What is liquid staking?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 5 min
In short
Liquid staking issues you a token representing your staked position, which you can then use elsewhere in DeFi. It solves the problem of capital sitting locked and idle — and introduces a new one, because that token's market price can drift away from the asset it represents.
Key points
- You receive a token representing your staked position
- Locked capital becomes usable across DeFi
- The token's price can depeg from the underlying
- You take on the operator's and validators' failure risk
Definition
A design that issues a transferable token representing a staked position, so the capital can be traded or used in other protocols while it remains staked; the token is designed to be redeemable for the underlying.
Ordinary staking locks the asset and imposes a waiting period to exit. Liquid staking mints a token at the moment of deposit that represents the position. It can be transferred freely, sold on a DEX, or posted as collateral. To get the underlying back you either redeem through the protocol or sell the token on the market.
Rewards are reflected in one of two ways: your token balance grows, or the balance is fixed and each token becomes worth more of the underlying over time. With the second design, a price above the underlying is the intended behaviour, not a depeg. Confusing the two leads to misreading the quoted price.
Two risks dominate. First, redemption takes time, so anyone who wants out quickly must sell on the market — and when many do, the market price falls below redemption value. That has happened at scale, cascading into liquidations of loans collateralised by the token. Second, if the operator or its validators misbehave or fail, the staked amount itself can be reduced.
Watch out for
- · The market price has fallen below redemption value in practice, triggering liquidations for anyone using it as collateral
- · Redemption involves a waiting period, so the underlying is not always available on demand
- · Validator misbehaviour or downtime can reduce the staked balance itself