Liquid Staking Tokens: What they are and what they are for

Blockchain technology has revolutionized the way we interact with finance and investment. One of the most exciting developments in this space is the creation of Liquid Staking Tokens (LST). In this article, we will explore what Liquid Staking Tokens are, what they are for, how they work, and the different types that exist.

What are Liquid Staking Tokens

Liquid Staking Tokens are an innovation in the world of cryptocurrencies and blockchain networks. These tokens represent a novel way to harness the power of proof-of-stake (proof of stake) on blockchains like Ethereum 2.0, Polkadot, Cosmos and others. In essence, Liquid Staking Tokens are a fungible representation of staking assets on a blockchain network. They allow users to participate in validating the network while having the flexibility to trade or use their staking assets in other activities.

diagram

Scheme of operation of a Liquid Staking protocol. Source: Chainlink blog.

What are Liquid Staking Tokens for?

Liquid Staking Tokens serve to solve one of the fundamental challenges of traditional staking: lack of liquidity. When users participate in staking, they lock their assets on the network for a set period, limiting their ability to use those funds for other purposes. Liquid Staking Tokens solve this problem by tokenizing the staking assets and allowing users to use them more flexibly. These tokens have a variety of use cases, ranging from earning staking rewards to participating in DeFi systems, lending, exchanges, and more, without needing to withdraw your staking funds.

How Liquid Staking Tokens Work

How Liquid Staking Tokens work involves a process in which users lock their assets in a smart contract, which acts as a kind of bridge between the main blockchain network and the issuance of liquid tokens. In exchange for locking their assets, users receive LST equal to the amount of staking assets locked. These LSTs can be used in decentralized applications (dApps) or traded on exchanges like any other cryptocurrency. As long as users hold their LST, their staking assets continue to generate rewards on the mainnet. When they want to withdraw their staking assets, they can redeem their LST for the original assets plus the accumulated rewards.

diagram 2

Technical architecture of liquid staking. Source: Cointelegraph.

Types of Liquid Staking Tokens

There are several types of Liquid Staking Tokens, each associated with a specific blockchain network. Some notable examples include:

  1. ETH2 Staking Tokens (stETH): These represent participation in Ethereum 2.0 and allow users to access liquidity while participating in validating the network.
  2. DOT Staking Tokens (xDOT): They offer liquidity to Polkadot staking participants, allowing for greater flexibility in asset management.
  3. ATOM Staking Tokens (LATOM): For those interested in Cosmos, LATOM gives stakers the opportunity to leverage their investment in a more versatile way.

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