Liquid Staking Derivatives: A New Frontier in DeFi

Liquid Staking Derivatives: A New Frontier in DeFi

In the ever-evolving landscape of Decentralized Finance (DeFi), one area that has been gaining significant traction is Liquid Staking Derivatives (LSDs), also frequently known as Liquid Staking Tokens (LSTs). As a relatively new concept, LSDs are reshaping the way we perceive staking, offering a solution to one of its most significant drawbacks - liquidity. This article aims to provide an in-depth understanding of LSDs, their benefits, types, trading implications, risks, rewards, and their role in the DeFi ecosystem.

Understanding Liquid Staking Derivatives

Staking is a fundamental aspect of many blockchain networks. It involves participants locking up their assets in a network to support operations like block validation, security, and governance. While staking offers attractive rewards, it comes with a significant downside - the lack of liquidity. Once staked, these assets are often locked and cannot be used until the end of the staking period.

Liquid Staking Derivatives are an innovative solution to this problem. When you stake your assets in a LSD/LST protocol (e.g Lido or RocketPool), you receive some tokens in return. These tokens represent your staked assets and can be traded or used in other DeFi protocols, creating a liquid position for the staker. Essentially, LSDs allow you to stake your assets and still have a liquid token that you can then do other things with in DeFi.

The Appeal of Liquid Staking Derivatives

The main advantage of LSDs is that they allow you to utilize your staked assets in multiple ways. Instead of your assets being locked up, you receive derivative tokens that can be used in the broader DeFi market. This means you can earn staking rewards while also leveraging other yield opportunities.

For instance, you can use your LSDs as collateral to borrow other assets, or you can lend them out to earn interest. You can also use them to participate in yield farming or liquidity mining programs, potentially earning additional rewards. In essence, LSDs provide a way to earn multiple streams of income from your staked assets.

Different Types of Liquid Staking Derivatives

There are several types of LSDs, each with its own characteristics and use cases. For example, stETH is a derivative token provided by the Lido protocol. When you stake ETH with Lido, you receive stETH tokens in a 1:1 ratio. These stETH tokens can then be used in other DeFi applications, effectively making your staked ETH liquid.

It's also worth noting that the concept of LSDs isn't limited to Ethereum. Other blockchains are also exploring liquid staking. For instance, Binance Smart Chain has staked BNB (stBNB), Polygon (previously Matic Network) has staked MATIC (stMATIC) via Lido, and Solana also has a staked version of their token SOL in Lido (stSOL).

Trading Liquid Staking Positions

LSDs can be traded like any other token in the DeFi space. They can be exchanged for other tokens on decentralized exchanges, used as collateral for loans, or even deposited into yield farming protocols to earn additional rewards.

This opens up a world of possibilities for stakers. For example, you could stake your ETH, receive stETH, and then use that stETH to provide liquidity in a Uniswap pool with USDC or DAI, earning trading fees in the process. Alternatively, you could use your stETH as collateral to borrow stablecoins on a lending platform like Aave, and then use those stablecoins to earn yield elsewhere.

Providers of LSDs and the Decentralization Spectrum

There are several providers of LSDs, each with its own approach and degree of decentralization. On one end of the spectrum, we have fully decentralized protocols like Lido and Rocket Pool. These protocols are governed by their communities and operate in a permissionless manner.

Lido, for instance, is a decentralized protocol that allows for Ethereum 2.0 staking without locking up assets. When you stake ETH with Lido, you receive stETH tokens, which can be used in the DeFi market.

Rocket Pool is another decentralized protocol that offers a similar solution. When you stake ETH with Rocket Pool, you receive rETH tokens, which represent your staked ETH and can be used in the DeFi market.

On the other end of the spectrum, we have centralized exchanges like Coinbase and Binance. These platforms also offer staking services, but they operate in a more centralized manner. When you stake assets with these platforms, you typically receive an IOU token that represents your staked assets.

In the middle of the spectrum, we have protocols like Frax, which offer a hybrid approach. Frax's staking solution, for instance, is partially decentralized and partially governed by the Frax team.

It's important to note that each approach comes with its own trade-offs. Fully decentralized protocols offer greater transparency and control, but they may also come with higher risks and technical complexity. Centralized platforms, on the other hand, offer convenience and simplicity, but they also come with the risks associated with centralized custody.

