What is a liquid staking token?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 5 min
In short
A liquid staking token is a receipt issued against assets that are currently staked. While the underlying stays locked, the receipt itself can be traded or used elsewhere. But nothing guarantees it trades at parity with the underlying, and it adds the issuer's contract risk on top.
Key points
- A receipt token representing staked assets
- Tradable and usable while the underlying stays locked
- Its price can diverge from the underlying
- Adds dependence on the issuer's contracts and operations
Definition
A token issued to represent assets deposited into staking and the holder's claim on them, transferable and usable while the underlying remains locked.
In ordinary staking, deposited assets cannot move until you unstake and wait. Liquid staking issues a token against the deposit instead, so the holder can sell it on the market or post it as collateral in another protocol.
Two designs exist. In one, the token count stays fixed and its exchange rate against the underlying rises over time. In the other, the rate is held at one to one and the holder's balance grows as rewards accrue. The economics match; the accounting presentation differs.
The token's price is set by the market. Its theoretical value is the deposit plus accrued rewards, but when withdrawal queues are congested or confidence in the issuer wavers, it can trade below that. There is no assurance such a gap closes quickly.
Posting the token as collateral elsewhere stacks staking risk on top of borrowing risk. That is the channel through which a price gap can cascade into collateral shortfalls, so understand the full exposure before layering uses.
Watch out for
- · The unbonding constraint stays with the underlying, and holders bear the price risk
- · If the issuer's validators are slashed, the backing principal shrinks
- · A flaw in the issuer's contracts can make redemption impossible