Liquid Staking Token
A liquid staking token (LST) is a tokenized receipt issued by a staking protocol that represents a user's staked cryptocurrency position, allowing the underlying staked asset to remain locked in a validator while the holder can freely trade, transfer, or use the receipt token in decentralized finance applications.
Proof-of-stake networks require validators to lock up collateral for extended periods. On Ethereum, the unbonding queue can take weeks depending on network conditions. This illiquidity discourages participation from holders who want yield but cannot afford to lock their assets indefinitely. Liquid staking solves this by issuing a tokenized proxy that represents the staked position plus accruing rewards.
The largest liquid staking protocol on Ethereum is Lido Finance, which issues stETH (staked Ether). When a user deposits Ether into Lido, they receive stETH at a roughly one-to-one ratio. As Ethereum staking rewards accrue, the stETH balance in a user's wallet automatically increases via a rebasing mechanism, or in some protocols, the token appreciates in value relative to the underlying asset rather than rebasing.
Other major LST providers include Rocket Pool (rETH), Coinbase (cbETH), and Frax (sfrxETH), each using slightly different technical designs and fee structures. On Solana, Marinade Finance (mSOL) and Jito (JitoSOL) are prominent examples.
LSTs unlock capital efficiency. A holder of stETH can deposit it as collateral in a lending protocol such as Aave or MakerDAO, borrow against it, and deploy that borrowed capital elsewhere — all while the staking rewards on the underlying position continue to accrue. This nesting of yield-bearing positions is sometimes called yield stacking.
However, LSTs introduce several risks. The primary risk is smart contract vulnerability — if the staking protocol is exploited, all token holders are affected. A secondary risk is depeg risk: although an LST is supposed to track the value of the underlying asset closely, market stress events (such as the Terra collapse in May 2022) can cause LSTs to temporarily trade at a significant discount, triggering liquidations for users who posted them as collateral.
In the United States, the SEC has scrutinized liquid staking services. In February 2023 the agency took action against Kraken's staking-as-a-service offering, characterizing it as an unregistered securities offering and requiring the exchange to shut down the program and pay a settlement. Lido and similar decentralized liquid staking protocols have not faced equivalent enforcement, but the regulatory risk of staking-derived tokens being classified as securities remains material.