TL;DR
Liquid staking solves a fundamental problem in blockchain networks by allowing users to stake their tokens for network security while maintaining liquidity. Instead of locking up assets, users receive liquid staking tokens (LSTs) that represent their staked assets, enabling participation in DeFi while still earning staking rewards.
Key points:
Liquid staking provides staking benefits without sacrificing asset liquidity
LSTs represent staked assets and automatically accumulate rewards
Users can utilize LSTs in DeFi applications for additional yield opportunities
Different blockchains offer various liquid staking solutions with unique features
Key risks include smart contract vulnerabilities, validator issues, and market fluctuations
Introduction to Liquid Staking
Staking is essential for securing Proof-of-Stake blockchains but traditionally requires locking up tokens, making them unusable for other purposes. Liquid staking emerged as an innovative solution to this challenge, allowing users to stake their tokens while maintaining liquidity through liquid staking tokens (LSTs).
The Problem Liquid Staking Solves
In traditional staking, assets are:
Locked for validation purposes
Unavailable for other uses
Subject to unbonding periods when unstaking
Missing potential DeFi opportunities
Liquid staking addresses these limitations by tokenizing staked positions, enabling users to participate in network security while maintaining asset utility.
How Liquid Staking Works
The liquid staking process follows a consistent pattern:
1. The Staking Process
Users deposit their tokens into a liquid staking protocol, which:
Delegates tokens to validators
Issues liquid staking tokens (LSTs) representing the staked position
Manages validator relationships and performance
2. Reward Accumulation
Staking rewards are handled through one of two mechanisms:
Rebasing Mechanism
The LST's value increases relative to the underlying asset
Example: 1 stCORE might equal 1.08 CORE after one year of staking
Balance-Increasing Mechanism
The number of LST tokens in the user's wallet increases
Example: 100 LSTs might grow to 108 LSTs after a year
3. Redemption Process
Users can convert their LSTs back to the original tokens:
Submit LSTs to the protocol
Wait through an unbonding period (varies by blockchain)
Receive the original tokens plus accumulated rewards
Major Liquid Staking Tokens
Different blockchains have developed their own liquid staking solutions:
Ethereum Ecosystem
Lido's stETH
Largest liquid staking protocol by TVL
Uses a rebasing mechanism for rewards
Rocket Pool's rETH
Focuses on decentralization with distributed node operators
Balance-increasing reward mechanism
Solana Ecosystem
Marinade Finance's mSOL
Automatically distributes stake across validators
Promotes decentralization by focusing on smaller validators
Core Ecosystem
stCORE
Represents staked CORE tokens on the Core blockchain
Uses a rebasing mechanism for reward distribution
Enables participation in Core's Satoshi Plus consensus while maintaining liquidity
Integrated with Core's growing DeFi ecosystem
Liquid Staking vs. Traditional Staking
Understanding the differences helps users make informed decisions:
| Feature | Traditional Staking | Liquid Staking |
| ----- | ----- | ----- |
| Liquidity | Assets locked | Assets remain liquid as LSTs |
| Capital Efficiency | Low - tokens unusable | High - LSTs usable in DeFi |
| Reward Distribution | Direct payments | Value accrual in token or balance |
| Validator Selection | User-selected | Typically protocol-managed |
Liquid Staking vs. Restaking
These related concepts are often confused but serve different purposes:
Liquid Staking
Primary Purpose: Provide liquidity for staked assets
Mechanism: Tokenize staked positions
Reward Source: Native staking rewards from the blockchain
Restaking
Primary Purpose: Use staked assets to secure multiple protocols
Mechanism: Extend security beyond a single blockchain
Reward Source: Multiple protocols paying for security
The key distinction: liquid staking focuses on liquidity for single-chain staking, while restaking allows the same staked assets to secure multiple protocols simultaneously.
Using Liquid Staking Tokens in DeFi
LSTs unlock various DeFi opportunities while maintaining staking rewards:
Lending and Borrowing
LSTs can be:
Deposited as collateral to borrow other assets
Lent to other users for additional yield
For example, stCORE can be used as collateral on lending platforms like Colend in the Core ecosystem.
