What Is Liquid Staking? How Liquid Staking Tokens (LSTs) Work
Staking your crypto usually means locking it up and losing access for days, weeks, or longer. Liquid staking changes that — letting you earn staking rewards while still holding a token you can trade, spend, or put to work elsewhere in DeFi.
Staking your crypto usually means locking it up and losing access for days, weeks, or longer. Liquid staking changes that. It lets you earn staking rewards while still holding a token you can trade, spend, or use elsewhere in DeFi. Here’s how liquid staking tokens (LSTs) actually work.
What Is Liquid Staking and How Do LSTs Work?
When you stake through a liquid staking protocol, your original coins — say ETH —
are locked on your behalf, but you receive a separate token in return, called a liquid staking
token (LST). This LST represents your staked position and continues earning staking rewards.
Meanwhile, you can hold, trade, or use the LST in other applications, something traditional
locked staking doesn’t allow.
An LST is essentially a receipt for your staked coins that keeps working for you. It tracks your staking rewards over time while remaining a token you’re free to hold, trade, or put to use elsewhere in DeFi.
How Liquid Staking Works in Practice
The process is straightforward from a user’s perspective. You deposit your coins into a liquid staking protocol, and the protocol stakes them with validators on your behalf. In return, you receive an LST in roughly the same value as your deposit, which adjusts over time to reflect accumulated rewards.
Liquid Staking vs. Traditional Locked Staking
Traditional staking ties up your funds until an unstaking period ends, which can take days depending on the network. Liquid staking removes that wait for your staked position itself — though converting your LST back to the original coin, or selling it on the open market, may still involve its own fees or price differences from the underlying asset.
Why Investors Use Liquid Staking Tokens
The main appeal is flexibility. With an LST in hand, you can still participate in lending, liquidity pools, or other DeFi strategies, effectively earning staking rewards on top of whatever else you do with that token. As Coinbase’s guide to liquid staking explains, this dual-use design is a major reason liquid staking has grown alongside networks like Ethereum, where a large share of circulating supply is staked through such protocols.
| Feature | Traditional Staking | Liquid Staking |
|---|---|---|
| Funds locked | Yes, until unstaking completes | Represented by a tradable LST |
| Access to liquidity | None during staking period | Yes, via the LST |
| Can be used in DeFi | No | Often yes |
| Smart contract risk | Lower | Additional protocol-level risk |
Ethereum is one of the networks where liquid staking has seen the widest adoption, with a meaningful share of staked ETH represented through LSTs rather than locked directly with a single validator — a sign of how much investors value staying liquid while still earning rewards.
Liquid staking adds a layer of protocol and smart contract risk on top of standard staking risk. If the protocol or its smart contracts are compromised, both your staked coins and your LST could be affected. Always research a protocol’s security history and audits before depositing funds.
Frequently Asked Questions About Liquid Staking
Can you trade liquid staking tokens?
Yes. Unlike coins locked in traditional staking, an LST is a regular token that can typically be traded on exchanges or used across DeFi applications, which is the core advantage of liquid staking.
How do LSTs earn staking rewards?
The value or quantity of your LST adjusts over time to reflect the staking rewards earned by the underlying staked coins, so holding the LST means your position keeps growing even while you remain free to use the token elsewhere.
What are the risks of liquid staking protocols?
Beyond normal staking risks such as validator penalties, liquid staking adds protocol-level and smart contract risk, along with the possibility that an LST’s market price could differ from the value of the underlying staked coins when you redeem or sell it.
Conclusion
Liquid staking gives you a way to earn staking rewards without giving up access to your capital entirely, though it adds a layer of protocol and smart contract risk worth understanding first. If you’re weighing how staking rewards could add up over time, use our free Crypto Staking Calculator to estimate your potential returns.
