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Liquid staking — a double spend or double profits?

Coinbase Cloud announced a collaboration with the Acala Foundation aimed to support liquid staking. The cooperative work will start with…

Coinbase Cloud announced a collaboration with the Acala Foundation aimed to support liquid staking. The cooperative work will start with KSM liquid staking on Karura. But, what is liquid staking?

At the end of April, an announcement appeared on the Coinbase Cloud blog. In it, the head of Coinbase Cloud, Joe Lallouz, shared the news about the upcoming collaboration. Coinbase Cloud together with Acala Foundation will work on liquid staking. And work will start with KSM liquid staking from Karura (all-in-one DeFi hub of Kusama).

What is liquid staking? This was explained very clearly by Joe Lallouz in the announcement of the collaboration. «Liquid staking lets token holders stake their tokens while still putting them to work in DeFi — without being subject to unbonding periods. This offers token holders more opportunities to participate in the crypto economy».

One of the disadvantages of the classic proof-of-stake network is an unbonding period. This is the period of time for which the user’s assets are frozen before withdrawing them from the proof-of-stake network. This time period may be different depending on the protocol. For example, Polkadot has 28 days, and Kusama has 7 days. In addition to this disadvantage, there is another one — the inability to use staked tokens in other applications.

It is these two problems that liquid staking is designed to solve. It allows users to both receive a reward for staked tokens, and use tokens to receive additional rewards in various De-Fi applications.

How does it work? For each staked token, the user receives a representative L-Token. This L-Token represents both a staked asset and a staked yield, which continues to accumulate. L-Token can be used in the Polkadot network and in the Kusama network. This token can be bought, sold, and also exchanged for the main asset at any time. Such technology can help users increase their potential income.

The meaning of the L-Token is that it is given in exchange for your staked tokens in the same amount. Thus, the interest from the main tokens is accumulating, and the L-Token is something like compensator of the frozen liquidity of your staked tokens.

Liquid staking has been available for Karura since 2021. The KSM token can be staked, and in exchange you can get LKSM. LKSM offers liquidity for staked KSM, as users are not subject to an unbonding period and can unbound at any time for a small fee. Coinbase Cloud is powering allowlisted validators that receive delegations from the community. Learn more about KSM/LKSM staking here.

As part of the Coinbase Cloud and Acala Foundation collaboration, it is planned to launch liquid staking on Acala. By analogy with KSM and LKSM, LDOT will be available for DOT. Also, “Liquid staking is set to lay the foundation for a number of new use cases, including minting aUSD (the native stablecoin of the Polkadot and Kusama ecosystem), creating new synthetic assets, and additional yield opportunities for aUSD and L-tokens.»

Liquid staking is an important technology for validators that can return to them the liquidity of staked tokens. Still a question arises whether the most sought feature of crypto — prevention of “double spend” is undermined if token design is changed to be used in two places simultaneously. From the current design, it looks like this is not the case. They just issue a different token instead of the staked one. So the questions is in a different domain: where is this new token project gets its profits to pay interest?