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Liquid staking, which allows users to stake cryptocurrencies while retaining a tradeable variant of the locked coins, will soon become accessible to investors wary of Ethereum's high transaction costs.
On Monday, Ethereum-based liquid staking giant Lido Finance announced plans to offer staked ether (stETH) – a derivative representing an equivalent amount of ether (ETH) deposited into the protocol – on layer 2 systems, which process transactions relatively faster and at cheaper costs than the Ethereum mainnet.
"For Ethereum stakers, this means staking with lower fees and access to a new suite of DeFi applications to amplify yields," Lido said in an explainer blog published Monday. Lido's stETH is heavily integrated into decentralized finance. Ethereum's high transaction costs have kept retail investors from accessing decentralized finance (DeFi), therefore, the launch of liquid staking solutions on the relatively cheaper layer 2s could boost mainstream adoption of DeFi.
Layer 2 protocols run a separate blockchain on top of the mainnet, providing a secondary framework where transactions can take place. Once the transactions are processed, the data is sent back to the layer 1 blockchain, where it is stored in the blockchain ledger. That way layer 2s help alleviate network congestion on the mainnet.
Polygon, Optimism, Arbitrum and Loopring are some of the well-known Ethereum layer 2 solutions, facilitating higher transaction throughput (expressed as a number of transactions per second) at lower prices to broaden participation, all the while retaining the security of the layer 1.
While Lido did not announce a timeline for its layer 2 expansion, it did express commitment to offering liquid derivatives of staked tokens on various layer 2s with "demonstrated network activity," starting with Arbitrum and Optimism.
Lido said it has already integrated with Ethereum smart wallet Argent to make wstETH, the wrapped version of the staked ether token, available on Ethereum-focused scaling product zkSync. Earlier this year, Aztec protocol unveiled its layer 2 system on zkSync.
At press time, Lido controlled 90% of the $6.9 billion ether liquid staking market, according to Dune Analytics.
Lido users can stake their ether in return for stETH, which can be used in decentralized lending and borrowing protocols to generate an additional yield. Lido users can also avoid the burden of owning a minimum of 32 ETH to participate in staking – a process of holding coins in a cryptocurrency wallet to support the network's operations in return for newly minted coins. Lido users can redeem stETH for ETH only after the completion of Ethereum's transition from the proof-of-work to the proof-of-stake consensus mechanism.