What is liquid staking?

Want to take part in staking without your crypto sitting locked up with no other use? Liquid staking adds a transferable “receipt” on top of the process. You deposit coins into a protocol, it directs them to validators that help secure the network, and you receive a liquid staking token, known as an LST. In the plural, you’ll see them called LSTs.

Think of it as a deposit receipt that you can hand over to someone else. If you deposit ETH, for example, you get the protocol’s corresponding LST. You no longer have the original ETH free in your wallet, but a token that represents your staking position. Depending on the design, rewards show up either as more tokens in your balance or as a growing amount of the original coin that each token is worth.

Why it matters

An LST can be transferred, swapped or used in decentralized finance (DeFi) apps, as long as they support it. For example, it may be accepted as collateral for borrowing. That gives staking more flexibility, without you having to run your own validator.

We find this flexibility useful, but an LST isn’t a second, independent pot of capital. If you sell it, you also transfer the economic claim it represents. You don’t keep the original amount available for withdrawal at the same time.

What to watch out for

“Liquid” doesn’t guarantee an immediate exit at the value you expect. Selling an LST on the market depends on the available liquidity, and its price can diverge from the value of the underlying crypto. Redeeming through the protocol, on the other hand, may involve a wait and be subject to specific terms.

There are also risks from smart contract bugs, the provider’s operations and possible penalties on validators, known as slashing. Rewards vary and there are usually fees. If you use the LST as collateral for a loan, you take on an added liquidation risk: a drop in its value can lead the lending app to forcibly sell it.