A staking mechanism where a staking pool or exchange provides users with derivative tokens when they stake the original tokens with the staking pool or exchange. The derivative tokens may then be used in other DeFi activities instead of being locked.
Liquid staking is a term used to describe a type of staking system in which users are able to easily and quickly stake and unstake their tokens. In a traditional staking system, users must lock up their tokens for a certain period of time in order to participate in the staking process and earn rewards. In a liquid staking system, on the other hand, staked assets holders are given a derivative token of equal value that they can use in DeFi activities while their staked assets are locked.
They can claim their staked token back when they return the equal value of derivative tokens. While users can maximize the reward by doing so, as of now, there are limited platforms that accept derivative tokens for DeFi activities. In Lido, users can stake their Eth and get stEth–a derivative token of Eth–that can be used for DeFi activities while still earning from the staked Eth.
Illustration of Liquid Staking on Lido Finance (with examples on Etherscan):
