What are Liquid Staking Derivatives?

Liquid Staking Derivatives (LSDs) allow users to stake tokens on Proof-of-Stake (PoS) networks like Ethereum while keeping their assets liquid. For example, when staking ETH through Lido, users receive stETH, a derivative token representing their staked ETH. This stETH can be traded or used in DeFi apps like AAVE, enabling users to earn staking rewards without locking their capital.

LSDs like stETH are minted at a 1:1 ratio to the staked ETH through Lido's onchain application, as shown below. The stETH token retains its value relative to ETH and can be used in lending, collateral, or yield farming strategies.

This dynamic increases capital efficiency by providing liquidity to staked assets while maintaining the underlying staking rewards, offering flexibility for Ethereum investors.

Liquid Staking Protocols

Liquid staking protocols represent a major shift in DeFi, transforming how capital is used. First popularized on Ethereum, they’ve become essential across blockchains by enabling stakers to secure networks while keeping liquidity for DeFi activities like lending or earning extra yield.

Here’s a quick look at the top LSD protocols on major layer 1 blockchains.

Lido (stETH)

Lido leads the Ethereum liquid staking market, offering stETH in exchange for staked ETH. With a 3% APY, stETH lets users stay liquid, using their tokens in DeFi without waiting for unstaking periods.

Lido is the largest protocol in crypto by total value locked, with over $24 billion in ETH staked.

Jito (JitoSOL)

On Solana, Jito offers a higher yield at 7.81% APY, thanks to its focus on MEV (Maximal Extractable Value) strategies. Stakers get JitoSOL, which remains liquid and can be traded or used across DeFi apps on Solana like Jupiter and Kamino.

Jito is the largest LSD on Solana with over $2 billion SOL locked on the platform.

Benqi (sAVAX)

Benqi handles liquid staking on Avalanche, issuing sAVAX with a yield of around 5.42% APY. Like its counterparts, sAVAX stays liquid, allowing stakers to use it in DeFi protocols while still earning staking rewards. 

Benqi is also the top liquid staking protocol on Avalanche with over $270 million in sAVAX locked.

Total Value Locked in Liquid Staking

According to Defillama, over $43.9 billion is currently locked in liquid staking protocols across top Proof-of-Stake blockchains.

The top five protocols are Lido (ETH) with $24 billion, Binance Staked ETH at $3.5 billion, Rocket Pool (ETH) holding $3.1 billion, Jito (SOL) with $2 billion, and Mantle Staked ETH at $1.2 billion.

Ethereum dominates the liquid staking market, with the majority of assets staked in ETH, solidifying its position as the largest collateral asset across smart contract platforms.

Liquid Staking vs Restaking

Liquid staking is all about unlocking liquidity. You stake your tokens, get liquid staking derivatives (LSDs), and keep your capital active. Those LSDs can be traded, used as collateral, or deployed in DeFi protocols, all while still earning staking rewards.

Restaking, on the other hand, takes it further. In protocols like Eigenlayer, you can restake your staked ETH (e.g. stETH) to secure multiple protocols through Actively Validated Services (AVSs). This means your staked ETH aren't just securing the base layer; they're also validating other networks or services.

Restaking offers higher yields, but also opens investors up to more smart contract and slashing risks.

Are Liquid Staking Derivatives Safe?

Liquid Staking Derivatives (LSDs) can offer flexibility, but they aren’t without risks. Key concerns include:

• Smart Contract Vulnerabilities: Flaws in the protocol’s code could be exploited.
• Slashing Risk: If validators perform poorly, your staked assets could be slashed.
• Depegging: LSDs can deviate from the value of the underlying asset, causing potential losses.
• Liquidity Issues: In smaller markets, it may be difficult to sell LSDs without affecting prices.

Careful assessment of protocol security and validator performance is essential, as audits and coverage may reduce, but not eliminate, these risks.

Bottom Line

In summary, Liquid Staking Derivatives (LSDs) provide a powerful way to enhance capital efficiency by allowing stakers to remain liquid while earning rewards. They are essential tools for DeFi participants, offering flexibility to use staked assets across various protocols. 

However, while LSDs unlock new opportunities, they come with risks like smart contract vulnerabilities, slashing, and liquidity challenges.