Exploring the Benefits and Security of Liquid Proof of Stake (LPoS)

What Is Liquid Proof of Stake (LPoS)?

"If you're familiar with blockchain and cryptocurrencies, you've likely encountered concepts like proof of work and proof of stake. However, a newer validation method has emerged—liquid proof of stake (LPoS). LPoS enhances traditional proof of stake (PoS) by enabling users to stake assets without complete lockup, employing a trusted execution environment (TEE) as an intermediary."

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How Does Liquid Proof of Stake Help?

"Despite its advantages, LPoS requires security measures to prevent attackers from forging stakes or executing double-spending schemes. Validators play a crucial role in this process, as the TEE selects them randomly based on the size of their stake. Validators are responsible for verifying transactions and proposing blocks. If any malicious activity is detected, validators may face slashing, resulting in the loss of part of their stake. This system ensures the integrity of validators and enhances network security. Additionally, the TEE employs cryptographic techniques to thwart external attacks on the staked assets, providing protection against potential draining or theft of your coins."

How Are Staked Assets Protected in Liquid PoS?

Despite its advantages, LPoS requires security measures to prevent attackers from forging stakes or executing double-spending schemes. Validators play a crucial role in this process, as the TEE selects them randomly based on the size of their stake. Validators are responsible for verifying transactions and proposing blocks. If any malicious activity is detected, validators may face slashing, resulting in the loss of part of their stake. This system ensures the integrity of validators and enhances network security. Additionally, the TEE employs cryptographic techniques to thwart external attacks on the staked assets, providing protection against potential draining or theft of your coins.

What Is Liquid Staking?

Liquid staking enables users to stake tokens and utilize them within the DeFi ecosystem. This involves wrapping staked tokens, providing users with a wrapped token representing the underlying collateral. These wrapped tokens can be transferred and generate yield. Unlike traditional staking, liquid staking allows users to stake and unstake without a lock-up period, enhancing capital efficiency and liquidity on proof-of-stake blockchains.

Benefits of Liquid Staking:

1. Capital Efficiency: Liquid staking allows DeFi protocols to maximize capital usage, promoting faster ecosystem growth.

2. Yield Opportunities: Investors can earn additional yield by using wrapped staked tokens as yield-bearing assets, complementing staking rewards.

3. Flexibility: Unlike traditional staking, liquid staking provides immediate access to funds, crucial during market volatility.

Drawbacks:

1. Smart Contract Risk: Liquid staking introduces an additional layer of smart contract interaction, potentially exposing users to smart contract vulnerabilities.

2. Collateral Value Divergence: There's a risk of temporary divergence between the collateral value and the wrapped token value, as observed in certain instances like stETH trading at a discount to ETH. However, such divergences tend to correct over time.

What is Snapshot ?

Traditionally, the term snapshot refers to the ability to record the state of a computer system or storage device at a specific point in time. In cryptocurrencies, a snapshot is often describing the act of recording the state of a blockchain on a particular block height. In this case, the snapshot records the contents of the entire blockchain ledger, which includes all existing addresses and their associated data (transactions, fees, balance, metadata, and so on).

Snapshots are commonly used during airdrops events before each round takes place. During an airdrop, tokens are distributed based on the balance of each blockchain address. In this case, snapshots are taken to record the balance of each token holder, at a specific point in time (i.e., block height). In most cases, users can move their funds after the snapshot is taken, without compromising their eligibility to participate in that round of distribution.

Snapshots are also important during blockchain hard forks, as they mark the block height in which the main chain will be recorded before giving birth to the new chain. For instance, when the Bitcoin Cash hard fork took place (on August 1st, 2017), every blockchain address that had Bitcoins at block 478,558, had the balance copied on the Bitcoin Cash blockchain. The reason for that is because both blockchains share the same historical data prior to the fork. As soon as the split is done, each blockchain network will operate independently.