What Are Liquid Staking Tokens and How Do They Work

As the crypto ecosystem continues to evolve, new financial instruments are transforming how traders earn yield and participate in blockchain security. One such innovation is liquid staking tokens (LSTs)—a solution for traders who want to stake assets without locking them up.

Whether you're a beginner navigating DeFi for the first time or a seasoned trader seeking more efficient capital utilization, understanding how liquid staking tokens work is essential.

In this guide, we’ll break down what liquid staking tokens are, how they compare to traditional staking, why they matter to traders, and how you can get started.

What Is Liquid Staking?

Staking refers to locking up your crypto assets in a blockchain network to help secure the network and earn rewards. This is common in proof-of-stake (PoS) networks such as Ethereum, Solana, and Cosmos.

However, traditional staking often comes with lock-up periods, meaning your assets are illiquid and can’t be used for other trades or opportunities during that time.

Liquid staking solves this problem.

With liquid staking, you still stake your crypto assets—but in return, you receive a tokenized representation of your staked assets. These are called liquid staking tokens (LSTs). These tokens can be traded, used in DeFi, or held as collateral—all while you continue to earn staking rewards in the background.

What Are Liquid Staking Tokens (LSTs)?

Liquid staking tokens are synthetic or derivative tokens that represent your staked assets. They are issued by liquid staking protocols when you stake your tokens through their platform.

Example:

• If you stake ETH with Lido, you receive stETH, which represents your staked ETH.

• With Rocket Pool, you receive rETH.

• With Coinbase, you may receive cbETH.

These tokens remain tradable and usable across multiple DeFi platforms—essentially unlocking liquidity without giving up staking rewards.

How Liquid Staking Works: Step-by-Step

1. You stake tokens (e.g., ETH) via a liquid staking protocol.

2. The protocol stakes them on the PoS blockchain to earn rewards.

3. You receive LSTs (like stETH) that represent your staked assets.

4. You earn rewards automatically, while using the LSTs however you wish—trade, lend, borrow, or hold.

Benefits of Liquid Staking for Traders

1. Access to Liquidity

Unlike traditional staking, you don’t have to wait for unbonding periods to retrieve your assets. You can trade your LSTs on exchanges or use them across DeFi protocols.

2. Compound Earning Opportunities

You can earn staking rewards from your LSTs while also using them in yield farming, lending protocols, or liquidity pools—stacking multiple layers of passive income.

3. Capital Efficiency

For active traders, LSTs provide flexibility. You can manage risk more dynamically and deploy capital into higher-yield strategies without sacrificing your staking position.

4. Interoperability Across DeFi

LSTs are supported by major DeFi platforms such as Aave, Curve, Uniswap, and Balancer. This means they can be used as collateral or to provide liquidity, enhancing your trading and yield potential.

Liquid Staking vs. Traditional Staking

Risks and Considerations

While liquid staking offers enhanced flexibility and capital efficiency, it is not without risks. One major concern is smart contract risk, as these protocols rely on complex code that may be vulnerable to bugs or exploits. 

Price divergence is another factor—liquid staking tokens (LSTs) like stETH can occasionally trade below the value of their underlying assets due to market volatility or liquidity imbalances. 

Additionally, there are centralization risks, as some liquid staking providers may operate with limited validator diversity, potentially undermining the principles of decentralization. 

Finally, each platform comes with protocol-specific limitations, such as varying fees, reward structures, and integration capabilities, making it essential for users to conduct thorough research before committing assets.

Popular Liquid Staking Platforms

Several leading platforms offer liquid staking solutions. Lido provides stETH, widely used across Ethereum DeFi. Rocket Pool offers rETH, focusing on decentralization. Frax issues sfrxETH, combining staking with stablecoin mechanics. Coinbase offers the exchange-backed cbETH, while Marinade provides mSOL, a top choice for Solana-based liquid staking. Each serves different needs based on user goals and networks.

Liquid staking tokens are reshaping how traders interact with proof-of-stake networks. They unlock liquidity, increase capital efficiency, and open the door to advanced yield strategies—all without giving up staking rewards. Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. Trading digital assets and digital asset derivatives comes with a significant risk of loss due to its high price volatility, and is not suitable for all investors. Please refer to our Terms.