Liquid Staking Derivatives (LSDs) are tokens issued to users who stake a proof-of-stake asset through a liquid staking protocol. Instead of locking coins and receiving only staking rewards, the user receives a tradable derivative token that represents their claim on the underlying staked assets plus accrued rewards. These derivatives are often called liquid staking tokens (LSTs), and they are designed to track the value of the original asset.
How LSDs work and why they exist
On many proof-of-stake networks, staking can impose operational constraints such as unbonding periods, validator management, and reduced flexibility while funds are staked. Liquid staking separates economic exposure from that lock-up. A user deposits tokens into a liquid staking protocol, the protocol stakes them with validators, and the user receives an LSD in return. As staking rewards accumulate, the LSD’s value typically increases relative to the underlying asset, or the token balance rebases, depending on the design.
Using LSDs in DeFi, plus key risks
Because LSDs are liquid, they can be used across decentralized finance while the underlying stake continues earning rewards. For example, a user might stake an asset via a liquid staking provider, then supply the received LSD to a lending market as collateral, or trade it on decentralized exchanges to adjust exposure without waiting for an unbonding period.
However, LSDs introduce additional risks beyond base-layer staking. These include smart contract risk in the liquid staking protocol, validator performance and slashing risk, liquidity and depegging risk in secondary markets, and broader protocol governance or custody assumptions.