What is LST (liquidity staking token) and its applications?

LSTs allow users to stake assets and maintain liquidity, enabling participation in DeFi while earning staking rewards.

Apr 12, 2025 at 09:08 am

Liquidity Staking Tokens (LSTs) are a type of cryptocurrency token that represents staked assets while maintaining liquidity. They are created through a process where users stake their cryptocurrencies, typically in a proof-of-stake (PoS) blockchain, and in return, they receive these tokens that can be traded or used in various DeFi applications. LSTs bridge the gap between staking rewards and liquidity, allowing users to benefit from staking without locking up their assets for extended periods.

How LSTs Work

The mechanism behind LSTs involves staking a cryptocurrency and receiving a corresponding token in return. For instance, if you stake Ethereum (ETH) in a liquidity staking protocol, you might receive a token like stETH. This token represents your staked ETH and can be traded or used in other DeFi protocols. The underlying staked asset continues to earn staking rewards, which are typically reflected in the value of the LST.

Benefits of Using LSTs

One of the primary benefits of LSTs is enhanced liquidity. Traditional staking often requires users to lock up their assets for a fixed period, which can limit their ability to respond to market changes. With LSTs, users can stake their assets and still have access to liquidity. This flexibility allows users to participate in other DeFi activities without sacrificing staking rewards.

Another significant advantage is increased yield opportunities. By holding LSTs, users can benefit from staking rewards while also using these tokens in yield farming, lending, or other DeFi protocols. This dual earning potential can significantly enhance the returns on staked assets.

Applications of LSTs

LSTs have a wide range of applications within the DeFi ecosystem. One common use case is yield farming, where users can stake their LSTs in various liquidity pools to earn additional rewards. For example, a user might stake their stETH in a DeFi platform to earn tokens like UNI or other governance tokens.

Another application is lending and borrowing. Platforms like Aave or Compound allow users to deposit their LSTs as collateral to borrow other cryptocurrencies. This provides users with access to capital while their staked assets continue to earn rewards.

LSTs can also be used in governance. Some protocols issue governance tokens alongside LSTs, allowing users to participate in decision-making processes. By holding these tokens, users can vote on proposals that affect the protocol's future direction.

Examples of LSTs

Several projects have implemented LSTs within their ecosystems. Lido is one of the most well-known, offering stETH as an LST for Ethereum. Users stake their ETH with Lido and receive stETH, which can be used across various DeFi platforms. Ankr is another example, providing ankrETH as an LST for Ethereum staking.

Rocket Pool offers rETH as an LST, allowing users to stake ETH and receive a token that represents their staked assets. These tokens can be traded on decentralized exchanges or used in other DeFi applications. Each of these projects demonstrates the versatility and utility of LSTs within the DeFi space.

How to Use LSTs

To start using LSTs, users need to follow a few steps. Here's a detailed guide on how to stake ETH and receive stETH through Lido:

• Choose a staking platform: Select a reputable platform like Lido that offers LSTs.
• Connect your wallet: Use a compatible wallet like MetaMask to connect to the platform.
• Stake your ETH: Navigate to the staking section and deposit your ETH. The platform will lock your ETH and issue stETH in return.
• Use your stETH: You can now trade your stETH on decentralized exchanges or use it in other DeFi protocols to earn additional yields.

For those interested in using stETH in yield farming, here's how to do it on Curve:

• Go to Curve Finance: Open the Curve Finance website and connect your wallet.
• Select a pool: Choose a pool that accepts stETH, such as the stETH/ETH pool.
• Add liquidity: Deposit your stETH into the pool to provide liquidity and earn CRV tokens as rewards.
• Manage your position: You can withdraw your stETH at any time, and the platform will automatically calculate your share of the pool's rewards.

Risks and Considerations

While LSTs offer numerous benefits, they also come with certain risks. Smart contract risk is a significant concern, as the protocols that issue LSTs rely on complex smart contracts that could potentially have vulnerabilities. It's crucial for users to conduct thorough research and understand the risks associated with the platforms they use.

Another consideration is market risk. The value of LSTs can fluctuate based on the performance of the underlying staked asset and the broader market conditions. Users should be aware that the value of their LSTs may not always track the value of the staked asset perfectly.

Frequently Asked Questions

Q: Can I convert my LSTs back to the original staked asset at any time?

A: Yes, most platforms allow you to convert your LSTs back to the original staked asset at any time. However, the process and any associated fees can vary depending on the platform. For example, with Lido, you can convert your stETH back to ETH whenever you want, but you may need to account for withdrawal times and potential transaction fees.

Q: Are there any tax implications when using LSTs?

A: Tax implications can vary by jurisdiction, but generally, staking rewards and any gains from trading LSTs may be subject to taxation. It's advisable to consult with a tax professional to understand the specific tax obligations in your region.

Q: How do I choose the best platform for staking and receiving LSTs?

A: When choosing a platform, consider factors such as the platform's reputation, the security of its smart contracts, the fees associated with staking and withdrawals, and the additional yield opportunities available. Researching user reviews, audits, and the platform's track record can help you make an informed decision.

Q: Can I use LSTs on multiple DeFi platforms simultaneously?

A: Yes, one of the key benefits of LSTs is their versatility. You can use them on multiple DeFi platforms at the same time, allowing you to maximize your yield opportunities. For example, you could stake your stETH in a Curve pool while also using it as collateral on Aave.