Liquid staking is a method of crypto staking that enables the simultaneous staking and using of tokens. In liquid staking, tokenized representations of staked assets are available, allowing users to simultaneously stake and use tokens. These liquid staking tokens (LSTs) can be used for lending, yield farming, or liquidity provision purposes. For example, a user engaging in liquid staking of ETH may receive an LST that stands for the staked ETH and cumulative rewards that can be invested, while the underlying asset continues to generate rewards from staking.
What makes liquid staking different from traditional staking is that it increases the efficiency of capital. It allows users to contribute to network security while using their staked assets across DeFi applications. The improved capital efficiency is somewhat offset by risks, such as alterations in staking reward percentages and unfavorable changes in the peg ratio between the tokenized representation and the underlying asset.
