Staking & LSTs

In Proof of Stake (PoS) systems, validators deposit some tokens, known as a stake, which makes them eligible to become the validating node for a specific epoch. On Ethereum, validators need to stake at least 32 ETH to be considered for the same. If a validator performs their tasks responsibly, they get rewards for their services or get ‘slashed’ otherwise. However, a problem with this mechanism is that smaller but honest validators might not always possess the 32 ETH required to participate. To bypass this hurdle, PoS systems allow a validator to accept deposits from delegators who can help them build their stake. Once the validator is selected and performs their tasks successfully, they receive staking rewards, which are then divided between the validator and the delegators at a pre-discussed ratio.

In PoS networks, any user can become a delegator and participate in a network’s security by staking tokens to validators. This allows users to share the rewards of a network’s consensus system. Unfortunately, this also locks up a user’s staked deposits and severely restricts their liquidity. To solve this problem, there exist staking protocols such as Lido, Rocket Pool, Binance Staking etc. that issue Liquid Staking Tokens (LSTs). Once a user stakes through such a protocol, they receive in return a corresponding number of LSTs that represent their staked deposits. These LSTs can, in turn, be traded or utilized in other DeFi protocols. This enables users to earn stable staking yields while keeping their staked deposits liquid.