There are more and more providers of LSDs, including some protocols that are beginning to do some very innovative things (e.g restaking). We won’t dive into all of them today, but in a future article we will cover the broader list of staking protocols and the pros and cons that come with using them.

Risks and Rewards

As with all DeFi activities, there are risks and rewards associated with liquid staking and staking derivatives. On the one hand, LSDs offer increased liquidity and the potential for higher returns. By allowing staked assets to be used in the broader DeFi market, LSDs open up new avenues for yield generation.

On the other hand, there are also risks to consider. These include smart contract vulnerabilities, market volatility, and regulatory uncertainties. For instance, if the smart contract of the liquid staking protocol has a bug, it could lead to a complete loss of funds. Similarly, if the price of the derivative token falls significantly, it could result in a loss for the holder. If you are using an LST as collateral and the price of the LST depegs significantly for any reason, even if its only for a short time, you could get liquidated.

Liquid Staking and the DeFi Ecosystem

Liquid staking derivatives contribute significantly to the DeFi ecosystem by enhancing liquidity and enabling more efficient capital utilization. By allowing staked assets to be used in the broader DeFi market, LSDs help to connect different parts of the DeFi ecosystem, creating a more interconnected and efficient market.

For instance, a user could stake their ETH, receive stETH, use that stETH to provide liquidity in a DEX, earn trading fees, and then use those fees to participate in a yield farming program. This kind of interconnected activity would just not be possible without LSDs.

Moreover, by increasing the liquidity of staked assets, LSDs also help to reduce the risk of liquidity crises in the DeFi market. In a liquidity crisis, the demand for liquidity exceeds the supply, leading to rapid price drops and potential market instability. By making staked assets liquid, LSDs help to increase the overall liquidity of the DeFi market, making it more resilient to such crises.

Superpowered Liquid Staking with Gearbox

So, now you know what LSDs/LSTs are. How does any of this relate to Gearbox? If you’re here, you probably already know what Gearbox Protocol does and what we’re trying to achieve, but just in case you don’t, here’s a quick refresher.

Gearbox is a composable leverage protocol that aims to be the leverage layer for all of (safe) DeFi. The way this works is we created a primitive called the Credit Account. The Credit Account acts almost like a smart wallet with built in leverage - you can put in 1 ETH as collateral and get up to 10 ETH in your Credit Account. You can then use this 10 ETH to interact across a variety of protocols that Gearbox has integrated with, like Yearn, Curve, Uniswap… and Lido (currently the leading LSD/LST project).

Since Gearbox has a Lido integration, that means you can get leverage on your liquid staking positions. This means that you can boost your staking yield by up to 9x (minus the cost of borrowing all that ETH of course). Now, we don’t recommend using that much leverage, even on a safe position like Lido staked ETH, but the long and the short of it is you can supercharge the yields you’re receiving from your liquid staked ETH positions by using leverage through Gearbox.


Liquid Staking Derivatives (LSDs) represent a groundbreaking advancement in the DeFi landscape, addressing the long-standing liquidity challenge associated with traditional staking. By transforming staked assets into tradable tokens, LSDs not only unlock liquidity but also open up diverse avenues for earning, trading, and leveraging within the DeFi ecosystem. From relatively decentralized protocols like Lido and Rocket Pool to centralized platforms like Coinbase and Binance, the spectrum of LSD providers offers various options catering to different preferences and risk tolerances.

Furthermore, LSDs are not confined to a single blockchain; they are being explored and implemented across various networks, including Ethereum, Binance Smart Chain, Polygon, and Solana. This cross-chain applicability enhances the possibilities for earning staking yield in the DeFi market.

In the context of Gearbox, the integration with leading LSD projects like Lido amplifies the potential of liquid staking by introducing leverage. This supercharging effect on yields exemplifies the innovative spirit of DeFi, where new primitives and integrations continually push the boundaries of what's possible.

As the DeFi space continues to evolve, LSDs are poised to play a pivotal role in shaping the future of decentralized finance. Whether you're a whale, an ETH staker, or someone intrigued by new crypto technologies, the world of LSDs offers exciting opportunities and signifies a new frontier in DeFi. The journey has just begun, and the possibilities are endless.

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