What Is an LST?
An LST, a liquid staking token, is the tradable receipt you get for staking through a liquid staking protocol. stETH from Lido is the canonical example: hold it and you hold a claim on staked ETH plus its accumulating rewards, in a token you can sell or deploy any time.
How It Actually Works
- Rewards accrue either by balance growth (your stETH quantity ticks up) or by exchange rate (each token redeems for slowly more of the underlying, the rETH model).
- Redemption with the protocol converts the LST back to the underlying, sometimes with a queue. The open market provides the instant exit, at whatever price it feels like.
- DeFi treats major LSTs as premium collateral, which is why they sit at the center of so many lending and yield strategies.
Risks and Common Mistakes
- Assuming 1:1 forever. An LST's market price can trade below the underlying during stress. If you must sell into a depeg, the discount is your loss.
- Treating all LSTs alike. They differ in validator quality, decentralization, redemption mechanics, and audit depth. The receipt is only as good as the machine behind it.
- Tax surprises. Converting between an asset and its LST may be a taxable swap in the U.S. My tax guide explains the property rules.
When It Matters
Choosing how to stake, and understanding what actually backs the yield positions across DeFi. Corporate treasuries deploying nine figures through these protocols made LSTs a mainstream finance topic; context on my corporate ETH staking page.
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