A Guide to Native Staking vs. Liquid Staking vs. Liquid Restaking

With over 33 million Ethereum (ETH) staked as of July 2024, staking has become a popular way for cryptocurrency holders to earn passive income while supporting the security and functionality of blockchain networks. However, traditional or native staking has one significant drawback — it locks up your assets, meaning you can't access them while they're staked. This is where liquid staking comes into play, offering a solution that maintains liquidity. Taking it a step further, there's liquid restaking, an even more advanced option. 

This article breaks down the key differences and similarities between native staking, liquid staking and liquid restaking, helping you understand how each method works and which might be the best fit for your investment strategy.

Key Takeaways:

• With over 33 million ETH currently staked, cryptocurrency holders are increasingly using staking to earn passive income while supporting blockchain networks.

• Native staking involves locking up cryptocurrency tokens within a blockchain to earn rewards, contributing to the network’s security and integrity.

• Liquid staking allows users to stake their tokens, while maintaining liquidity, through liquid staking tokens (LSTs), which can be traded or used in DeFi applications.

• Liquid restaking is a more advanced strategy that involves leveraging tokenized staked assets across multiple DeFi protocols to maximize rewards and enhance profitability.

• Choosing the best staking approach between native staking, liquid staking and liquid restaking depends upon individual priorities, such as control, liquidity, complexity and potential returns.

What Is Native Staking?

Native staking is the process of locking up your cryptocurrency tokens within their original blockchain network to help maintain its operations, such as validating transactions and enhancing network security. In exchange for this, you typically earn staking rewards in the form of additional tokens.

How Does Native Staking Work?

Native staking is like a high-stakes game of trust in which participants lock up their cryptocurrency holdings to help maintain the blockchain's operations — basically putting your money on the line to ensure the game's integrity. 

Validators — who are participants in this system — lock up a certain amount of the blockchain's native cryptocurrency as their "stake." This stake serves as collateral, encouraging them to act honestly and uphold the network's integrity. The blockchain's consensus algorithm then randomly selects validators to propose and verify new blocks of transactions. The more a validator stakes, the greater their chances of being chosen.

When selected, a validator reviews the transactions in the block and adds it to the blockchain — a process known as "forging," rather than mining. If the validator does this correctly and honestly, they earn rewards in the form of new cryptocurrency and transaction fees, with the rewards being proportional to their stake.

On the flip side, if a validator tries to validate fraudulent transactions or act dishonestly, they risk having their stake "slashed," meaning a portion of it could be confiscated as a penalty. This risk creates a strong incentive for validators to play by the rules.

Once the validation work is complete, validators can withdraw their original stake (along with any earned rewards), though there may be a waiting period. 

What Is Liquid Staking?

Liquid staking is a way to stake your cryptocurrency while still keeping it accessible. In return, you receive liquid staking tokens (LSTs), which can be traded or used in DeFi applications. This allows you to earn staking rewards while maintaining flexibility and liquidity.

How Does Liquid Staking Work?

Unlike native staking, liquid staking allows you to stake your cryptocurrency while still keeping it accessible for other uses. Talk about having your cake and eating it! 

First, you deposit your cryptocurrency tokens, such as ETH, into a liquid staking pool. The pool then delegates your tokens to trusted validators responsible for verifying transactions and securing the blockchain. In return, you receive LSTs that represent your stake in the pool. These tokens can freely be traded or used as collateral in DeFi protocols, allowing you to earn additional yield while your original assets remain staked.

Since validators earn rewards for securing the network, those rewards are automatically distributed to LST holders, based on how much they hold. This way, if you ever want to withdraw your original tokens, you can simply exchange your LSTs back for the underlying assets in the pool, minus any applicable fees.

What Is Liquid Restaking?

Liquid restaking is a more advanced staking strategy whereby users leverage their already-staked assets (tokenized into liquid restaking tokens) in additional DeFi protocols to earn more rewards, enhancing the utility and profitability of staked crypto.

Native Staking vs. Liquid Staking vs. Liquid Restaking: The Similarities

While they aren’t quite the same, native staking, liquid staking and liquid restaking share several core features that make them integral to blockchain networks

Network Security

All three staking methods — native staking, liquid staking and liquid restaking — help to secure and operate blockchain networks. Participants lock their assets to help support validators, ensuring the integrity of transactions and network consensus. This collective effort strengthens a blockchain network’s overall security.

