Liquid Staking Token
A liquid staking token (LST) is a tradable token you receive when you stake through a liquid staking protocol. It represents a claim on your staked coins plus their rewards, so you keep a usable asset while the original stays staked.
How an LST works
On proof-of-stake networks, staked coins help secure the chain and earn rewards, but they are locked or slow to withdraw. A liquid staking protocol pools user deposits, stakes them through validators, and issues an LST in return. Lido's stETH and Rocket Pool's rETH are well-known examples on Ethereum.
Because the LST is an ordinary token, you can hold it, trade it, or use it in DeFi, for example as collateral for a loan, while the underlying stake keeps earning.
Two ways rewards show up
Rebasing LSTs, such as stETH, increase the number of tokens in your wallet as rewards accrue, so your balance grows daily. Value-accruing LSTs, such as rETH or wstETH, keep your token count fixed while each token becomes redeemable for more of the underlying coin over time. Both reflect the same rewards, but they behave differently in DeFi apps and may be treated differently for tax.
An example
Say you stake 10 ETH and receive about 10 units of a rebasing LST. A year later, at a hypothetical 3% staking reward, your balance shows about 10.3 units, minus the protocol's fee. With a value-accruing LST you would still hold the same number of tokens, but each would redeem for about 3% more ETH than before.
Risks to understand
An LST trades on the market, so its price can drift below the value of the underlying stake, especially when many holders want to exit at once. In June 2022, before Ethereum allowed withdrawals, stETH traded noticeably below ETH during the market stress around Celsius and Three Arrows Capital.
You also take on smart contract risk, the risk of validator penalties (slashing), and dependence on the protocol's governance and operators. Using an LST as loan collateral adds liquidation risk if its price drops. And very large liquid staking providers raise concerns about concentration of stake on a single network.
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Frequently asked questions
Is an LST the same as the coin I staked?
No. It is a claim on that coin plus rewards, issued by a protocol. Its value depends on the protocol working correctly and on market demand.
Can I get my original coins back?
Usually yes, either by redeeming through the protocol, which may involve a withdrawal queue, or by selling the LST on the market.
What is the difference between liquid staking and an LST?
Liquid staking is the process; the LST is the token you receive that represents your staked position.
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