Liquid staking benefits the industry as a whole because it enables bigger proof-of-stake (PoS) blockchains to help secure smaller ones.
The creation of Bitcoin in 2009 is likely to rank among the most significant technological moments in history. The first actual use case for blockchain's immutable, transparent, and tamper-proof ledgers was demonstrated, laying the groundwork for the growth of cryptocurrency and other blockchain-based enterprises.
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These industries are still thriving a little over ten years later. When it peaked in November 2021, the total market capitalization of cryptocurrencies reached an all-time high of $3 trillion. Worldwide, there are currently over 300 million cryptocurrency users, and predictions indicate the number could reach 1 billion by December 2022. Despite being incredible, this journey has only just begun.
The success of the blockchain and cryptocurrency industries thus far has been attributed to several things. But more than anything, it's because of several important aspects of the underlying technology, including data security, decentralization, and lack of confidence. Due to their proof-of-work (PoW) consensus process, popular blockchain networks like Bitcoin are generally quite stable.
These networks are protected by globally dispersed miners who contribute "hashing," or computer power. Similar to this, validators protect the network in the proof-of-stake (PoS) consensus that Ethereum aims to implement soon by locking up or "staking" digital assets.
The number of miners or validators is vital in PoW and PoS, respectively; more miners or validators equal more security. Traditional consensus mechanisms are thus most effective on bigger, more established blockchains. On the other hand, despite their innovation potential, new blockchains sometimes lack the resources to safeguard their networks effectively.
One approach to addressing this relatively important issue is to strengthen interchain security frameworks. Additionally, larger PoS blockchains can assist safeguard the emerging ones thanks to technologies like liquid staking, ultimately facilitating a safer and more stable market as a whole.
Both large and small blockchains must prioritize interchain security
One wonders why bigger blockchains would ever wish to share validators with smaller blockchains. After all, isn't it about meritocratic competition? Of course, it is, but that doesn't imply we should minimize the importance of cross-chain or interoperability techniques. Furthermore, the success of new, innovative blockchains will be advantageous to both them and the sector at large. And this is the key to using blockchain technology widely, which is the end goal despite all resistance.
Generally speaking, PoS blockchains are more vulnerable to different majority attacks than their PoW-based counterparts. "If one can control one-third of a network, they can do censorship attacks," Billy Rennekamp of the Interchain Foundation succinctly stated. "If they can control two-thirds of the network, they can control governance and pass a proposal for a malicious upgrade or drain the community pool with a spending proposal.”
Having said that, Ethereum is one of the approximately 80 blockchains that already use PoS, with more to follow soon. This is mostly due to PoW chains' enormous energy usage and negative environmental effects. This transformation is positive, but if no strong steps are taken, it could result in a security disaster that affects the entire sector. If that occurs, the sector would lose the confidence of investors, which will hurt everyone—even the larger chains with established PoS networks. Therefore, improving interchain security is a win-win strategy and is urgently needed.
Interchain security is optimized through liquid staking
So much for the interchain security justification. Because of the Cosmos Hub, is already in operation. However, there is still a long way to go. With advancements like liquid staking, interchain security can be increased to a new level.
For those who don't know, liquid staking unlocks the liquidity of assets that have been staked (locked up) on PoS blockchains or other staking pools. This is crucial because, without it, the staked liquidity is not properly utilized. Users are prevented from using their staked assets in decentralized finance (DeFi), which limits their ability to produce the best yields. Liquid staking enables people to take advantage of staking and DeFi concurrently by providing tokenized derivatives of these staked assets. In addition to increasing yield, this also provides added utility.
Some individuals may find these benefits overly focused on money, but they fail to consider a more important factor. Interchain security is improved by the mechanism that allows liquid staking methods to release locked assets. Simply put, this work enables transaction verification on smaller "consumer" chains by validators on established PoS blockchains like Cosmos, also known as the provider chain. Validators won't give up on the process because doing so would mean losing their staked assets in the provider chain.
The more specific importance of liquid staking is that it increases interchain security, though. The value of the assets staked on any producer chain can be represented by the liquid-staked assets, which can subsequently be utilized to share validators with almost any consumer network. In other words, liquid staking enables widespread access to what is currently only achievable on Cosmos.
Disclaimer
The content is for informational purposes only, may include the author’s personal opinion, and does not necessarily reflect the opinion of The Daily CrptoZ. All Financial investments, including crypto, carry significant risk, so always do your complete research before investing. Never invest money you cannot afford to lose; the author or the publication does not hold any responsibility for your financial loss or gains.
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