- The liquid staking market sector is worth approximately $17 million, bigger than the decentralized lending and borrowing sectors.
- LSTs are gaining traction as the preferred type of collateral for DeFi applications, the crypto market intelligence database states.
Earlier this year, data source DefiLlama reported that the total value of cryptocurrency assets placed in liquid staking protocols was $14.1 billion, only second to decentralized exchanges with deposits of $19.4 billion. Currently, it is worth approximately $17 million, larger than the decentralized lending and borrowing market sector. However, experts speculate that liquid staking tokens (LST) might overtake the traditional Ether (ETH), based on statistics showing its tremendous rise since Ethereum’s Merge.
What are LST Tokens?
LSTs are receipt tokens that enable users to directly engage in staking while also retaining the option to utilize their LSTs in other decentralized finance (DeFi) applications or swap ownership of their staked tokens. LSTs can be freely exchanged and used in DeFi applications and other Dapps, giving stakeholders access to increased liquidity and capital efficiency.
Furthermore, unlike certain staking-backed yield products that offer “no staking lockups,” most LSTs (including LsETH) do not involve pooling tokens for capital formation or asset management. They serve as a transferrable receipt for the underlying token, which is staked 1:1.
What is the Hype with LST Tokens?
Despite its relative novelty to the crypto space, the LST tokens benefit they offer over classic ETH is becoming immediately apparent to liquidity providers (LPs) who have flocked in numbers to the Ethereum chain after the merge for gains from both price stability and progressive price appreciation. The merit comes from the dilemma ETH users face; would they be better off providing liquidity with their ETH and hoping to earn fees, or would they be better off staking their ETH and getting a guaranteed dividend?
Liquid staking tokens solve this dilemma by unlocking the intrinsic value of staked tokens, giving LPs a liquid “receipt” token that can be freely exchanged and used as collateral within decentralized finance (DeFi) protocols. This contrasts with conventional staked ETH, which is illiquid in the Ethereum staking contract. LSTs allow token holders to participate in other activities across several networks while still earning ETH staking benefits since they liquidate staked assets.
As a result, LPs can now use LSTs to offer liquidity in automated market makers (AMMs) and get the yield from staked ETH. Importantly, LSTs provide a considerably lower barrier to entry than traditional ETH staking, which is attractive for attracting new audiences and investors with smaller investment amounts.
Liquid Staking Tokens Gaining Ground as Collateral Preference
Liquid Staking Tokens (LSTs) are slowly gaining traction as the preferred type of collateral for DeFi applications. In June, Messari, a crypto market intelligence database, reported on a shift in which LSTs have gained traction as a preferred kind of collateral in Ethereum’s DeFi ecosystem. This trend was especially noticeable in the loan industry. Furthermore, LSTs were seen as the primary choice for collateral, replacing ETH.
Moreso, Aave’s staking and borrowing activity revealed a considerable increase in LST usage. As a result, as shown in Messari’s graphic, LSTs surpassed ETH to become the largest collateral asset.
