What is a Liquid Staking Token (LST)? | Learn about crypto and DeFi | Get Started with Bitcoin.com (2024)

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What is a Liquid Staking Token (LST)? | Learn about crypto and DeFi | Get Started with Bitcoin.com? ›

Once tokens are staked, they usually become illiquid, meaning they cannot be easily accessed or sold. This is where LSTs come into play. A liquid staking token is a tokenized representation of staked assets. When a user stakes their assets, they receive an equivalent amount of Liquid Staking Tokens.

What are Liquid Staking Tokens (LSTs)? · Exploring liquid staking tokens (LSTs), the tokens programmatically minted when a user stakes their tokens via a liquid staking protocol. LSTs represent ownership of the staked tokens and any network rewards earned from participating in the network.

These are middlemen that take assets from users, deposit them into EigenLayer and equivalent platforms, and offer receipts, called "liquid restaking tokens" (LRTs), that accrue interest and can be traded in decentralized finance to earn even larger yields.

Bitcoins are staked through a specific type of native Bitcoin transaction called a 'stake transaction', which includes a lockup period and Core Chain staking details such as the Core Validator and the Core reward address.

Staking on DeFi platforms involves depositing your tokens into a staking pool or smart contract. These tokens are used to validate transactions and secure the network. In return for your contribution, you receive staking rewards, which can be in the form of a native token or other incentives.

Liquidity risk: users may not have access to their staked tokens. So users with staked assets cannot sell or withdraw their assets. Slashing risk: the risk that a validator could lose a portion or all of its pledged tokens.

In some cases, users receive liquid staking tokens (LSTs) in exchange for their staked assets. For example, if you stake ETH on a platform like Lido, you will receive stETH tokens in return. This model is also known as liquid staking derivatives. In other cases, the assets can be staked directly without using LSTs.

If the protocol chooses untrustworthy validators then the staked assets could get slashed. Therefore, you should carefully consider the operational risks associated with liquid staking and only invest with trusted and reputable providers.

Security risks: Liquid staking platforms are vulnerable to hacking and smart contract exploits, which can cause users to lose their funds. Market risks: Liquid staking exposes users to market risks such as price volatility and liquidity crises, which can lead to significant losses.

While liquid staking offers advantages, there are some potential downsides to consider. One downside is the deppeging risk, where the price of the staked derivative tokens may depeg from their original price.

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Risks of Staking

The capricious nature of cryptocurrency markets introduces another layer of risk, as the volatility in prices can potentially outweigh the rewards earned, underscoring the importance of a steadfast, long-term asset-holding strategy to mitigate the impact of price swings.

How Can I Start Earning Passive Income Through DeFi? To start earning passive income in decentralized finance, you can participate in liquidity provision, staking, yield farming, or lending on DeFi platforms.

Stake your tokens.

Staking is another low-risk way to earn passive income with DeFi. By staking your tokens on Liquid Crypto, you can help to secure the network and earn rewards in return. To stake your tokens, simply deposit them into a staking pool on Liquid Crypto. You will then start earning rewards immediately.

Defi users earn variable yield by depositing cryptocurrency into a staking pool, lending protocol, or liquidity pool and gain fees on its use while it is locked up for a period of time.

Key Takeaways: Staking and liquid staking are two different tools that allow cryptocurrency holders to earn rewards. Staking involves locking in cryptocurrency to secure and validate blockchain transactions. Liquid staking enhances flexibility by issuing synthetic tokens against staked assets.

Native Restaking vs.

Similarly to native staking, liquid staking involves locking tokens up in a smart contract. The key difference, however, is that the liquid staking platform then gives you liquid staking tokens (LSTs) in return. You can then use these LSTs as you would any other token on DeFi applications.