Cross-chain liquid staking tokens enable users to deposit their assets into a liquid staking protocol on one blockchain and utilize a representation of those staked assets on another blockchain.
Liquid staking has emerged as one of the most popular ways of earning yield in the cryptocurrency ecosystem. As of September 2023, more than 25M ETH is staked, representing ~21% of the circulating supply, while about half of that staked ETH supply is deposited into liquid staking protocols.
Liquid staking expands proof-of-stake staking systems by unlocking liquidity for staked tokens. However, these tokens can typically only be used on the network they are issued on.
Cross-chain liquid staking tokens (LSTs) open up new design space for the DeFi ecosystem by unlocking cross-chain liquidity for liquid staking tokens.
In this post, we’ll briefly explore what liquid staking is, the opportunities and risks of cross-chain liquid staking, and how Chainlink is critical infrastructure for enabling cross-chain LSTs across Web3.
What Is Liquid Staking?
Traditional staking in proof-of-stake systems involves locking up cryptocurrency in a smart contract to secure a network and receiving rewards in the form of additional tokens. While this supports the security of the underlying network, it can be a less flexible option, as the staked assets are illiquid and unable to be utilized across DeFi.
Liquid staking tokens (LSTs) introduce a solution to this problem by enabling users to unlock the liquidity of their staked tokens while simultaneously continuing to earn rewards. Liquid staking providers take user deposits, stake the tokens on behalf of users, and issue a receipt in the form of a new token, which is redeemable for the staked tokens along with a share of accrued rewards or penalties.
For example, a user could deposit ETH to the Lido staking pool and receive stETH (staked ETH) tokens in return. These stETH tokens can then be used as collateral or to earn yield in other DeFi protocols, all while continuing to accrue staking rewards. However, LSTs are typically confined to the network on which they were issued, which is where cross-chain liquid staking tokens come into play.
What Are Cross-Chain Liquid Staking Tokens?
Cross-chain liquid staking tokens are a fusion of liquid staking and cross-chain interoperability. Cross-chain LSTs enable users to deposit their assets into a liquid staking protocol on one blockchain and utilize a representation of those staked assets on another blockchain. Cross-chain LSTs can be utilized across multiple chains while the original staked assets continue to accumulate staking rewards.
As mentioned, there is significant interest in liquid staking solutions across many of the largest proof-of-stake ecosystems. However, LSTs are typically restricted to use on one network, siloing liquidity and restricting capital flow between various blockchain ecosystems. Cross-chain LSTs unleash additional utility for these tokens by enabling them to be used across the multi-chain ecosystem.
How Do Cross-Chain LSTs Work?
Cross-chain LSTs work similarly to single-chain LSTs, with the added benefit of being cross-chain enabled.
Liquid staking providers take user deposits on Chain A, stake those tokens on behalf of users, and provide them with a receipt in the form of a new token on Chain B, which is redeemable for the staked tokens (plus/minus rewards and penalties) on Chain A.
Benefits and Risks of Cross-Chain Liquid Staking
The benefits of cross-chain LSTs align with those of any cross-chain token, offering more liquidity, enhanced composability, and expanded opportunities for earning rewards. Enabling a token to function across multiple blockchains generally broadens its utility, granting access to a larger pool of liquidity and yield opportunities.
The risks associated with cross-chain liquid staking bear similarities to those of single-chain LSTs. These include slashing risk, vulnerabilities stemming from smart contract bugs and exploits, and token volatility.
It’s worth noting that certain risks may be heightened in the context of cross-chain LSTs due to their reliance on cross-chain infrastructure, which can introduce an additional layer of risk. This is why it’s critical to integrate a secure, reliable, and decentralized cross-chain solution for providing the necessary infrastructure for constructing a cross-chain liquid staking token.
The Role of Chainlink in Cross-Chain Liquid Staking
High-quality Chainlink infrastructure can play a critical role in supplying cross-chain liquid staking tokens with key Web3 services. Chainlink Data Feeds can be used for providing highly reliable and secure pricing data on LSTs. Chainlink Automation can also be leveraged to trigger smart contracts that utilize cross-chain liquid staking tokens.
As the most secure, reliable, and easy-to-use interoperability protocol for building cross-chain applications and services, the Cross-Chain Interoperability Protocol (CCIP) gives developers the flexibility to build their own cross-chain solutions using Arbitrary Messaging. Notably, CCIP also provides simplified token transfers that enable protocols to securely transfer tokens across chains in a fraction of the time it would take to build a custom solution—with battle-tested security. CCIP provides audited token pool contracts that handle the complexity of burning/minting or locking/unlocking tokens across chains.
In addition to providing fully audited token pool smart contracts, CCIP token transfers have additional security features, such as transfer rate limits that allow developers to cap the value transferred over a given time interval. Additionally, the Risk Management Network is an independent network of nodes that enhances CCIP’s security by acting as a secondary validation service.
The combination of these features, all of which are supported by Chainlink’s industry-standard decentralized infrastructure, enables protocols to quickly and seamlessly create cross-chain LSTs.
Making liquid staking tokens cross-chain enabled not only deepens the liquidity of LSTs but also helps create greater connectivity within DeFi. With the support of Chainlink’s robust Web3 services platform, cross-chain LSTs can enhance capital efficiency across the multi-chain ecosystem and provide broader utility for staking in proof-of-stake systems.