You\u2019ve likely heard of staking cryptocurrency before\u2013 the act of earning rewards by locking up tokens on a Proof-of-Stake blockchain for a specified period of time.<\/p>\n
If you\u2019ve never staked a token before, you basically just click \u201cstake\u201d on your staking service of choice, and voila, you\u2019re staking. Staking helps secure a blockchain network, and stakers are incentivized with rewards generally in the range of 5% to 12% APY paid in that token\u2019s denomination.<\/p>\n
The complexity is mostly abstracted from the act of staking by user-friendly services.<\/p>\n
LSTfi, or LST finance, significantly rose in popularity after Ethereum\u2019s Shanghai upgrade (April 2023) enabled staked ETH withdrawals.<\/p>\n
Liquid staking tokens are a newer invention, designed out of convenience and necessity to provide stakers some liquidity on their locked-up tokens.<\/p>\n
A liquid staking token is a token that represents the staked cryptocurrency\u2013 for example, Lido gives stakers stETH for the amount of ETH staked.<\/p>\n
Liquid staking tokens, like stETH, allow people to earn yield through staking while maintaining the ability to trade and sell the token.<\/p>\n
So, what\u2019s the catch? Is there a catch to liquid staking tokens? Is it a technological evolution or just a temporary loophole?<\/p>\n
The following liquid staking token guide explores everything you need to know about the evolution of liquid staking tokens.<\/p>\n
When the Ethereum beacon chain launched on December 1, 2020, ETH holders could stake a minimum of 32 ETH and become validators, and automatically earn rewards distributed by the network. In addition to 32 ETH being a substantial sum to lock up, withdrawals were only possible starting in April 2023.<\/p>\n
Liquid Staking Derivatives (LSDs) were introduced to make staking more attractive for small and large ETH holders.<\/p>\n
Liquid Staking Derivatives (LSDs) are basically tokenized receipts, representing an ownership claim of the staked assets. These receipts can be traded or utilized as loan collateral, providing liquidity for the stakers.<\/p>\n
This gave birth to a burgeoning economy of Liquid Staking Derivatives Finance (LSDFi), or Liquid Staking Token Finance (LSTfi)\u2013 the terms are used interchangeably<\/p>\n
As of writing, there are billions of dollars worth of tokens being staked\u2013 $92 billion across the top three PoS networks, Ethereum, Solana, and Cardano.<\/p>\n
Twenty-six of those billion dollars is currently in liquid staking (LST) protocols.<\/strong><\/p>\n It\u2019s the largest category in DeFi, in no small part thanks to market leaders like Lido, who have added a dazzling user-friendly interface to the whole ordeal.<\/p>\n The category is expected to grow even more rapidly due to:<\/p>\n Further, decentralized applications like Enzyme, Lybra, Prisma, and Sommelier enable users to stake their LSTs as collateral or for other purposes.<\/p>\n A common use for stETH is providing liquidity on the DeFi classics like Compound, Uniswap, Sushiswap, Balancer, and more\u2013 earning an additional 3% to 8% on your stETH, which represents your staked amount of ETH on Lido earning a base 3% or so.<\/p>\n The crypto holder\u2019s constant search for yield is the primary driver of the popularity of liquid staking.<\/p>\n Is liquid staking worth it?\u00a0<\/strong> On face value, the ability to stake one token for 5% and then stake its receipt for another 5% seems quite valuable\u2013 who wouldn\u2019t want to double their yield? One would be inclined to consider\u2013 what\u2019s the catch?<\/p>\n Is liquid staking safe?<\/strong> Ask yourself, is anything in DeFi ever safe or not risky? The answer is no, but the system has worked relatively well to its credit\u2013 we\u2019ll get into that below.<\/p>\n So, how risky is the search for that LSTfi 4.4% average yield?<\/p>\n There are a few threats to become aware of:<\/p>\n A few recent real-world examples help demonstrate LSTs in action at a high level.<\/p>\n It\u2019s 2022. Centralized lending company Celsius Network is spiraling out of control. Depositors want their money, and Celsius is caught in a vice\u2013 the company covered up significant market losses and was also stuck in illiquid liquid staking positions. Celsius was one of the largest single holders of stETH, with about $426 million of the ETH derivative.<\/p>\n Blockchain transaction data shows the following sequence of events: Celsius would continue to pay off its DeFi debts, including another $228 million debt to Maker for $440 million in collateral in WBTC (Wrapped Bitcoin). It would then pay down another $95 million on its loans from Aave and Compound.<\/p>\n What does this teach us about liquid staking tokens? Despite the mess Celsius got itself in, it was forced to untangle itself at least partially and get some liquidity from its various APY-generating engagements, namely using liquid staking tokens.<\/p>\n In other words, Celsius LSTfi endeavors were among the few things that didn\u2019t completely blow up. Celsius lost about $1.7 billion in UST’s collapse and unsecured loans.<\/p>\n In fact, many of LSTfi’s staples are still around today, whereas centralized companies like FTX, BlockFi, Celsius, Voyager, and Hodlnaut are all mired in bankruptcy and prison.<\/p>\n Here\u2019s where things get kind of confusing\u2013 everything you\u2019ve read up to this point is enough to know about liquid staking at a functional level. You\u2019re now entering the metaphorical weeds.<\/p>\n Rebase tokens are tokens like Lido\u2019s stETH or Binance\u2019s BETH that automatically adjust their balance based on rewards and deposits.