Liquid staking is key to interchain security

The birth of Bitcoin in 2009 will probably go down in history as one of the most notable technological events of all time. It demonstrated the first real-world use case for an immutable, transparent, and tamper-proof ledger, the blockchain, and established a foundation for the development of crypto and other blockchain-based industries.

Today, just ten years later, these industries are thriving. The cryptocurrency market capitalization has reached a record high of $3 trillion at its peak in November 2021. Already around the world he has over 300 million cryptocurrency users, but according to projections, this number could exceed 1 billion by December 2022. is just beginning.

Several factors have contributed to the success of the blockchain and cryptocurrency industry so far. But more than anything else, it is due to certain key features of the underlying technology. These include decentralization, trustlessness, and data security. Major blockchain networks like Bitcoin are very robust thanks to the Proof of Work (PoW) consensus mechanism. Globally distributed miners secure these networks by providing “hash” or computing power. Similarly, in the Proof of Stake (PoS) consensus that Ethereum plans to soon adopt, validators secure the network by locking or “staking” digital assets.

Related: The truth behind the misconceptions that thwart liquid stakebacks

However, the number of miners or validators is very important in PoW and PoS respectively. Security increases as the number of miners or validators increases. Therefore, only larger and more established blockchains can optimally benefit from traditional consensus mechanisms. On the other hand, emerging blockchains, regardless of their innovative potential, often lack the resources to fully secure their networks.

Hardening the security framework between chains is one way to solve this rather apt problem. Additionally, with innovations such as liquid staking, larger PoS blockchains can help secure emerging blockchains, ultimately making the entire industry safer and more stable.

Interchain security is critical for blockchains big and small

One might wonder why large blockchains would be interested in sharing validators with smaller ones. It’s a meritocracy competition, isn’t it? Of course yes, but that doesn’t necessarily mean underestimating the role of interoperability or cross-chain mechanisms. bring benefits to And this is the key to mass adoption of blockchain technology, the ultimate goal despite all competition.

PoS blockchains are generally more susceptible to various majority attacks than PoW-based blockchains. Billy Rennekamp of the Interchain Foundation succinctly points out: Upgrade or drain community pools with spending proposals. ”

That said, over 80 blockchains already use PoS, with more coming in the near future, including Ethereum. This is mainly due to the large amount of energy consumption and environmental impact of PoW chains. However, although this change is welcome, without robust countermeasures it could lead to an industry-wide security crisis. Everyone, including the big chains, will suffer. Enhancing security between chains is therefore a win-win approach, and in fact what we need now.

Liquid staking optimizes cross-chain security

So much for the rationale behind inter-chain security. In fact, it’s already running thanks to Cosmos Hub. But the journey isn’t over yet. Innovations like liquid staking can take interchain security to the next level.

For starters, liquid staking unlocks liquidity in assets staked (locked up) on PoS blockchains or other staking pools. This is very important as otherwise the liquidity staked will remain underutilized. Users cannot use their staked assets in decentralized finance (DeFi), which limits their ability to generate optimal yields. By offering tokenized derivatives of these staked assets, Liquid Staking allows individuals to enjoy the benefits of staking and her DeFi at the same time. This allows for additional utility in addition to maximizing yield.

Related: Layers of cryptocurrency staking in the DeFi ecosystem

If some people feel that these benefits weigh heavily on the financial side, it’s because they’re overlooking the more important aspect. Mechanisms that allow the Liquid Staking Protocol to release locked values ​​also enhance cross-chain security. Simply put, this works by having validators on established PoS blockchains (aka provider chains) like Cosmos validate transactions on smaller “consumer” chains. A validator cannot become fraudulent in the process. Because that would mean losing the assets you bet on the provider chain.

But the more tangible importance of liquid staking is to extend the scope of security between chains. Liquid staked assets can represent the value of assets staked on any producer chain. You can use this to share your validator with almost any consumer chain. In other words, what is primarily possible in Cosmos today will be broadly accessible in Liquid Staking.

This article is for general information purposes and is not intended, and should not be construed as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author and do not necessarily reflect or represent the views or opinions of Cointelegraph.