Twenty-six billion dollars. That’s how much money is currently deposited into liquid staking token (LST) protocols, by far the biggest category in decentralized finance (DeFi). And, of course, it is expected to grow even further.
Liquid staking token (LST) is a crypto-specific term that can be hard to grasp at the first sight. It is a utility token issued upon securing proof-of-stake blockchain, like Ethereum, by depositing native cryptocurrency in a dedicated protocol. For example, stETH is an LST issued by Lido when staking ETH on the Ethereum network.
Decentralized applications (dApps), such as Lybra, Prisma, Sommelier, Enzyme, that use these types of tokens are part of the LSTfi (LST finance) category of finance (allowing users to stake their LSTs in a form of collateral, or for other DeFi use cases). In other words, LSTfi is the use of LSTs in DeFi. LST finance (LSTfi) exploded after Ethereum’s Shanghai upgrade on April 12 2023, which enabled staked ETH withdrawals.
Here are the three main LST architecture models:
1. Rebase tokens – tokens that automatically adjust their balance in response to deposits and rewards. This process, known as rebasing, typically happens daily. During rebasing, there is no visible transactional activity for the token holders. Examples of such tokens include Lido's stETH and Binance's BETH, both of which are classified as rebase tokens. This type of LST is designed to be user-friendly, as the balance of your LST increases in line with your staking activities.
For example: staking 1,000 ETH at Lido will give you 1000 stETH, which, after one week, should amount to about 1,000.67 stETH (at today’s 3.5% APR).
2. Rewards-bearing tokens – tokens that increase in value over time, with the value and rewards determined by the changing exchange rate between the token and the staked asset. The quantity of LST stays the same, but its rate varies. This single-token model is convenient, but less straightforward than rebase tokens. Holders benefit from rising rewards, examples of which include rETH, cbETH, swETH, osETH, and ETHx.
For example: staking 1,000 ETH at Stader will give you about 989.78 ETHx that after one week will be the same amount of ETHx, but worth about 1,000.68 ETH (at today’s 3.56% APR).
3. Wrapped tokens – certain LST are available in wrapped versions. After wrapping, these tokens no longer experience automatic balance adjustments and become reward-bearing tokens. Unlike rebasing, which occurs without any transactions, changes in the balance of wrapped tokens are achieved through actions like minting, burning, or transferring. The rewards are integrated into the exchange rate. Wrapped LSTs, such as stETH and BETH, often see higher popularity and volume in DeFi and trading sectors because they aren't subject to rebasing.
For example: wrapping 1,000 stETH at Lido will give you about 874.62 wstETH that after one week will be the same amount of wstETH but worth about 1,000.67 ETH (at today’s 3.5% APR).
LSTs Types by Architecture Models (Source: RedStone’s LSTfi report)
Liquid staking tokens play an essential role in the DeFi ecosystem, offering users a way to participate in cryptocurrency staking without the hassles of running validator nodes and managing hardware and software. As the DeFi landscape continues to grow, liquid staking tokens will keep providing users with opportunities to earn rewards and participate in cryptocurrency staking with ease.
LST & LSTfi is here to stay. Therefore, it is vital to understand the mechanism behind them and major players on the market. In 2024, my advice is to keep eye on the trending LST protocols, LST-backed stablecoins and put a lot of attention to restaking space, especially with the upcoming mainnet launch of Eigenlayer that is expected in the late March of next year.
Want to learn more? Read the LSTfi Report.