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Introduction

Traditionally, staking in Proof-of-Stake (PoS) protocol based networks has been about locking tokens for a certain time period and expecting a fixed, predetermined staking reward in return to secure the network. While it guarantees a return on staked tokens much like a bond, it also limits the opportunities of generating higher returns on those tokens as they remain locked and inaccessible.

The alternative is “liquid staking” which has become more popular as it opens up opportunities to efficiently utilize staked assets as collateral to trade, lend, and provision liquidity more quickly.

Liquid staking generally requires minting staked[token] which are a representation (a “derivative”) of the actual token that is being staked and used to secure the network, thus the term Liquid staking derivatives (LSDs) was coined.

Recently, the notion Liquid Staking Tokens (LSTs) also started to grow in usage - both terms are used interchangeably.

What problem does liquid staking address?

Liquid staking introduces various fundamental benefits to stakers by:

• Making staking process simple - no need to worry about hardware setup and maintenance, there is significantly less technological background required compared to staking Ethereum on your own as a solo staker
• Making staking less capital intensive - making it possible to get rewards on as small a deposit as users want, compared to the fixed amounts required in some PoS-Chains (i.e, Ethereum requires minimum 32 ETH staked)
• Making staked assets productive - providing the st[token] as building block for other applications and protocols (e.g., as collateral in lending or other trading DeFi solutions).

Liquid staking provides an opportunity to maximize the potential of a staked asset.

How does liquid staking work?

As described above, a user can deposit their token in liquid staking solutions (either with centralized exchanges such as Coinbase or Kraken, or with liquid staking protocols such as Lido or Rocketpool) and will receive a representation of their staked token st[token] in return.

The st[token] now accrues the staking reward for staking token but can be used as collateral, to trade, lend or provision liquidity.

Liquid staking thus allows the user to get the best of both worlds - a reward on your staked tokens as well as the opportunities of using the token actively.