Rewards

Participants can earn rewards for their contribution by using any of the three staking methods. With native staking, users receive rewards directly for supporting the network. Liquid staking not only provides rewards, but also issues LSTs that can further be used in DeFi to earn additional returns. Liquid restaking takes this a step further, enabling users to earn even more by using their LSTs in various yield-generating activities.

Decentralization

Native staking, liquid staking and liquid restaking all contribute to the decentralization of blockchain networks by encouraging a wider range of participants to engage in the consensus process. This distribution of power helps prevent centralization and helps to ensure the network remains resilient.

Encouraging Integrity

All three staking methods incentivize validators to act honestly and in the network’s best interest. Validators put their staked assets on the line, and if they engage in malicious activities like validating fraudulent transactions, they risk losing those assets. This "skin in the game" approach strongly motivates validators to uphold the integrity of the blockchain.

Increased Returns

While reward rates often vary, all three staking methods generally provide higher yields than traditional investments. As a participant in the blockchain's consensus mechanism, you can expect juicer interest rates than those offered by conventional financial institutions.

Native Staking vs. Liquid Staking vs. Liquid Restaking: The Differences

When comparing native staking, liquid staking and liquid restaking, the distinctions become clear across several aspects.

Liquidity

Native staking usually requires locking assets for a fixed period, which limits liquidity. On the other hand, liquid staking provides users with LSTs that can be traded or used in DeFi applications, offering immediate liquidity. Going a step further, liquid restaking maintains this liquidity through LSTs while letting users restake their tokens on other platforms to earn additional rewards.

Complexity

Native staking is often simplest, requiring users to lock their tokens with a validator. Liquid staking introduces more complexity, due to the need to manage LSTs and navigate DeFi platforms. Liquid restaking adds another layer of complexity, as users must understand how to apply their LSTs effectively across different platforms in order to earn extra rewards.

Reward Structure

Native staking rewards come directly from a blockchain as compensation for validating transactions. With liquid staking, you receive rewards in the form of LSTs, which can also earn extra returns through DeFi activities. Liquid restaking takes it even further by allowing you to earn rewards from both your initial staking and additional activities involving your LSTs, thereby maximizing your potential returns.

Risk Exposure

Native staking is usually considered least risky because it involves direct participation in a blockchain's consensus mechanism. In contrast, liquid staking introduces counterparty risks related to the platforms managing the staking pools and the smart contracts involved. Liquid restaking carries similar risks, but also adds potential volatility from the DeFi markets in which LSTs are used.

Governance

In the world of blockchain, governance refers to the framework and processes through which decisions are made and enforced within a network in order to ensure its proper functioning. With native staking, participants often have a say in governance decisions because their stakes translate into voting power. Liquid staking, however, typically doesn’t offer governance rights, as LSTs represent a claim on pooled assets, rather than direct ownership. Similarly, liquid restaking focuses on maximizing rewards through additional staking activities, and doesn’t provide governance participation.

Asset Control

With native staking, users maintain full control over their staked assets, which are directly tied to the blockchain. However, with liquid staking, users receive LSTs, while their original assets are held in a pool, which can diminish individual control. Liquid restaking continues this trend, as users must rely on the protocols managing their LSTs, further reducing their control over their underlying assets.

Which Is Best Suited for You — Native Staking, Liquid Staking or Liquid Restaking?

Choosing the right staking method depends upon both your individual needs and investment strategy. Native staking is best for those who want direct control and a straightforward approach to earning rewards while supporting the network. Liquid staking caters to users who value liquidity and flexibility, allowing them to access their assets while still earning rewards. Lastly, liquid restaking is ideal for more advanced users who are looking to maximize returns by leveraging their staked assets across multiple platforms. Each method offers unique benefits, so consider your priorities when deciding which one suits you best.

The Bottom Line

Choosing between native staking, liquid staking and liquid restaking comes down to your preferences and investment goals. Native staking offers direct control and simplicity, while liquid staking gives you the flexibility to trade and engage in DeFi without losing rewards. If you're an advanced user seeking to optimize returns across platforms, liquid restaking might be your best bet. Each method has its unique advantages, so pick the one that most closely aligns with your strategy in order to fully enjoy the benefits of staking.



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