Liquid Staking Token (LST)

What is a Liquid Staking Token?

A liquid staking token is a representation of a staked token on a proof-of-stake blockchain, such as Ethereum or Solana. Proof-of-stake blockchains often require a lockup or cool-down period, during which staked tokens can’t be used.

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Liquid staking addresses this problem by creating a new token that represents the staked token, which can then be spent, sold, or used as collateral. 

The ability to use the new token makes it “liquid,” unlocking its value for immediate use.

How Do Liquid Staking Tokens Work?

Liquid staking tokens work by using smart contracts to lock staked tokens, minting a new liquid staked token that represents the staked token.

To understand how liquid staking tokens work, it’s helpful to explore some basics.

Proof-of-stake (PoS) blockchains use cryptocurrency as a form of collateral to validate transactions:

Validators, which are computers running specialized software, must commit cryptocurrency as a “stake.” Many blockchains also support delegated proof of stake (DPoS), which allows individuals to delegate their stake to a validator.

In exchange for staking, validators and delegators earn staking rewards paid in cryptocurrency:

Yields of 3% or higher are common, making staking an attractive form of passive income.

Staked tokens are often illiquid:

When staking Ethereum, for example, the protocol requires 32 ETH per validator, and staked ETH cannot be used until it’s unstaked.

In the ETH example, an investor who chose to stake 32 ETH locks up over $70,000 in value at current ETH prices. However, even at smaller values, there are several benefits to remaining liquid rather than locking your tokens indefinitely. 

If you want to use the value of your staked tokens, liquid staking tokens offer a solution. In addition, liquid staking tokens continue to generate staking yields. However, there is a cost involved as well. More on that in a bit.

Why are Liquid Staking Tokens Popular?

The main draw of liquid staked tokens is found in the name itself; they’re liquid, meaning you can easily trade in and out of the position.

Here are some of the advantages of using liquid staking tokens rather than traditional staking.

  • Buy on the Open Market: You can buy popular liquid staking tokens like stETH (Lido Staked ETH) or rETH (Rocket Pool ETH) on crypto exchanges or decentralized exchanges. This eliminates the need to learn the technical staking details for each cryptocurrency you want to stake. Instead, you can buy a liquid staking token and start earning yields immediately. This approach also allows you to invest in smaller amounts.
  • Sell Quickly: Crypto markets can move quickly. If the market price changes or you need to sell for another reason, you can sell liquid staking tokens as easily as you can buy.

However, liquid staking tokens provide additional use cases compared to traditional staking.

  • Use as Collateral: Many decentralized finance (DeFi) applications allow you to use liquid staked tokens as collateral. For example, on the Aave decentralized lending platform, you can use either wstETH (wrapped Lido Staked ETH) or rETH (Rocket Pool ETH) as collateral to borrow other cryptocurrencies.
  • Lend to Earn Interest: On Aave and other platforms, you can also lend liquid staking tokens to earn interest. For example, on Seamless, you can lend cbETH (Coinbase Wrapped Staked ETH) to earn interest from lending while also earning staking rewards.
  • Use in Yield Farming: Platforms like Yearn Finance and Beefy Finance offer newbie-friendly apps that let you use stETH and other tokens to earn additional yields paid in a myriad of ways.

Types of Liquid Staking Tokens

Liquid staking tokens fall into two main categories: rebasing tokens and reward-bearing tokens.

The differences between these two models revolve around how staking rewards accrue.

Rebasing Tokens

Rather than a fixed one-to-one supply of tokens relative to the staked token, rebasing tokens can increase or decrease supply, with supply increases reflecting staking rewards. Rebasing tokens are sometimes called elastic tokens due to their ability to expand or contract supply. For example, Lido’s stETH token expands in supply to provide staking rewards.

Reward-Bearing Tokens

Rather than expand the supply, reward-bearing tokens hold the value of the staked token in addition to accrued staking rewards. In short, the token increases in value rather than expanding in quantity. Coinbase’s cbETH uses this model.

