DeFi, much the same as stETH.
These two tokens are Ankr’s equivalent of the stETH tokens from Lido. The differences between Ankr’s two liquid staking tokens can be summarized below.
Ankr’s liquid staking tokens are at a much lower level of risk for substantially de-pegging from the price of ETH. This is because the companies like Celcius and 3AC which may become insolvent didn’t use Ankr to stake millions of dollars in ETH. This means there will not be such a high sell pressure on aETHb or aETHc.
With Liquid Staking, Ankr will stake ETH with top validator nodes they’ve selected while giving stakers new aETHb or aETHc tokens in return. These are ERC-20 tokens that will distribute staking rewards automatically just by holding them in your private self-custody wallet.
aETHb tokens grow in number to reflect staking rewards
aETHc tokens grow in value to reflect staking rewards
Using Ankr Staking to stake gives users access to instant liquidity in the form of liquid staking tokens like aETHb and aETHc. Avoiding locking value up with the Ethereum network is a big advantage — it enables stakers to use the value of their staked ETH to potentially earn multiple layers of rewards on DeFi platforms and expand ROI potential. Let’s take a look at all the use cases stakers can now unlock:
As Liquid Staking solves the capital inefficiency problem of Proof-of-stake networks, it offers a way to earn additional rewards on staked ETH, enabling new yield farming strategies. The main opportunities for ETH Liquid Staking are:
- Liquidity mining opportunities are enabled by providing liquidity to pools in decentralized exchanges. Additionally, liquidity pools on DEXs offer a very low risk of impermanent loss because the price of ETH and aETHc or aETHb remain so similar.
- Farming rewards for liquidity providers — ETH liquid staking presents several yield farming strategies for users to contribute to liquidity pools and gain a share of the trading fees and Liquidity Provider or governance tokens. These new LP tokens can be used to generate yet another layer of earnings.
- Staking rewards on farmed tokens — After using yield farming strategies, users can also reinvest their farmed LP tokens into more staking opportunities. This is a highly repeatable process as layers of rewards from farming and staking will quickly stack up.
- Yield aggregators & vaults — Contribute to vaults and automate yield farming rewards with compounding returns with minimal effort.
- Borrowing & lending — The ETH liquid staking tokens also allow users to borrow against their assets in exchange for assets like ETH that can be restaked or used for additional earning strategies. Or, lend your liquid staking tokens in return for interest paid by borrowers.
Making Staking Easy as a Swap
Ankr’s liquid staking creates an even easier staking experience so more users can get involved right away while skipping more in-depth or technical delegation processes. Users can either stake ETH via Ankr Staking or simply purchase aETHb and aETHc tokens on a DEX to earn staking rewards.
Ankr’s ETH Liquid Staking will not be using only Ankr validator nodes to stake the ETH from users. Ankr Staking will select several suitable and reliable ETH Chain validators, making ETH Liquid Staking more decentralized one validator at a time.
Staking with ETH Liquid Staking allows you to play an important role in boosting the network’s security as a whole. Ankr’s ETH staking system distributes staked ETH intelligently across the Ethereum ecosystem to help the network achieve optimal decentralization. Diversity and decentralization of active validators ensure the network remains as secure as possible.