Liquid Staking: When Does It Help?

Sylvain Carré () and Franck Gabriel ()
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Sylvain Carré: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique
Franck Gabriel: LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: Liquid staking, which allows to redeploy capital from a blockchain's staking pool into decentralized finance (DeFi), is a recent instance of a financial innovation promoted for its ``capital efficiency". But is it always desirable? We build a tractable general equilibrium setup to answer this question, where for concreteness the DeFi outlet is a lending pool. In the benchmark case without friction, liquid staking does improve upon traditional staking. But we prove that liquid staking can backfire when a friction is at play. (i) When investors are large, liquid staking exacerbates concentration issues, so that replacing traditional by liquid staking may be inefficient. (ii) When the security of the blockchain is endogenous, liquid staking can worsen security.

Keywords: Welfare; Security; Market concentration; Large agents; Wrapped Tokens; Liquid Staking; Proof-of-Stake PoS; Decentralized finance; Blockchain (search for similar items in EconPapers)
Date: 2024-10-15
Note: View the original document on HAL open archive server: https://hal.science/hal-04867678v1
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