At first glance, it seemed like DeFi had too much value being locked away in various smart contracts and was seemingly boasting of it, but on looking deeper, I discovered that a chunk of these lock-ups were actually tokenized.
I've mentioned on different occasions that DeFi’s success will be highly dependent on its ability to foster revenue/income generation that is not tied to protocol token inflation. Having certain on-chain actions tokenized is essentially a way to free-up value and allow for its use in several other sectors.
It is evident in the real world that no value should be kept idle, doing such essentially robs the world of innovation. Money has to be constantly moving to power developments that improve society.
Liquid staking is one of many ways DeFi can maximize its value flow. This is something I've lightly talked about in the past in relation to stablecoins and CBDCs expanding the bank's arms in fractional reserve banking.
Surely, the game of fractional reserve banking is risky, some might argue that it's been the cause of several bank collapses, I can't say for sure as the data of most government regulated entities are never how they are presented.
Nonetheless, liquidity staking isn't totally like fractional reserve banking because it isn't designed to empower an entity or institution, but the individuals that own the value being deposited.
Let's talk about stock holders for example. More often than not, when someone with a high position in a valuable stock wants to fund something new, he takes out a loan using his stock, in the process, ensuring that he retains the stock wealth and can at the same time, build new things by borrowing against that value.
What to note here is that whilst voting rights may be given up in contracts of this nature, all appreciation of the stock remains that of the owner taking out the loan and this includes dividend payouts for stocks that offer such.
When it comes to crypto, things are a bit different. Stockholders may have voting rights but their assets are not as largely tied to the companies that issue them as crypto tokens are tied to their native protocol or network.
As such, a solution is needed to enable token holders to contribute maximally to network developments whilst still being able to maximize investment returns.
Liquid staking allows token holders to commit their assets to the network and still be able to leverage it in other areas of the ecosystem.
With lido, you stake ETH, receive a wrapped version in the process which can then be used as collateral for loans and so much more.
You know this makes me think about Polycub for a moment there. I was personally excited about the over collateralized lending that was to be developed(not sure if that's still in the roadmap) cause this was going to be an epic tool to maximize DeFi returns.
Think about it, buy ETH, stake to Lido, receive 3%+ APR on average, take the wrapped ETH issued to you in the process, head over to MakerDAO or whatever other lending protocol that accepts it, use it for collateral to take out a stablecoin loan, dump that stablecoin(DAI in this case) for Hive, buy Polycub with Hive and stake, receive % APR, use the xPolycub received to take out a USDC loan, dump that USDC for HBD and move it into HBD savings.
Can you count how many sources you're effectively earning from now?
First, ETH is an investment that has an upside potential, it's literally the largest chain. It sucks, but it has more potential to continue in its dominance than fail, so you have an investment that should grow in value overtime and you're earning a 3%+ APR on top of that.
Now, on polycub, you would be earning interest as the protocol grows and if you look at the value dynamics of the protocol(as it was presented), there's quite an insane upside potential if a good amount of investors are attracted.
Now note that the loan from Polycub is self-paying, so the only debt you have to settle is that on MakerDAO and your HBD savings could potentially provide some funds for that.
This is what happens when protocols develop tools that allow for vast value flow. That said, I'd still add that it comes with a great amount of risk and that if I were to play this long term, I would use the HBD yield at the end of this chain of investment to fund off-chain businesses in other to offset the risk of being fully connected to the volatility of the crypto markets.
Liquid staking has the potential to take DeFi to whole new levels with minimal risks as all issued wrapped tokenized are backed by the locked native assets and those tokens do not hold any protocol influence until burned for the native asset.
This is the future.