What Is “Liquid Staking” and What Financial Risks Does It Introduce?
Liquid staking is a mechanism where a user stakes their cryptocurrency through a protocol and receives a tokenized derivative (a "liquid staking derivative" or LSD) representing their staked asset plus rewards. The financial risk introduced is counterparty risk (the risk of the staking pool operator failing), smart contract risk (bugs in the protocol), and the potential for the LSD to de-peg from the underlying asset.
Glossar
Counterparty Risk
Exposure ⎊ Counterparty risk represents the potential loss incurred when a trading partner defaults on their contractual obligations.
Smart Contract Risk
Vulnerability ⎊ Smart contract risk, within cryptocurrency and derivatives, stems fundamentally from inherent code flaws and systemic dependencies.
Financial Risks
Scope ⎊ The spectrum of potential negative outcomes inherent in trading cryptocurrency derivatives, encompassing market volatility, counterparty default, smart contract failure, and regulatory shifts.