What Are ‘Liquid Staking Derivatives’ (LSDs) and How Do They Impact PoS Network Security?
Liquid staking derivatives (LSDs) are tokens representing staked cryptocurrency, allowing users to earn staking rewards while keeping their capital liquid and usable in DeFi. They impact security by concentrating staking power into a few major LSD protocols, increasing the risk of a single point of failure.
If one LSD provider gains a supermajority of staked capital, they could potentially launch an attack, or be a target for regulatory capture.
Glossar
Regulatory Risk
Jurisdiction ⎊ Regulatory Risk within cryptocurrency, options trading, and financial derivatives stems from the fragmented global regulatory landscape, creating uncertainty regarding applicable laws and enforcement mechanisms.
LSDs
Mechanics ⎊ Liquid Staking Derivatives (LSDs) represent tokenized representations of staked digital assets, primarily within Proof-of-Stake (PoS) consensus mechanisms, enabling capital efficiency by allowing users to access liquidity while participating in network validation.
Staking Power
Security ⎊ The collective staking power represents the economic security budget of a Proof-of-Stake network, as it is the cost to mount a successful attack.
PoS Network
Consensus ⎊ The PoS Network achieves block finality and transaction ordering through a consensus mechanism where validators are selected based on their staked capital.
Staking Rewards
Incentive ⎊ These rewards function as the core economic incentive driving participation in Proof-of-Stake consensus, ensuring the network remains secure with minimal energy overhead.