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Liquid staking derivatives (LSDs) are tokens that represent staked cryptocurrencies. LSDs give users access to the liquidity of their staked tokens which otherwise would be locked in a staking smart contract.
LSD is predominately used when staking Ethereum (ETH).
The process of ETH staking involves depositing ETH tokens in order to be eligible to run a validating node. Validators earn staking rewards typically at an annualized percentage return of 4%.
Since becoming a solo staker is out-of-reach for most individuals due to the high deposit requirement of 32 ETH (about $65,000 at the time of writing), many use staking pools to earn interest on their ETH tokens.
These pools allow users to earn rewards by delegating any amount of their ETH tokens to staking service providers.
What makes pooling solutions like Lido and Rocketpool popular is users receive LSD tokens on a 1:1 basis for their staked ETH.
There are two ways to get your hands on LSDs:
Let’s take the example of the two most popular liquid staking platforms – Lido and Rocket Pool.
When you stake ETH tokens on Lido and Rocket Pool, you get an equivalent amount of LSD called stETH or rETH, respectively.
These LSDs represent the staked ETH tokens on a 1:1 basis.
The value of stETH and rETH are equivalent to the market price of ETH. So, you can use these LSDs on decentralized finance (DeFi) platforms for trading, collateral, and lending.
Meanwhile, your staked ETH tokens are deposited and earning interest on Lido or Rocketpool.
You can withdraw your staked tokens anytime you want. Upon withdrawal, your LSDs will be burned, and you will receive an equivalent amount of ETH tokens plus staking rewards.
Here are the top LSD solutions – based on total value locked (TVL) – that you can use to stake your cryptos:
Lido Finance is the top liquid staking platform on Ethereum, with a TVL of about $19 billion, as of November 2023. You can stake ETH and Polygon (MATIC) on Lido.
Rocket Pool is an Ethereum liquid staking platform with a TVL of about $2.4 billion.
Binance staked ETH
An Ethereum liquid staking solution provided by Binance.
Frax Ether is an Ethereum LSD platform with stablecoin mechanisms.
Coinbase Wrapped Ether
An Ethereum liquid staking solution provided by Coinbase.
The need for liquid staking derivatives came from Ethereum’s transition from a proof-of-work (PoW) blockchain to a PoS protocol.
Since this transition, LSDs have grown to become popular tools that DeFi users are leveraging to maximize their investment return.
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Mensholong is an experienced crypto and blockchain journalist, now a full-time writer at Techopedia. He has previously contributed news coverage and in-depth market analysis to Capital.com, StockTwits, XBO, and other publications. He started his writing career at Reuters in 2017, covering global equity markets. In his free time, Mensholong loves watching football, finding new music, and buying BTC and ETH for his crypto portfolio.
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