5. What is a liquid staking token? How can I use it in Phezzan?
Written by the Phezzan team
1. What is a liquid staking token?
Typically, when you stake your asset, your assets will be locked up for a certain period. Liquid staking solves this issue by giving staker an LP token. For example, when you stake 1 ETH on Lido, you can get back 1 stETH in return. Later on Lido, you can claim back 1 ETH on Lido with your 1 stETH. You can also swap you stETH for ETH on various DEXs.
2. How is liquid staking token useful?
Liquid staking makes your staked asset liquid. For example, you can use stETH to borrow assets on Aave.
Phezzan Protocol plans to support liquid staking token as collateral in the future. Thus, you can earn APY while you trade.
3. What is the risk of liquid staking?
Despite all the benefits, liquid staking has several risks:
Protocol risks. For example, Lido can have bugs and gets hacked. Your stETH in the smart contract might be stolen by hackers.
Staking execution risks. For example, Lido stake poorly and your staked ETH can get slashed and thus has 0 value.
Price depeg risks. A lot of people use liquid staking assets as collateral. When the market price drops, they might be forced to sell because of liquidation. This has played out many times in previous market crash. For example, stETH price can be lower than ETH because of demand of stETH drops. In the past, many people have been arbitraging off the price depeg.
Because of these risks, when calculating the collateral value of the liquid staking asset, it will have a lower weight than the staked token itself (e.g. stETH will have a lower collateral weight than ETH itself in Phezzan Protocol.)
In summary, liquid staking is a creative solution to illiquid staking issue. It has many benefits and risks. Phezzan Protocol will support liquid staking tokens as collateral in the future.