Liquid staking is a way to stake tokens on a proof-of-stake blockchain while keeping those assets usable elsewhere. Instead of your stake being locked and illiquid, you deposit tokens into a liquid staking protocol, which stakes them on your behalf and issues a “receipt” token, commonly called a liquid staking token (LST). The LST represents a claim on the underlying staked tokens plus any accrued staking rewards.
How liquid staking works
In traditional staking, you delegate or lock tokens to help secure the network and, in return, earn staking rewards. The tradeoff is reduced flexibility, since unstaking can take time and your assets cannot be freely moved while staked. Liquid staking separates economic exposure from operational lock-up. The protocol handles validator operations and the on-chain staking position, while you hold an LST that remains transferable.
For example, a user might stake ETH through a liquid staking provider and receive an LST in return. As rewards accrue, the LST’s value relative to the underlying asset typically increases, reflecting the growing claim on the staked position.
Using LSTs in DeFi, and key risks
Because LSTs are tradable, they can be used throughout DeFi, such as posting them as collateral for borrowing, supplying them to liquidity pools, or integrating them into yield strategies. This can improve capital efficiency by allowing users to earn staking rewards and participate in DeFi at the same time.
However, liquid staking adds additional layers of risk. LST prices can diverge from the underlying asset due to market liquidity or redemption constraints, smart contract vulnerabilities can affect the staking protocol, and validator performance or slashing events can impact returns.
Liquid staking matters because it helps align network security with user liquidity, making staking more accessible and enabling staked assets to become productive building blocks across the broader crypto ecosystem.