Liquid Staking

Liquid staking is a staking model in which a user commits an asset to a staking protocol and receives a derivative asset called a liquid staking token. The derivative represents an economic claim or position connected to the underlying staked asset and its accumulated results according to the protocol's rules.

Traditional staking can restrict capital because of an unbonding period. Liquid staking allows the user to hold a derivative token instead and potentially use it in other applications, such as DeFi lending, a liquidity pool, or a swap.

How liquid staking works

1. the user supplies a native asset to the protocol;
2. the protocol stakes the asset or delegates it to validators;
3. the user receives a derivative liquid staking token;
4. the derivative can circulate independently from the underlying asset;
5. its quantity or exchange value can reflect accumulated staking rewards;
6. the protocol provides a mechanism for redeeming or otherwise recovering the underlying asset.

Liquid staking does not eliminate staking risk. It adds another layer of protocol risk: besides the blockchain and validator risks, the user may face smart-contract risk, token-accounting risk, liquidity risk, and the possibility that the derivative trades away from its expected value relative to the underlying asset.

If the liquid staking token is used in another DeFi protocol, these risks can compound. A position may simultaneously depend on staking, smart contracts, market liquidity, and the rules of an external application.