"Pledge" refers to the process of locking up the native assets of a blockchain that uses the PoS (Proof-of-Stake) consensus mechanism (such as Ethereum) for a certain period of time to help maintain the operation of the blockchain and earn corresponding rewards.
Background#
When pledging in a traditional way, one needs to become a validator on the blockchain network. Taking Ethereum as an example, becoming a network validator requires preparing hardware devices that meet certain conditions and pledging 32 ETH, which is relatively high in terms of threshold. Once becoming a validator, the pledged ETH will be locked in a smart contract and cannot be used for other purposes, thus locking up the liquidity of ETH. Because low liquidity may end the cryptocurrency market, leading to bankruptcies of companies, traders exiting the market, and the currency losing all its value. Therefore, liquidity pledging has become an alternative solution to traditional pledging, to some extent addressing some of the drawbacks of traditional pledging.
What is Liquidity Pledging#
Users can provide ETH to liquidity pledging platforms without directly participating in traditional pledging. The platform will collect the ETH provided by participating users and package these ETH into batches of 32 each to be distributed to eligible network validators. These network validators will then directly engage in traditional pledging, and the profits from pledging will be shared by users, liquidity pledging platforms, and network validators. Therefore, liquidity pledging has lower thresholds and lower returns compared to traditional pledging.
What are Liquid Staking Derivatives (LSD)#
When users participate in liquidity pledging and provide ETH to liquidity pledging platforms, the platform will mint an equal amount of derivative tokens tied to the ETH as proof of the user's participation in liquidity pledging. These derivative tokens are called "Liquid Staking Derivatives" (LSD). Since these derivative tokens represent the user's ETH on the liquidity pledging platform, they are generally considered to have slightly lower value than the original ETH. Therefore, these derivative tokens can also be traded directly or used in other DeFi protocols to earn additional income. This provides liquidity to pledgers even when the original assets are still pledged.