Liquid stake and frozen stake are terms often used in Proof of Stake (PoS) blockchain systems to describe different states of a staker’s funds (cryptocurrency) in relation to their participation in the network’s consensus and reward mechanisms.
1. Liquid Stake
Liquid stake refers to the portion of a staker’s funds that are not currently locked up or “staked” in the consensus process. These funds are fully accessible and can be transferred, traded, or used in any way the staker wishes at any time.
Characteristics:
- Fully usable: Liquid stake can be freely moved, spent, or traded on exchanges without any restrictions.
- Not contributing to consensus: Since liquid stake is not staked in the network, it does not contribute to the validation of blocks, nor does it earn staking rewards.
- No penalties: Liquid stake is not subject to penalties or slashing since it is not part of the network’s consensus process.
Example:
Suppose you have 1,000 tokens, and you decide to stake 700 of them in a Proof of Stake system. The remaining 300 tokens are considered liquid stake because they are not locked up in staking. You can spend or trade these tokens without any restrictions.
2. Frozen Stake
Frozen stake refers to the portion of a staker’s funds that are locked up in the staking process and are currently participating in the consensus mechanism (validating blocks, securing the network). These funds cannot be freely accessed, spent, or moved while they are staked.
Characteristics:
- Locked up: Frozen stake is locked in the staking process, meaning the staker cannot move, spend, or trade these tokens while they are being used to validate the network.
- Contributing to consensus: Frozen stake plays an active role in the consensus mechanism by helping to validate transactions and secure the network. Stakers are often rewarded in proportion to the amount of frozen stake they have.
- Subject to penalties: Frozen stake can be slashed (reduced or lost) if the staker behaves maliciously or negligently, such as by double-signing or going offline for an extended period.
- Time-locks: In many PoS systems, once funds are staked (frozen), they may be locked for a specific period. After unstaking, it may take several days or weeks before the stake becomes liquid again.
Example:
Using the earlier example, if you stake 700 tokens, they become frozen stake. These 700 tokens are locked and cannot be used for other activities until they are unstaked. While they are frozen, you earn rewards for helping secure the network.
Differences Between Liquid and Frozen Stake
| Feature | Liquid Stake | Frozen Stake |
|---|---|---|
| Accessibility | Fully accessible and can be spent or traded | Locked in the staking process and inaccessible |
| Participation in Consensus | Does not contribute to consensus or earn rewards | Actively contributes to the network and earns rewards |
| Risk of Slashing | No risk of slashing | Can be slashed if the validator misbehaves |
| Time-Locked | No time-lock; available immediately | Often locked for a period and must be unstaked before use |
Importance of Liquid and Frozen Stake in PoS Systems
- Flexibility: Liquid stake gives stakers flexibility by allowing them to keep a portion of their funds available for immediate use, while frozen stake allows them to contribute to securing the network and earning rewards.
- Security: Frozen stake is essential for securing the network, as it incentivizes validators to act honestly. The potential risk of slashing for misbehavior ensures that validators have “skin in the game.”
- Rewards: Frozen stake generally earns staking rewards, which are distributed based on the amount staked and the overall network participation. This is a key incentive for locking funds in staking.
Examples of Liquid and Frozen Stake in Blockchains:
- Ethereum 2.0:
- When a validator stakes ETH in Ethereum 2.0, those funds are frozen and cannot be withdrawn until after the full transition to Proof of Stake. Validators are rewarded for securing the network, but their staked ETH is locked during this period.
- Any unstaked ETH that is not part of the validator’s stake is liquid, meaning it can be freely traded or spent.
- Cardano:
- In Cardano, ADA holders can delegate their stake to a stake pool. While their stake is delegated, it can still be considered liquid, as Cardano allows users to transfer or spend their ADA even while it is delegated. This makes Cardano unique compared to systems where staking means funds are “frozen.”
- Tezos:
- Tezos uses a staking mechanism where staked funds (referred to as “baking”) become frozen. The staked funds cannot be moved until they are unstaked and may be subject to slashing if the validator misbehaves.
Conclusion:
- Liquid stake refers to funds that are free to use, while frozen stake is locked up in the staking process to participate in network consensus.
- Frozen stake contributes to the security of the network and earns rewards but comes with the risk of slashing.
- Both types of stake are essential in Proof of Stake systems, providing stakers with a balance between liquidity (access to funds) and the ability to earn rewards by securing the network.
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