Liquid Staking

Liquid staking lets users stake their cryptocurrency while receiving a tradable derivative token that represents their staked position. This solves the liquidity problem of traditional staking, where tokens are locked and inaccessible for weeks or months.

How Liquid Staking Works:

1. User deposits ETH (or another token) into a liquid staking protocol
2. The protocol stakes the tokens with validators
3. User receives a Liquid Staking Token (LST) representing their deposit + accruing rewards
4. The LST can be traded, used as collateral in DeFi, or held
5. To unstake, users swap the LST back for the underlying asset

Major Liquid Staking Tokens:

Rebasing vs. Reward-Bearing:

DeFi Composability: LSTs can be used across DeFi: - As collateral for borrowing on Aave or Compound - In liquidity pools on Curve or Uniswap - For restaking on EigenLayer for additional yield - As margin for perpetual trading

Benefits: - Earn staking rewards without locking capital - No minimum stake requirement (vs. 32 ETH for solo staking) - Participate in DeFi while staking - Simple, no technical knowledge needed

Risks: - Depeg Risk: LSTs can trade below the value of the underlying asset during market stress (stETH briefly depegged in 2022) - Smart Contract Risk: Bugs in the staking protocol - Centralization: Lido controls ~30% of all staked ETH, raising censorship concerns - Slashing: Validator penalties reduce the value of the underlying stake