The explanation concerns Hatom but Liquid Staking works more or less the same everywhere. Let's go. When you stake directly on the network, your tokens are blocked and therefore unusable, which is a shame.
Liquid Staking is a game changer. It allows you to stake, to participate in securing the network, to obtain the return of native staking while keeping the possibility of using the tokens that you have staked.
Let's see how it works and what benefits you can get from it. Hatom, in a nutshell, acts as an intermediary between the user and the network staking. They deposit your EGLDs into staking and issue "proof of deposit" in the form of a token, which they send to you
Let's take an example to illustrate the complete process of a deposit on Liquid Staking:
- We deposit 10 EGLD
- Hatom (the SC) will deposit the 10 EGLDs with network validators
- The SC sends us 10 sEGLD (it's not exactly 1:1, we'll see why)
This proof of deposit, called sEGLD, represents your staking position. You can use sEGLD for different things:
- Exchange it for EGLD
- Use it as lending on Hatom
- Use it as collateral to borrow on Hatom
- Use it to add liquidity to DEXs And much more
In short, you can use it for many reasons and especially to generate a return above the return of "native staking".
If you want to get your staked EGLDs back, you can simply exchange your sEGLDs for EGLDs on Ashswap. You will receive EGLD and any rewards instantly.
You can also choose conventional unstaking and withdraw via staking, but then you will have to wait 10 days to receive your EGLDs and rewards.
The sEGLD is a reward-bearing asset, which means that its value increases every day. Staking rewards are reinvested directly into staking, which increases the number of EGLDs staked compared to the number of EGLDs initially deposited.
It is important to understand that you own part of the staking done through Hatom, and that the sEGLD/EGLD ratio will change.
If you deposit 10 EGLD on the first day of staking and do so again 6 months later, you will not receive the same amount of sEGLD.
Let's take a concrete example to understand: I deposit 100 EGLD on the first day. At this point the ratio is 1:1 (because no rewards have been received yet), so I get 100 sEGLD and own 100% of the stake (the amount that was staked by Hatom's SC) .
Staking generates an APY (yield) of 10%. After 1 year, "Hatom" therefore holds 110 EGLD in staking (10 EGLD of rewards have been reinvested), whereas initially only 100 EGLD had been deposited.
If I decide to leave the LS now with my 100 sEGLD, I will receive 110 EGLD (so "the price" aka the ratio is 1 sEGLD for 1.1 EGLD) If Bob decides to deposit in the LS now and deposits 50 EGLD, he will receive 45.45 sEGLD (because the inverse ratio is 0.909) After Bob's deposit, I hold 68.75% of the pool (i.e. 110 EGLD, my deposit of 100 EGLD + 10 EGLD of rewards) and he, 31, 25% of the pool (i.e. 50 EGLD) Over time, more staking rewards will be reinvested, causing the price of sEGLD to rise relative to EGLD.
It is essential to mention that not all Liquid Staking solutions are created equal. For it to be truly liquid, the token that represents your "Staked Tokens" must be accepted in many places, as normal EGLDs would be.
If a company offers Liquid Staking but the LS token cannot be used anywhere, then there is nothing liquid about it. Before depositing your funds in a Liquid Staking protocol, find out about the usability of the token.
Regarding the question "should I stay in 'normal' staking or switch to Liquid Staking?" I would say that there are only advantages to Liquid Staking. The only potential drawback concerns the decentralization of the network.
Hatom Liquid Staking will be available on July 16. To upgrade to Liquid Staking, you will need to unstake your EGLDs, wait 10 days for unstaking and finally deposit to Hatom's site. I recommend you unstake at the end of snapshots for xLaunchpad (now what).