Liquid staking tokens: what they are and how they work
A liquid staking token represents crypto you have staked and stays usable in DeFi. You get it by depositing tokens into a liquid staking protocol.
Vahe HakobyanEditor-in-chief
Updated Oct 6, 20262 min readFact-checked
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- A protocol stakes your deposit through validators.
- The token stays usable for lending, borrowing, and liquidity.
- Risks include smart contract bugs, slashing, and losing the peg.
Liquid staking exists because many people do not have the minimum or the setup to run their own validator. A protocol does that work for them.
How does liquid staking work?
A liquid staking protocol stakes your deposit through validators. On Ethereum, the token usually represents staked ETH.
- You deposit tokens into the protocol.
- The protocol stakes them through validators.
- The network pays staking rewards to the validators.
- You receive a token that represents your share, the protocol passes value to you through it, and you can still use it in DeFi.
How do people use liquid staking tokens?
Because the token is tradable, you can use it while the stake stays active. Common uses are in DeFi.
- Lend the token in a DeFi market.
- Borrow other assets against it.
- Provide liquidity in a trading pool.
What are the risks of liquid staking tokens?
Liquid staking adds software, smart contracts, and operators between you and the base network. Those layers can fail.
How is it different from regular staking?
Both approaches secure a proof-of-stake network. They differ in what you hold and who runs the validator.
Frequently asked questions
The IRS treats cryptocurrency as property. Staking rewards are usually taxable as ordinary income when you receive them.
It depends on the protocol. Many let you swap the token back for the original, while others use a withdrawal queue.
They are best known on Ethereum, where they represent staked ETH. Other proof-of-stake networks have similar services.
