What is Liquid Staking?
Liquid staking allows you to stake your tokens without losing access to their liquidity. When you stake, you receive a token that represents your staked assets, called a "liquid staking token." These tokens can be traded or used elsewhere while your original assets remain staked.
For example, when you stake SOL and receive mSOL, you're not exchanging one token for another. Instead, mSOL represents your original SOL, similar to wrapping a token or getting a "proof-of-stake token" that you can still use as an SPL token.
mSOL is not issued 1:1. You receive mSOL at the current mSOL/SOL rate, and that rate rises every epoch as rewards accrue, so 1 mSOL is worth more than 1 SOL. You will receive fewer mSOL than the SOL you staked. Nothing has shrunk: the same staked value is simply held as fewer, more valuable tokens.
Staking SOL to mSOL is just like regular staking. The rate at which Marinade redeems mSOL for SOL changes only based on staking rewards, not market speculation. mSOL bought or sold on the open market is priced by that market and can sit slightly away from the redemption rate.
This makes mSOL a stable way to diversify your stake across multiple validators in Marinade's stake pool, instead of locking your tokens with a single validator.
Since mSOL represents your staked position, it shouldn't be treated differently from staking for tax purposes. However, it's always best to consult your local tax laws for clarity.
Why is Liquid Staking Important?
Liquid staking solves several challenges in Proof-of-Stake (PoS) networks:
No Opportunity Cost: With liquid staking, you can earn staking rewards while also using your tokens in other DeFi activities like lending or trading. You don't have to choose between staking and using your tokens elsewhere. You can do both.
No Unbonding Wait: Normally, unstaking tokens takes time because of the unbonding period. With liquid staking tokens you can exit sooner, though not for free. Instant unstake returns your SOL right away and you pay a market spread for it. Delayed unstake costs 0.2% of the amount unstaked and still waits about one epoch.
Reduced Risk from One Validator: With liquid staking, your tokens can be spread across multiple validators. This reduces the risk of relying on a single validator and helps protect against penalties if one validator fails. Marinade's solution allows you to easily diversify your staked SOL across many validators.