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.
Just as warehouse receipts and bills of lading unlock the ability to transfer ownership of physical commodities in storage or transport, LSTs enable stakers to transfer ownership of digital commodities without unstaking them. /3— Mike Selig (@MikeSeligEsq) February 21, 2023
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:
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:
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.