Liquid Staking Tokens (LSTs)

The Problem with Traditional Native Staking

When you stake tokens natively to secure a Proof of Stake blockchain (such as Ethereum or Solana): 1: Capital Lockup: Your tokens are locked in consensus contracts and cannot be transferred, sold, or used as collateral.

1. Unbonding Periods: Withdrawing your stake requires waiting days or weeks (the unbonding queue), leaving you vulnerable to sudden market downturns.

How Liquid Staking Protocols Work

1. Deposit: You deposit native tokens (such as ETH or SOL) into a liquid staking protocol (like Lido or Jito).
2. Token Issuance: The protocol stakes your underlying tokens across distributed network validators and issues you a 1 to 1 receipt token (such as stETH or JitoSOL).
3. Reward Accrual: As staking rewards are earned from network validation, your liquid tokens either increase in quantity or appreciate in value relative to the base asset.

Core Use Cases and Systemic Risks

1. DeFi Composability: You can use your LSTs as collateral in lending protocols (Aave, Compound), provide liquidity on DEXs, or enter yield strategies while earning base staking APR.
2. Depeg Risk: In severe market volatility, the exchange price of an LST on secondary DEX markets can temporarily drop below the value of the underlying staked asset.
3. Smart Contract Risk: Flaws or exploits in the liquid staking smart contract pool can put deposited funds at risk.

Learn how to participate in decentralized finance in our Complete Guide to Decentralized Finance (DeFi).