Liquid Staking Token (LST)

An LST is a tokenized receipt for assets locked in a Proof-of-Stake (PoS) consensus mechanism. When a user stakes native tokens (e.g., ETH, SOL, ATOM) via a liquid staking protocol, they receive an equivalent amount of LSTs (e.g., stETH, mSOL, stATOM). These tokens are a direct claim on the underlying staked principal and the staking rewards it accrues over time.

The primary innovation of LSTs is solving the liquidity problem of traditional staking. Instead of having capital locked and illiquid in a validator for weeks or months, LST holders can trade, lend, or use their tokens as collateral across the DeFi ecosystem immediately. This transforms staked assets from a passive, frozen position into an active financial instrument.

LSTs function as yield-bearing collateral within decentralized finance. Protocols like Aave, Compound, and MakerDAO accept major LSTs as collateral for borrowing. This allows users to leverage their staked position—earning staking yield on the underlying asset while simultaneously accessing liquidity through a loan, a strategy known as recursive staking or "staking leverage."

LSTs automatically compound staking rewards for the holder. Unlike manual staking where rewards are distributed separately, the value of an LST increases relative to its underlying asset. For example, 1 stETH becomes redeemable for more than 1 ETH over time. This accrual typically happens via a rebasing mechanism (adjusting holder balances) or a price-per-share model (increasing the LST's exchange rate).

Using LSTs introduces distinct risks beyond standard staking:

• Smart Contract Risk: The liquid staking protocol's code is a point of failure.
• Validator Slashing Risk: Poor performance or attacks on the protocol's validators can lead to losses, potentially reflected in the LST's value.
• Centralization Risk: Dominant LST providers can concentrate validator control, posing a systemic risk to the underlying blockchain's security.

LSTs are fundamental DeFi primitives that enable complex, interconnected financial products. They are integral to:

• Liquid Staking Derivatives (LSDs): Protocols that use LSTs as collateral to issue further derivative tokens.
• Yield Strategies: Farming LSTs in liquidity pools or vaults to stack multiple yield sources.
• Stablecoin Backing: Serving as a key collateral type for decentralized stablecoins like DAI or LUSD.

The primary risk is the security of the liquid staking protocol's smart contracts. A bug or exploit could lead to the loss of staked assets. This risk is managed through:

• Code audits by reputable security firms.
• Bug bounty programs to incentivize white-hat hackers.
• Time-tested code and conservative upgrade mechanisms with multi-sig governance. Users should assess the protocol's audit history and the decentralization of its upgrade process.

Slashing is a penalty imposed on validators for malicious behavior (e.g., double-signing) or downtime. When using an LST:

• The underlying staked assets are subject to slashing.
• The loss is typically socialized across all LST holders, diluting the value of each token.
• Reputable providers often maintain slashing insurance funds or use a curated set of professional node operators to mitigate this risk. The protocol's slashing policy is a critical disclosure.

LST providers can become points of centralization, creating systemic risk.

• Node Operator Concentration: If a provider controls a large share of the network's validators, it could theoretically coordinate attacks or be forced to censor transactions.
• Governance Power: The LST's governance token may grant disproportionate influence over the underlying chain.
• Regulatory Targeting: A centralized entity behind an LST could be compelled to comply with sanctions, affecting users.

An LST's value is designed to track, but is not guaranteed to equal, the value of the underlying staked asset plus rewards.

• Depeg Risk: The LST can trade at a premium or discount on secondary markets (e.g., DEXs) due to supply/demand imbalances or loss of confidence.
• Liquidity Risk: The ability to sell the LST for its underlying asset at fair value depends on deep liquidity pools. Thin liquidity can exacerbate price slippage during market stress.

The risk profile depends heavily on the LST provider's architecture.

• Non-Custodial (Trustless): Users retain control of assets via smart contracts (e.g., Lido on Ethereum). Risk is limited to contract bugs.
• Custodial: Users delegate assets to a central entity (e.g., some exchange-issued LSTs). This introduces counterparty risk—the entity could become insolvent, be hacked, or act maliciously. Understanding who holds the validator keys is essential.

Many DeFi protocols that accept LSTs as collateral rely on price oracles to determine their value.

• Oracle Failure: If an oracle provides an incorrect price (e.g., during a market crash or due to manipulation), it could lead to unjust liquidations of borrowed positions or incorrect accounting of collateral.
• Staking Reward Accuracy: The LST's rebasing or reward accrual mechanism must be accurately reflected by integrators; errors can create arbitrage opportunities or losses.

Staking is the act of locking a Proof-of-Stake (PoS) network's native cryptocurrency (e.g., ETH, SOL, ATOM) to participate in network security and consensus. Delegation allows token holders to assign their staking power to a validator node without running the infrastructure themselves. Liquid Staking automates this delegation process, bundling user funds into a professional validator operation and issuing a liquid receipt token.

Liquid Staking Derivatives (LSDs) is a broader category that includes Liquid Staking Tokens (LSTs). While LSTs typically represent a 1:1 claim on staked assets + rewards, LSDs can encompass more complex financial instruments built on top of staked positions, such as yield-bearing tokens that separate principal from staking yield or derivatives for interest rate trading.

A validator is a node on a PoS network responsible for proposing and attesting to new blocks. LST providers run these validators. Slashing is a protocol-enforced penalty for validator misbehavior (e.g., downtime, double-signing), which results in a loss of a portion of the staked funds. A key risk for LST holders is the performance and slashing history of the provider's validator set.

Restaking is the process of staking an LST (like stETH) or a native staked asset a second time to secure additional services, such as data availability layers or oracle networks. EigenLayer is a primary protocol enabling restaking on Ethereum, allowing staked ETH to be "reused" to provide cryptoeconomic security to other applications, creating a new yield stream for stakers.

LST-Fi refers to the decentralized finance ecosystem built on Liquid Staking Tokens. Key applications include:

• Collateral: Using LSTs (e.g., stETH) as collateral for borrowing on lending protocols like Aave.
• Yield Strategies: Automating LST deposits into vaults that optimize for additional yield (e.g., Yearn Finance).
• LST Trading & Indexes: DEX pools for swapping between different LSTs and index tokens that bundle multiple LSTs (e.g., Diva Staked ETH Index).

Prominent examples illustrate different models:

• Lido Staked ETH (stETH): The largest LST by TVL, using a decentralized validator set.
• Rocket Pool ETH (rETH): A more decentralized model requiring node operator collateral (RPL).
• Coinbase Wrapped Staked ETH (cbETH): A custodial, institutionally-backed LST from a centralized exchange.
• Marinade Staked SOL (mSOL): A leading LST on the Solana network, featuring automatic validator selection.