Coinbase Cloud announces support of liquid staking through a collaboration with the Acala Foundation, starting with KSM liquid staking on Karura.

Liquid staking lets token holders stake their tokens while still putting them to work in DeFi — without being subject to unbonding periods. This offers token holders more opportunities to participate in the crypto economy.

In traditional proof-of-stake networks, users who stake their assets are subject to an unbonding period where they cannot withdraw their tokens before a given time period. This time period is different for each protocol, such as 28 days for Polkadot and 7 days for Kusama. Additionally, even though users are earning rewards on their staked tokens, they are unable to use staked tokens in other applications.

Liquid staking changes that — it lets users earn both staking rewards as well as any rewards that would accrue from using their tokens in DeFi applications.

Through this process of liquid staking, users can stake their tokens and receive a representative L-Token in exchange (e.g. stake DOT and receive LDOT). The L-token represents both the principal staked asset as well as the staking yield that continues to accrue. L-Assets are tradable across all chains on the Polkadot and Kusama networks and are redeemable for the underlying asset at any time. Therefore, stakers are able to maximize their potential rewards. We must note that, like many other proof-of-stake networks, users also risk losing a portion of their tokens in the event that a validator is slashed.

Liquid staking launched for Karura in 2021, which allows users to stake KSM tokens on Karura in exchange for LKSM. To support the initiative, Coinbase Cloud is powering listed validators that receive delegations from the community.

LKSM offers liquidity for staked KSM, as users are not subject to an unbonding period and can unbond at any time for a small fee. This newfound liquidity will enable users to use their LKSM to earn yield in other use cases, such as to earn yield on Anchor Protocol in Acala’s recently announced integration. Early unbonding allows users to instantly exit staking positions, instead of waiting for the standard seven days unbonding period, eliminating the opportunity cost of the unbonding period.

Once live, the mechanism for liquid staking on Acala will function in the same way. Users can stake DOT and receive LDOT in return.

Liquid staking is set to lay the foundation for a number of new use cases, including minting aUSD (the native stablecoin of the Polkadot and Kusama ecosystem), creating new synthetic assets, and additional yield opportunities for aUSD and L-tokens. As the crypto and Polkadot DeFi ecosystem continue to grow, initiatives like liquid staking create opportunities to unlock additional value for token holders and help the network grow and scale securely through increased participation.