Arcade Receipts, Web3 Liquid Staking, and More: Crypto Liquid Staking Explained for Beginners

Preface: This is part 2 of a series where I break down the concept of crypto liquid staking to a non-crypto audience using the metaphor of a new-age arcade. Read part 1 here, where I covered the concept of traditional staking!

A caveat: a lot of technicalities have been omitted to simplify explanations, but this should establish a fundamental understanding of Web3 staking amongst non-crypto native readers. :)

A Brief Recap of the New-Age Arcade

Welcome back! If you’re new to the Arcade and Web3 staking, I strongly urge you to read part 1 of this series before returning. Here’s a quick recap:

Web3 staking is when users/stakers lock up their crypto in smart contracts that make up a blockchain (such as Ethereum), often with the help of validators. This is a win-win situation where users earn staking rewards (passive income!) while helping to make the blockchain/Ethereum more secure.

Similarly, Players/Contributors in the Arcade deposit Tokens into the Automated System with the help of Depositors via the Token Machines, earning Deposit rewards (passive income!) while contributing to the robustness of the system.

The Problem With Staking or Depositing

In both cases, users face locked liquidity because tokens are locked in the system during staking or depositing. As such, they lose out on the chance (an opportunity cost) of using this locked amount to earn more by using other Ethereum platforms or playing other games in the Arcade.

But fret not because there’s a solution to this! First, let’s switch gears back to Arcade mode.

A Different Token Machine

We bring you an upgraded Token Machine V2 to solve locked liquidity! With V2, Contributors will receive Receipts representing the amount deposited in the Automated System in a 1:1 ratio. For instance, if a Contributor deposits 5 Tokens, he will receive 5 Receipts.

If Contributors want to exchange Receipts for Tokens, they can simply head to a Token Machine V2 to redeem the Deposit rewards and exchange Receipts back for Tokens in a 1:1 ratio.

What’s special about Receipts is that they are also recognized as currency in the Arcade and can be used to play other games. This means that now, for the same amount of money, more work can be done (more profit!).

Higher Risk for Higher Reward

Granted, V2 is a new system with only a few units running. For now, it can’t beat the trial-and-tested trusty advantage of the OG Token Machine, and Players might thus be suspicious of its reliability.

Receipts are distributed by Token Machine V2, and if the V2 system breaks down, then Receipts will become void.

Hence, Contributors using V2 are trusting the reliability of the system, and run the risk of a breakdown.

In order to incentivize adoption, the V2 system gives out additional V2 rewards for early users, building towards the network effect. The more people trust and use Token Machine V2, the more Receipts will be generated and circulated in the Arcade, and the more games will support the use of Receipts (as with Tokens), contributing to a flywheel effect toward the success of the V2 system.

A Comparison Between the OG Token Machine and V2

If a Contributor has 5 Tokens and uses the OG Token Machine, he gains Deposit rewards only. (Here’s a recap on the roles if you need it!)

If a Contributor has 5 Tokens and uses Token Machine V2 instead, he gains Deposit rewards, V2 rewards, and any additional profit from playing other Arcade games with his Tickets. This gives the Contributor more flexibility, having the chance to gain more rewards with the same 5 Tokens.

Introducing Liquid Staking Tokens (LSTs), A.K.A. Liquid Staking Derivatives (LSDs)

The Arcade Receipts parallel liquid staking tokens (LSTs), also known as liquid staking derivatives (LSDs) in the Web3 world. As the name suggests, LSTs provide liquidity to users who have their crypto locked in when staking. The LST mechanism was pioneered by Lido in December 2020 and has since gained traction and adoption by multiple protocols across many chains.

*Today, liquid staking is the sector/category in decentralized finance (DeFi) with the largest total value locked (TVL) at $29B, followed by lending at $20.8B. Lido is also the DeFi protocol/platform with the highest TVL at $20B.

The beauty in all of this is how a simple concept of providing a receipt for staking can lead to many more possibilities in the space.

*Numbers as of 18th Dec 2023, according to DeFiLlama.

A Broad View of How Liquid Staking Works

Let’s use Lido as an example to explain since it is the most widely used liquid staking protocol.

When users stake ETH with Lido, they get stETH (staked ETH) in a 1:1 ratio, just like how Contributors get a Receipt for every Token deposited.

While users accumulate staking rewards through staking ETH on Ethereum with the help of Lido validators, they can continue to participate in other DeFi protocols using the Lido-issued “staking receipt”, stETH.

With this, users no longer face the disadvantage of locked liquidity and can put their assets to work in multiple ways at the same time! For instance, stETH can be used on lending platforms to borrow crypto or leveraged and traded on exchanges — there are many ways stETH can be used in DeFi to bring in more profits for users (when used correctly!).

This is just like how Players can use Receipts to play other games in the Arcade for more profit (if the odds are in their favor!).

The 2 most common mechanisms used in LST protocols are rebasable LSTs and exchange rate-based LSTs. We’ll not complicate matters by going too deep into the details here, except that Lido uses the former. Do read up on your own if it interests you!

Some Risks

Increased third-party risk is a disadvantage since the liquid staking platform, such as Lido, is involved in the process. This is similar to Contributors trusting the reliability of the V2 system.

Users will automatically take on the smart contract risks and a chance of Lido being exploited. Users must also trust Lido’s validators in handling their crypto.

Is Liquid Staking Only for Ethereum?

Good question! Absolutely not.

Just as staking is a way to further secure all proof-of-stake (PoS) networks, liquid staking is a solution to the locked liquidity of staking on all PoS networks too. For instance, Lido also offers liquid staking on Polygon. In fact, as of today, in Q4 2023, one of the hottest topics is Jito, an up-and-coming liquid staking protocol built on Solana.

Ending Remarks

Start your Web3 journey today with staking; be it on Ethereum, Polygon, Solana, or any other PoS chains. NFA, but staking is quite a safe and beginner-friendly way to get started in DeFi while earning some passive income! But of course, DYOR! Also, the bull market is almost back (??), so it’s a good time to start. ;-)

This non-sponsored article is for informational purposes and definitely should not be taken as a form of financial advice. Reach out to me to discuss this article or any other Web3 topics! Say hi on X (Twitter): https://twitter.com/0xxxxxin

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