Liquid staking is an innovative method in decentralized finance (DeFi) that allows cryptocurrency holders to earn staking rewards while maintaining liquidity. Traditionally, staking DOT, Polkadot's native cryptocurrency, required locking tokens for a set period, limiting users' ability to trade or use these tokens elsewhere. Liquid staking solves this issue by providing tokenized representations of staked assets.
When users liquid stake DOT, they deposit their tokens into a staking protocol that issues a tokenized derivative (often called Liquid Staking Tokens or LSTs), such as vDOT. These derivative tokens represent the user's staked voucher and accrue staking rewards automatically. Users can freely use these tokens in other DeFi protocols or trade them, enhancing capital efficiency.
Liquid staking allows holders to retain liquidity while staking DOT. Tokenized derivatives like vDOT can be traded freely on decentralized exchanges like Hydration.
Participants receive staking rewards continuously and automatically. As staking rewards are received, vDOT increases in value, without any change to the quantity of tokens.
Users can use liquid staking tokens in other DeFi activities such as lending, borrowing, or providing liquidity in liquidity pools.
Unlike traditional staking methods requiring 28 days of unbonding periods, liquid staking allows immediate access to tokens via derivatives.
Bifrost leverages Polkadot’s native security and decentralized infrastructure. With a solid foundation already in place, Bifrost has surpassed $60M in TVL and now dominates over 67% of liquid staking market on Polkadot.
Unlike other liquid staking solutions, Bifrost employs a dedicated account to manage the unstaking queue. This design ensures that unstake requests are not restricted to batching in each ERA. For instance, when a user initiates an unstake request for vDOT and no DOT is currently available in the unstake queue, the system will trigger an on-chain request to begin the standard 28-day unbonding period. However, if another user subsequently deposits a large amount of DOT—say, 10,000 DOT—within that period, Bifrost can immediately fulfill the original unstake request using the newly deposited assets. This mechanism allows users to bypass the 28-day waiting period entirely. Remarkably, the total fee for this advanced service is only 0.1%.
On Hydration, users can employ a looped strategy by depositing vDOT as collateral to borrow DOT, swapping the borrowed DOT for additional vDOT, and repeating the process. This recursive mechanism allows users to amplify their exposure to staking rewards and optimize capital efficiency.
vDOT can be utilized as collateral on Interlay’s money market, enabling users to borrow assets such as DOT or iBTC. Borrowing DOT allows users to restake and mint additional vDOT, effectively compounding their staking position. Alternatively, borrowing iBTC provides access to a broader range of yield-generating strategies within the DeFi ecosystem, expanding the utility of vDOT across multiple protocols.
vDOT holders retain full governance rights within the Polkadot OpenGov system. By staking DOT to mint vDOT, users maintain their ability to participate in governance without forfeiting yield. This also underscores Bifrost’s commitment to neutrality and non-custodial participation in network governance.
Liquid staking DOT presents an attractive alternative to traditional staking by combining liquidity and staking rewards. While offering significant advantages such as enhanced liquidity and capital efficiency, users must remain aware of inherent risks. Always perform thorough due diligence when choosing a liquid staking provider.
By understanding these aspects, investors and users can effectively leverage liquid staking DOT to optimize their DeFi strategies.
