Liquid staking lets users participate in proof-of-stake validation while holding a transferable token representing their stake. A protocol or provider arranges validator operations and issues a liquid staking token, commonly called an LST. The underlying assets remain subject to the network's staking rules even while the receipt token circulates.
How rewards appear
Token designs account for rewards differently. A rebasing token adjusts the holder's balance, while a token with a changing conversion rate represents more underlying assets as net rewards accrue. Lido's stETH and its wrapped form, wstETH, illustrate these two accounting approaches. Penalties and fees can reduce the amount ultimately represented; a receipt is not a promise of a fixed return.
Trading the token or redeeming the stake
Holders may sell an LST where a market exists or request redemption through the relevant protocol. Redemption can involve queues and delays. A market sale instead depends on available liquidity and can occur below the token's underlying accounting value.
Using an LST as DeFi collateral adds lending and liquidation risks. Liquid staking also retains validator risks and introduces dependencies on contracts, operators, governance, and accounting systems. Transferability does not make the underlying stake instantly withdrawable.