Explore
Glossary

Liquid Staking Derivatives (LSDs)

Liquid Staking Derivatives (LSDs) are tokenized representations of staked assets that allow users to earn staking rewards while maintaining liquidity. Unlike traditional staking, where assets are locked and inaccessible for a set period, LSDs provide a liquid alternative, enabling users to trade, lend, or use staked assets in decentralized finance (DeFi) applications.

LSDs are issued by liquid staking protocols, which stake assets (e.g., ETH, DOT, SOL) on behalf of users and provide them with a derivative token representing their stake. These staking derivatives accrue rewards and can be used across DeFi for lending, borrowing, liquidity provision, or yield farming, significantly enhancing capital efficiency.

How LSDs Work

  1. User Stakes Assets – A user deposits a native cryptocurrency (e.g., ETH) into a liquid staking protocol such as Lido, Rocket Pool, or Frax ETH.
  2. Issuance of LSD Tokens – In return, the user receives an LSD token (e.g., stETH, rETH, sfrxETH) that represents the staked asset and its rewards.
  3. Earning Staking Rewards – LSD tokens accrue staking rewards over time, increasing in value or being periodically distributed to holders.
  4. DeFi Integration – Users can trade, lend, or use LSDs as collateral in DeFi applications, maintaining liquidity while still earning staking rewards.
  5. Redemption – LSD holders can unstake their tokens to reclaim their original assets, though some networks impose waiting periods or liquidity constraints.

Key Features

  • Liquidity Preservation – LSDs allow users to stake assets while keeping them liquid for use in DeFi.
  • Yield Optimization – LSDs enable users to compound returns by deploying staked assets in lending, farming, and liquidity pools.
  • Cross-Chain Compatibility – Some LSDs can be bridged across multiple blockchains to maximize capital efficiency.
  • Decentralized Security – LSD protocols help secure the network while providing alternative yield sources.

Benefits of LSDs

  • Passive Income – Users earn staking rewards without sacrificing liquidity.
  • Enhanced DeFi Utility – LSDs can be used in lending, AMMs, and cross-chain liquidity.
  • No Validator Setup Required – LSD protocols remove technical barriers for staking participation.
  • Diversification – Users can deploy LSDs in multiple DeFi strategies, increasing earning potential.

Risks and Challenges

  • Smart Contract Vulnerabilities – LSD protocols rely on smart contracts, which may be vulnerable to exploits.
  • Liquidity Risks – Some LSD tokens may experience low liquidity, making it difficult to redeem assets instantly.
  • Price Volatility – LSDs can trade at a discount to their underlying asset, leading to potential slippage and arbitrage risks.
  • Centralization Risks – Some LSD protocols control a large percentage of staked assets, raising concerns about network centralization.

Examples of LSD Protocols

  1. Lido (stETH) – The largest liquid staking protocol, issuing stETH for staked Ethereum, which is widely used in DeFi.
  2. Rocket Pool (rETH) – A decentralized Ethereum staking network offering rETH, a liquid staking derivative.
  3. Frax ETH (sfrxETH) – A liquid staking solution providing sfrxETH, which auto-compounds staking rewards.
  4. Binance Staked ETH (BETH) – A centralized LSD provided by Binance for staking ETH on Ethereum 2.0.

Use Cases of LSDs

  1. Lending and Borrowing – Users deposit LSDs into platforms like Aave or Compound to borrow stablecoins while still earning staking rewards.
  2. Liquidity Provision – LSDs are paired with assets in AMMs like Uniswap or Curve, generating both trading fees and staking rewards.
  3. Yield Farming – LSD holders stake their tokens in yield aggregators to earn additional rewards.
  4. Cross-Chain Liquidity – LSDs can be bridged to other networks to participate in multi-chain DeFi strategies.

Read next

Comments ()