What is a Liquid Staking Token (LST)
Liquid Staking Tokens (LSTs) enable you to "stake" your cryptos, while still being able to utilize them. Normally, when staking a token on a blockchain, you lock the tokens for a particular period. Until they unlock, you can neither exchange the tokens nor utilize them. However, LSTs make a solution of this issue. You lock tokens to stake on blockchain, then you receive a liquid token, which represents your staked tokens PLUS staking rewards. While the tokens earn staking rewards, you're free to trade the liquid tokens, and use them across DeFi apps.
LSTs matter on Solana because of the current staking mechanism in Solana. If you stake SOL normally, you delegate to the validators, and your SOL remains locked for the duration of multiple epochs. Each epoch is approximately 48hrs long. While your SOL remains staked, you can't use them for trading or DeFi use cases (which can make it very difficult to take advantage of some DeFi opportunities). Liquid staking solves this by unlocking your tokens. By staking SOL through an LST protocol, you obtain a liquid token. The token can be used immediately, while your SOL continues staking and generating staking rewards.
How LSTs Function Within Solana's Ecosystem
So, how exactly do these work? When you deposit SOL into an LST protocol, such as The Vault (vSOL), Marinade Finance (mSOL), SolBlaze (bSOL), Lido on Solana, or Jito, it is staked on your behalf by the protocol, and you receive liquid tokens in exchange. For example, you may deposit SOL into Marinade Finance to get mSOL, deposit SOL into Lido to receive stSOL, deposit SOL into Jito to receive jitoSOL, and so on.
Each protocol has its own way of staking tokens. The Marinade protocol, for example, uses an algorithm to stake SOL across a large number of validators. This algorithm takes into account the historical performance, current validator fees, and the total amount already staked to each validator. The LST remains pegged to SOL using several strategies, such as the ability to unstake it for a fee instantly or wait for the official Solana unbonding period to expire (no fees) - and while you receive LSTs to represent your staked SOL, staking rewards are accumulated, reflected in the LST value growing slightly with respect to SOL. It occurs automatically and doesn't require claiming.
Benefits and Applications in Solana DeFi
Ultimately, LSTs turn staked tokens into active capital. Your mSOL or vSOL can be provided as liquidity on exchanges such as Raydium, Meteora, or Orca, in addition to being able to earn staking yield. Your LSTs can also be used as collateral to borrow on lending applications such as Solend, Kamino, or Jupiter Lend to generate yield in the meantime. And, you can also deposit them on platforms like Kamino or Jupiter Lend.
In the broader picture, LSTs contribute to the Solana network's overall health, as stake is distributed among a larger group of validators (particularly smaller ones), and capital moves through Solana's DeFi ecosystem at a greater pace. While the LSTs do come with certain risks, such as smart contract failures (although the above tokens utilize the official Solana Labs stake pool smart contract), poor-performing validators, and temporary deviations from parity with SOL when market conditions are very bad, there are now several billions of dollars of SOL that are liquidly staked. In Solana, LSTs have become the standard way of staking: it allows you to secure the chain while using your capital in DeFi.
