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What are Liquid Staking Tokens (LSTs)?

Liquid Staking Tokens are an important technological innovation allowing participants in proof of stake networks to access liquidity while staking.

What are Liquid Staking Tokens (LSTs)?

A key feature of liquid staking protocols like Liquid Collective is Liquid Staking Tokens (LSTs). LSTs are receipt tokens that allow users to directly participate in staking while also maintaining the ability to use their LST elsewhere in decentralized finance (DeFi) or transfer ownership of their staked tokens. As a result, LSTs like Liquid Staked ETH (LsETH) provide increased liquidity and capital efficiency for stakers.

Liquid Staking Token features

  • When a user stakes their tokens via a liquid staking protocol LSTs are programmatically minted in return. LSTs represent ownership of the staked tokens and any rewards earned from participating in the network.
  • LSTs serve as a blockchain-based document of title certifying that the holder has staked the corresponding token, retains ownership of the staked token, and can present the LST to withdraw the staked token according to network parameters.
  • LSTs can be freely transferred and used in decentralized finance (DeFi) applications and other dapps, providing stakers with access to additional liquidity and capital efficiency.
  • Additionally, most LSTs (including LsETH) do not involve the pooling of tokens for capital formation or asset management, as is the case with some staking-backed yield products that promote "no staking lock-ups." Instead, LSTs simply serve as a transferable receipt for the underlying token that is staked 1:1.

POSA's white papers provide crucial legal analysis for LSTs

The Proof of Stake Alliance (POSA) published two landmark white papers in February 2023 providing the first legal research and analysis defining and considering key questions surrounding liquid staking's regulation and taxation in the U.S.

The papers, which were created by the first-ever working group to bring together legal and policy experts, business leaders, and competitors to align on key liquid staking issues, were released alongside best-practice industry principles regarding LSTs. The working group focused on encouraging self-regulation within the liquid staking industry and was co-chaired by representatives from Alluvial, a team supporting Liquid Collective's development, Lido, a leading liquid staking solution, and legal experts from Willkie Farr & Gallagher.

You can learn more about the white papers in POSA's announcement overview. At a high level, the research by the working group reasoned that:

  • LSTs should not be considered investment contracts or notes, and, therefore, should not be treated as securities under the U.S. federal securities laws
  • LSTs should not be considered swaps under U.S. federal commodity law
  • The conversion of cryptoassets for receipt tokens (LSTs) should not be considered a taxable transaction for U.S. federal income tax purposes
  • It is important to name tokens appropriately based on the reality of the nature of the relationship between the staked token and the receipt token; as such liquid staking receipts should be named as “Liquid Staking Tokens or “LSTs”

It's important to note that LSTs have also recently (but inaccurately) been called “Liquid Staking Derivatives” (“LSDs”) in the crypto ecosystem. However, LSTs are distinct from derivatives, which are more commonly used to convey synthetic ownership of an asset.

This reiteration that liquid staking receipt tokens should be named Liquid Staking Tokens (and not the inaccurate term, Liquid Staking Derivatives) is also a tenet of the industry principles that POSA and the working group urged all LST builders to abide by, in order to support liquid staking's responsible growth:

  • Use appropriate terminology to describe liquid staking tokens (LSTs) and the nature of activities
  • Focus promotions on increased liquidity, without sacrificing what is of utmost importance—security and participation
  • Develop tools to enable direct staking with access to liquidity, not staking-backed yield products
  • Refrain from providing investment advice

You can learn more about the legal analysis of LSTs in POSA's whitepapers, “U.S. Federal Securities and Commodity Law Analysis of Liquid Staking Receipt Tokens” and “U.S. Federal Income Tax Analysis of Liquid Staking,” or in POSA's announcement, “Proof of Stake Alliance Offers First Legal Research and Analysis on Liquid Staking Tokens: Urges Industry to Self-Regulate.”

Overall, liquid staking tokens offer a unique combination of increased liquidity, capital efficiency, and direct participation in network security, making them an attractive option for those looking to stake their tokens while maintaining flexibility in their ownership. This makes staking more accessible and capital efficient, which in turn helps make proof of stake networks more secure by expanding participation.

You can learn more about LsETH, the LST for Ethereum Liquid Staking on Liquid Collective, in our LsETH overview or the Liquid Collective Litepaper.

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