What Is a Liquid Staking Derivative (LSD) and What Risk Does It Introduce?
An LSD is a token issued to a user when they stake their native cryptocurrency through a liquid staking protocol. This token represents their staked position and accrued rewards, allowing them to use it in other DeFi applications (e.g. as collateral) while the underlying asset is locked.
The main risk introduced is "depeg risk," where the LSD token loses its 1:1 value peg to the underlying staked asset, and smart contract risk in the liquid staking protocol.
Glossar
DeFi Applications
Meaning ⎊ DeFi applications, short for Decentralized Finance applications, are financial software protocols built on blockchain technology that operate without reliance on traditional centralized financial intermediaries.
LSD Token
Derivative ⎊ The LSD Token, or Liquid Staking Derivative token, is a financial derivative in the cryptocurrency space that represents a staked asset plus any accrued staking rewards, while remaining liquid and tradable.
Smart Contract Risk
Vulnerability ⎊ Smart contract risk, within cryptocurrency and derivatives, stems fundamentally from inherent code flaws and systemic dependencies.
Capital Efficiency
Leverage ⎊ Capital efficiency, within cryptocurrency and derivatives, fundamentally represents the maximization of risk-adjusted returns relative to the capital at risk, demanding strategic asset allocation and precise risk parameterization.
Liquid Staking
Mechanism ⎊ Liquid Staking is a decentralized finance primitive that allows users to stake their tokens in a Proof-of-Stake protocol while simultaneously receiving a liquid, tradeable derivative token representing their staked position and accrued rewards.
Liquid Staking Derivative
Token ⎊ A liquid staking derivative (LSD) is a financial token issued to a user upon staking their native cryptocurrency in a Proof-of-Stake protocol, representing both the staked principal and the accrued staking rewards.