<\/p>\n For example, let\u2019s say you stake 100 ETH on Lido. In return, you get 100 stETH. Assuming an APR of 3.5% on Lido, your stETH tokens would be about 100.067 stETH in a week. That .067 is the reward you got in ETH on Lido, automatically added to your staking balance.<\/p>\n This helps keep the 1:1 parity between the two tokens\u2013 if it didn\u2019t exist, you\u2019d be able to trade in 100 stETH for 103.50 ETH at the end of the year, throwing off the balance.<\/p>\n Rebasing typically happens every day, and there\u2019s no visible transaction activity.<\/p>\n Rewards-baring tokens, comparatively, don\u2019t change in quantity. Rather, the exchange rate between the liquid staking token and the staked asset determines the reward.<\/p>\n It\u2019s a bit confusing but no less functional compared to the more popular rebase token architecture,<\/p>\n For example, staking 100 ETH on Stader gives you 98.978 ETHx. In a week, you\u2019ll stll have 98.978 ETHx, but it\u2019ll be worth 100.068 ETH at an example 3.56% APR.<\/p>\n Same same, but different.<\/p>\n Wrapped tokens introduce yet another layer of complexity. The rewards are integrated into the exchange rate and realized through various actions like transfer, minting, or burning.<\/p>\n The follow LSTfi protocols, service providers, and dApps are listed alphabetically.<\/p>\n LST Protocols & CEXs:<\/strong><\/p>\n Earning Platforms:<\/strong><\/p>\n LST-backed Stablecoin:<\/strong><\/p>\n Here\u2019s where we enter the realm of opinion\u2013 this is neither a recommendation nor financial advice. This section is more of a cautionary warning label, if anything. Still, it should help point you in the directionally-accurate path.<\/p>\n Liquid staking LSTfi is pretty advanced stuff\u2013 we\u2019d advise against staking your life savings in ETH for some derivative token from some protocol with anonymous founders that has been around for a few weeks.<\/p>\n For starters, get comfortable with how platforms like Lido operate. Various software wallets like Exodus offer staking services. Even Coinbase allows users to earn rewards by staking their Proof-of-Work assets.<\/p>\n What we\u2019ve outlined here should serve as a mere introduction to the concept of liquid staking, not a strategic blueprint. That being said, there are billions of dollars in liquid staking protocols and quiet fortunes being precariously built\u2013 back of the napkin math says roughly $910 million in rewards is being generated by the $26 billion in liquid staking protocols every year.<\/p>\n It\u2019s not a stretch to assume the lion\u2019s share is by whales, institutions, and service providers aggregating tokens\u2013 not an even mixture of sub-$10,000 holdings.<\/p>\n It\u2019s a subsector within DeFi worth watching, which is already a fascinating landscape of innovation.<\/p>\n Liquid staking tokens (LSTs) are a response to the need for flexibility and liquidity in staking and have given birth to an entirely new DeFi subsector.<\/p>\n Billions of dollars worth of tokens are being staked and re-utilized in LSTfi, shaping how cryptocurrency users interact with PoS networks like Ethereum and Solana.<\/p>\n Like anything in DeFi, liquid staking comes with its unique set of risks. Smart contract vulnerabilities and market volatility are genuine concerns. Yet, a significant amount of stakers still seek out the potential rewards through one of the many growing LSTfi services.<\/p>\n Staking may seem like a simple click to the average user, but a peek under the hood unveils a complex task aimed at maintaining integral token parity and balancing rewards. The leading horses in the race for back-end LST mechanisms include rebase tokens and wrapped tokens.<\/p>\n For the average cryptocurrency user dipping their toes in the staking water, jumping headfirst into liquid staking might not be the wisest choice. However, understanding the basics (you just did a big part of that with this article!) and familiarizing yourself with popular user-friendly platforms is a sound first step before exploring more complex protocols.<\/p>\n If you decide to wade deeper into the liquid staking pool, make sure you know how deep the waters really are. Remember to never stake more than you can afford to lose.<\/p>\n","protected":false},"excerpt":{"rendered":" You\u2019ve likely heard of staking cryptocurrency before\u2013 the act of earning rewards by locking up tokens on a Proof-of-Stake blockchain for a specified period of time. If you\u2019ve never staked a token before, you basically just click \u201cstake\u201d on your staking service of choice, and voila, you\u2019re staking. Staking helps secure a blockchain network, and<\/p>\n","protected":false},"author":5,"featured_media":25135,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"iawp_total_views":117,"footnotes":""},"categories":[5712],"tags":[5774,28108,17744,27923],"class_list":{"0":"post-25134","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-guides","8":"tag-ethereum","9":"tag-liquid-staking","10":"tag-proof-of-work","11":"tag-solana"},"wppr_data":[],"yoast_head":"\n\n
Is Liquid Staking Safe?<\/h2>\n
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\nCelsius transferred $81.6 million in USDC to the automated decentralized lending protocol Aave, allowing it to…
\nfree up $410 million in stETH, which Celsius had pledged as collateral for its Aave loan.<\/p>\nTypes of Liquid Staking Tokens<\/h2>\n
Popular LSTfi Protocols and dApps<\/h2>\n
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Is Liquid Staking for You?<\/h2>\n
Final Thoughts: Staking Meets Open Market Liquidity<\/h2>\n