"Pledge" refers to the process of locking up the native assets of a PoS (Proof-of-Stake) consensus mechanism blockchain (such as Ethereum) for a certain period of time to help maintain the operation of the blockchain and earn corresponding rewards.
Background#
When pledging in a traditional way, one needs to become a validator on the blockchain network. Taking Ethereum as an example, becoming a network validator requires preparing hardware devices that meet certain conditions and pledging 32 ETH, which is relatively high in terms of entry barriers. Once becoming a validator, the pledged ETH will be locked in a smart contract and cannot be used for other purposes, thus locking up the liquidity of ETH. Because low liquidity may end the cryptocurrency market, leading to bankruptcies of companies, traders exiting the market, and the currency losing all its value.
Therefore, liquidity staking has become an alternative solution to traditional staking, to some extent addressing some of the drawbacks of traditional staking.
What is Liquidity Staking#
Users can provide ETH to liquidity staking platforms without directly participating in traditional staking. The platform will collect the ETH provided by participating users and package these ETH into batches of 32 each to distribute to eligible network validators. These network validators will directly engage in traditional staking, and the profits from staking will be shared by users, liquidity staking platforms, and network validators. Therefore, liquidity staking has lower entry barriers and lower returns compared to traditional staking.
What are Liquid Staking Derivatives (LSD)#
When users participate in liquidity staking and provide ETH to liquidity staking platforms, the platform will mint an equal amount of derivative tokens tied to the ETH as proof of the user's participation in liquidity staking. These derivative tokens are called "Liquid Staking Derivatives" (LSD). Since these derivative tokens represent the user's ETH in the liquidity staking platform, they are generally considered to have slightly lower value than the original ETH. Therefore, these derivative tokens can also be traded directly or used in other DeFi protocols to earn additional income. Even if the original assets are still staked, they provide liquidity for the stakers.