A Guide to Liquid Staking Tokens

The world of cryptocurrency investing is constantly evolving, with new concepts and technologies emerging all the time. One of the latest developments in the space is liquid staking tokens (LSTs), which offer users the ability to earn yields on their staked tokens while retaining liquidity.

In this article, we'll explore what LSTs are, how they work, and some of the platforms that allow users to earn high yields on their investments.

What Are LSTs and How Do They Work?

On most liquid staking services, users can deposit their ETH to the platform and receive LSTs, which are essentially receipts for the staked ETH. Alternatively, users can simply swap their ETH for LSTs on a DEX.

The use of LSTs allows investors to earn yields on their staked assets while maintaining liquidity. Smart contracts automate the process of staking and reward distribution, and LSTs can be traded on other DeFi projects or transferred to other users.

The Benefits of Using LSTs

For starters, users can earn yields on their staked assets while still retaining liquidity. This makes LSTs an attractive option for investors who want to earn passive income on their cryptocurrency holdings without sacrificing flexibility.

Another significant benefit of LSTs is their ability to enable composable yield strategies. Liquid staking tokens can be used as collateral on lending pools and exchanges, allowing token holders to receive additional interest on top of their staking rewards.

This composability is the bedrock of DeFi. Furthermore, staked tokens on centralized platforms can be used as collateral for loans, margin, and derivative trading.

Liquid staking also offers a technical advantage. Unlike traditional staking where token holders delegate their stake to a single validator, tokens are spread out across many validators, thus reducing the risk of significant loss from slashing.

Slashing penalties are usually socialized across the pool, making it less likely for a single validator's mistakes to affect the staker's rewards.

The Risks of Using LST

Liquid staking presents a potential risk of de-pegging, as it differs from traditional staking where token holders retain ownership and control of their assets. In liquid staking, staked assets are used as collateral to generate reflective tokens.

But, the risk of de-pegging has significantly decreased following the Shapella upgrade when withdrawals were turned on for staked ETH. Before the upgrade, staked ETH was illiquid, and there was no clear timeline for approved withdrawals, increasing the risk of de-pegging.

Still, there were no major dips lasting more than a week. With withdrawals now available, the risk of de-pegging is even lower.

Another risk is the potential for smart contract vulnerabilities, which could result in the theft or hacking of staked tokens.

Finally, centralization is another risk, as liquid staking pools are often controlled by a limited number of operators who could wield significant influence over the network.

Start Liquid Staking

With the rise of liquid staking, there are now several projects scrambling to establish themselves in this new market.

For example, while Lido Finance enjoys a first-mover advantage, many competitors are offering enticing yields to attract stakers including Rocketpool, Stkr, SharedStake, and Stafi. These projects are looking for ways to leverage those yields and gain an edge.

Sturdy Finance– the first positive sum DeFi lending protocol– is becoming the go-to platform for these projects and others to cheaply incentivize liquidity. With Sturdy's 10x leverage, the user can receive 10x the LP incentives, while the projects gain 10x the liquidity.

That means that an extra 2% APY can turn into an extra 20%. Best of all, the risk of impermanent loss or liquidation is minimal because the LPs are ETH and an LST (pegged to ETH).

For those concerned about taking on leverage, Sturdy lenders get a portion of yield farming profits and take advantage of $STRDY liquidity mining.

Liquid staking tokens (LSTs) offer an attractive option for investors seeking to earn yields while maintaining flexibility.

Despite potential risks such as de-pegging and smart contract vulnerabilities, the market for LSTs is growing rapidly with several projects competing to establish themselves as major players.

Platforms like Sturdy are making it easier for projects to incentivize liquidity, allowing investors to earn even higher yields.

By doing your due diligence and carefully evaluating the various projects and platforms available, you can take advantage of the benefits of LSTs while mitigating the risks.

Note: the author has previously had a business relationship with Sturdy Finance. Please do your own research before making any investment decisions.