Liquidity Provision
LSTs are commonly paired in liquidity pools:
LST/Native Token pairs (e.g., stCORE/CORE)
LST/Stablecoin pairs
Yield Looping Strategies
The real power of LSTs comes from composability:
- Stake tokens to receive LSTs (earning staking APY)
- Use LSTs as collateral to borrow stablecoins
- Deploy borrowed stablecoins in other yield-generating strategies
This approach requires careful risk management but can significantly enhance returns.
Risks of Liquid Staking
While offering significant benefits, liquid staking introduces several risk factors:
Smart Contract Risk
All DeFi protocols face potential vulnerabilities in their code that could lead to fund loss. Mitigation includes audits, formal verification, and gradual protocol maturation.
Validator Risk
LSTs depend on the performance of validators:
Slashing events if validators misbehave
Downtime affecting rewards
Quality protocols distribute stake across multiple validators to reduce this risk.
De-pegging Risk
Market conditions can cause LSTs to trade at different rates than the "fair value":
Limited liquidity can cause price deviations
Market stress might lead to selling pressure
Arbitrage opportunities should eventually restore proper pricing.
Centralization Risk
Some protocols concentrate control in ways that could undermine decentralization:
Limited validator selection committees
Centralized upgrade mechanisms
More decentralized protocols distribute governance and validator selection more broadly.
What Happens If a Validator Is Slashed?
When a validator in a liquid staking pool is slashed:
- Socialized Losses: Most protocols distribute the loss across all users
- Insurance Funds: Some protocols maintain insurance to cover slashing events
- Operator Penalties: Some protocols require validator operators to cover losses
Different networks handle slashing differently:
Ethereum: Significant penalties for malicious behavior
Solana: Loss of stake rather than active slashing
Core: Validators face potential slashing but token holders are not directly affected
How LST Yields Are Calculated
The total yield from liquid staking includes:
- Base Staking Rewards: The underlying staking yield from the blockchain
- Protocol Fees: Most liquid staking protocols take a percentage of rewards
- Validator Commission: Validators typically charge commission on rewards
FAQ: Common Questions About Liquid Staking
Q: How does liquid staking keep assets liquid?
A: Liquid staking keeps assets liquid by issuing derivative tokens (LSTs) that represent staked positions. These LSTs can be freely transferred, traded on exchanges, used as collateral in lending protocols, or provided as liquidity in DEXs—all while the underlying assets continue earning staking rewards. This tokenization effectively separates the economic benefits of staked assets from the staking restriction itself.
Q: What are the main risks of liquid staking?
A: The main risks include smart contract vulnerabilities that could lead to fund loss; validator-related risks such as slashing or poor performance affecting rewards; de-pegging risk where market conditions cause the LST to trade at a discount to its underlying value; and centralization risks if the protocol concentrates power in too few hands. Established protocols mitigate these risks through audits, validator diversification, and other measures.
Q: How are LST yields calculated?
A: LST yields are calculated based on the underlying blockchain's staking rewards, minus protocol fees and validator commissions. These rewards accumulate either by increasing the value of each LST token relative to the underlying asset (rebasing model) or by increasing the number of LST tokens in your wallet (balance-increasing model). Most protocols display yield as APY, which includes the effect of compounding.
Q: Can I use LSTs as DeFi collateral?
A: Yes, LSTs can generally be used as collateral in DeFi lending protocols, though support varies by platform. Many major lending protocols accept popular LSTs as collateral, allowing you to borrow against these assets while still earning staking rewards. This enables yield stacking strategies where you earn both staking rewards and leverage your position for additional yield.
Conclusion: The Future of Liquid Staking
Liquid staking represents a significant innovation in blockchain technology, addressing the fundamental tension between network security and capital efficiency. By allowing users to maintain liquidity while participating in network security, liquid staking protocols have unlocked billions of dollars of value that would otherwise be inaccessible.
As blockchain ecosystems mature, we can expect to see deeper integration between liquid staking and DeFi applications, more sophisticated yield strategies, and improved user interfaces simplifying the staking process.
For users of the Core blockchain, liquid staking options like stCORE enable participation in the network's security through Satoshi Plus consensus while maintaining the flexibility to use those assets across the growing Core DeFi ecosystem.
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