Liquid Staking

Introduction

Ethereum’s shift from proof-of-work to proof-of-stake enabled ETH holders to stake their tokens and help secure the blockchain network. As compensation for securing the network, stakers are rewarded with additional ETH tokens. At first, stakers were required to post 32 ETH (the minimum amount to run a node), and the user’s ETH tokens were to be locked until the Shapella upgrade was completed (successfully completed in March).

Due to the capital requirements and the illiquidity of staking ETH, a new financial primitive called a Liquid Staking Derivative (LSD) was created. LSDs (sometimes referred to as Liquid Staking Tokens, or “LSTs”) are protocols that enable ETH holders to stake their tokens but continue to use their collateral value in other DeFi applications and allows ETH holders to participate in staking without needing to provide a full 32 ETH or operate a node. LSDs allow users to deposit ETH into the protocol and receive a tokenized financial equivalent of their staked position. Each token is able to be redeemed on a 1:1 basis for the underlying asset, thus preserving their value. These derivative tokens have been integrated into the DeFi ecosystem, enabling additional financial strategies for ETH stakers while simultaneously offering them near-instant...