Liquid Staking: When Does It Help?

Abstract

In Proof-of-Stake blockchains, staking contributes to security. Traditionally, staked tokens were locked; liquid staking allows to delegate staking and redeploy (assets backed by) this capital in the decentralized finance (DeFi) ecosystem. In the context of DeFi lending, we extend the analytical framework of Carré and Gabriel (2024) to find out conditions under which liquid staking is, indeed, desirable. We show that it is so, for sufficiently small delegation costs, and if the DeFi lending platform is properly designed. Otherwise, there are situations in which liquid staking worsens security. This result holds for small or zero delegation costs, showing the limits of the ‘capital efficiency’ intuition, according to which allowing to redeploy capital can only be good, other things being equal. Finally, our results extend and confirm the robustness of those of Carré and Gabriel (2024), who analyze efficiency and security in DeFi lending when staking is traditional.

Keywords: blockchain, decentralized finance, Proof-of-Stake, liquid staking, wrapped tokens, protocol design, security, welfare