Reward-bearing tokens may offer tax advantages in some jurisdictions because the rewards are paid in increased value rather than increased quantity. In the US, for example, staking rewards are taxable as income when earned. Reward-bearing tokens include the staking rewards in the value, which may mean staking earnings are deferred until you sell or dispose of the asset.

A third, less common method called a dual token model uses two separate tokens. One token represents the base asset you stake, such as ETH, whereas the other represents staking rewards. Frax uses this model for its ETH liquid staking tokens.

Earlier, we also mentioned wrapped tokens. 

A wrapped token locks the original token in a smart contract to provide a new token that offers more usability.

For example, Lido’s stETH can be wrapped, becoming wstETH. The wrapped stETH does not increase in quantity but still earns staking rewards. 

Many DeFi protocols depend on wrapped tokens for compatibility. Wrapped tokens can also move amongst supported blockchains. For instance, you can use wstETH on Ethereum, Abitrum, and several other blockchains.

How are Liquid Staking Tokens Used?

Liquid staking tokens are available for several proof-of-stake blockchains, with Ethereum being the most popular. Solana liquid staking is also becoming more common. Lido and Marinade both provide liquid staking for SOL.

Some investors simply hold their liquid staking tokens because they can earn a yield without navigating the sometimes complex processes of traditional staking.

Below are tables displaying the leading liquid staking tokens and the popular DeFi apps that support them.

Top Liquid Staking Tokens

Protocol Total Value Locked (TVL)
Lido (stETH) $20.51 billion
Rocket Pool (rETH) $2.41 billion
Binance Staked ETH (wbETH) $1.73 billion
Frax Ether (sfrxETH) $674.54 million
Marinade (mSOL) $663.14 million
Jito (JitoSOL) $636.04 million
Coinbase Wrapped Staked ETH (cbETH) $462.27 million

Others might deploy their staking tokens in DeFi applications.

Popular DeFi Apps Supporting Liquid Staking Tokens

Protocol Total Value Locked (TVL)
Aave V3 $4.43 billion
Uniswap V3 $3.58 billion
Instadapp $2.24 billion
Compound Finance $2.23 billion
Curve Finance $1.97 billion

How Much Does Liquid Staking Cost?

Both delegated staking and liquid staking come with costs. In both cases, you’re not running a validator node but instead delegating your tokens to a node operator. The validator typically takes a fee, typically about 10%, but sometimes much higher. Coinbase, for example, charges 25% fees.

These fees are deducted from your staking rewards.

Rewards are distributed proportionally, meaning if your stake represents 10% of the total stake, you’ll receive 10% of the staking rewards, less fees. 

Let’s say your proportional share or staking rewards is $100 worth of ETH. After a 10% fee, you would receive $90 worth of ETH. The balance goes to the validator or perhaps a protocol treasury.

The Bottom Line

Liquid staking tokens transform a locked asset (staked tokens) into a liquid asset that can be spent, traded, used as collateral, or used to farm yields.

For many investors, liquid staking tokens offer a more convenient way to earn a staking yield combined with the ability to trade the tokens at any time.

However, because the token is liquid, you can also use these tokens in popular DeFi applications, including Aave and Uniswap, to earn additional yields.

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Eric Huffman

Eric Huffman has a diverse background ranging from business management to insurance and personal finance. In recent years, Eric's interest in finance topics and in making personal finance accessible led to a focus on cryptocurrency topics. Eric specializes in crypto, blockchain, and finance guides that make these important topics easier to understand. Publications include Milk Road, Benzinga, CryptoNews.com, Motor Trend, CoverWallet, and others. Always learning, Eric holds several certifications related to crypto and finance, including certificates from the Blockchain Council, Duke University, and SUNY. When he's not writing, you might find Eric teaching karate or exploring the woods.