LSD: Guide for dummies

LSD might decode as few things, but in this article we will leave aside the one that comes to mind first, and touch on the one that has to do with cryptocurrencies. Liquid staked derivatives are a relatively new and innovative financial instrument in the cryptocurrency space. They are designed to bring liquidity and flexibility to staked assets, allowing users to unlock the value of their staked tokens and participate in other financial activities while still earning staking rewards.

Staking explained

 In technical realm of the cryptocurrency world, there are two main consensus algorithms: Proof of Work (PoW) and Proof of Stake (PoS) (we will leave others behind the curtain for the sake of simplicity). These algorithms define the way blockchains work, what characteristics they possess and so forth. Usually PoS blockchains are more energy-efficient, due to the fundamental difference between them and PoW blockchains that lies within the means of keeping the blockchain going. PoW blockchains require devices they operate on to solve complex mathematical riddles, and on a big scale it turns into significant electricity consumption.
 
 PoS blockchains, as you might have guessed, operate on the concept of staking. Staking is a process that allows users to participate in block validation by locking their assets on the blockchain. In return, users get rewards, according to the sum of tokens they have staked. When you stake your tokens, you essentially delegate them to a chosen validator or validator pool. Validators are responsible for creating new blocks, verifying transactions, and maintaining the blockchain’s integrity. 
 
 While staking can be rewarding, especially in the long run, be aware that it comes with risks. For example: price of the token you have staked might drop significantly and you won’t get the rewards you have expected. Or the network might find your activity malicious, because you have failed to follow it’s rules and therefore you’ll have your rewards cut. As always, in this wild west which is the crypto industry, arm yourself with DYOR.

Liquid Staked Derivatives (LSD)

 
 Finally, the time has come to explore what you came here for. Staking might sound awesome on the paper, as it offers users the sweet possibility to have passive income. But in traditional staking protocols, user is required to lock their funds for extended periods of time. Varying from project to project, the time assets will be locked for might be weeks, 3 months, 6 months, a year and so forth. This limits one’s financial mobility, as once you have staked your coins, for example, on Cardano (ADA) blockchain, you will not be able to use them anywhere else. 
 
 Obviously, it’s a big issue that people were trying to solve ever since staking as a concept came to be. Gladly, now we have a solution, and it is liquid staked derivatives. It’s a complicated name, but I promise you that it’s not as scary as it seems.

Lido Finance was the first project to utilise LSD

LSD are designed to bring liquidity and flexibility to staked assets, allowing users to unlock the value of their staked tokens and participate in other financial activities while still earning staking rewards. They aim to address this liquidity issue by introducing a layer of financial abstraction on top of the staked tokens. They work by creating a derivative token that represents the underlying staked asset’s value and can be freely traded on various decentralized exchanges (DEXs) or other platforms. 
 
 These derivatives are typically backed by a pool of staked assets held by a custodian or a decentralized protocol. Users can deposit their staked tokens into this pool and receive an equivalent amount of derivative tokens in return. These derivative tokens can then be freely traded, providing users with liquidity and the ability to participate in various financial activities.
It’s important to note that liquid staked derivatives are still an emerging concept, and there are various projects and platforms exploring this space. Each project may have its unique features and mechanics, so it’s crucial for users to conduct thorough research and exercise caution when engaging with these derivatives.

Here are some examples of projects that utilize liquid staked derivatives:
 
Lido Finance is a decentralized staking protocol that allows users to stake their Ethereum (ETH) and earn rewards without having to lock up their tokens. Lido Finance provides liquid staked ETH (stETH), which can be used to earn yield on other DeFi platforms or traded on exchanges.


Ankr is a decentralized staking service that allows users to stake their cryptocurrencies and earn rewards. Ankr provides liquid staked derivatives for a variety of cryptocurrencies, including Ethereum (ETH), Solana (SOL), and Terra (LUNA). 
 
 Staked is a decentralized staking platform that allows users to stake their cryptocurrencies and earn rewards. Staked provides liquid staked derivatives for a variety of cryptocurrencies, including Bitcoin (BTC), Ethereum (ETH), and Cardano (ADA). 
 
These are just a few examples of projects that utilize liquid staked derivatives. As the DeFi space continues to grow, we can expect to see more projects offering this type of service. 

 To summarise:

 LSD are the solution for the key issue of staking: lack of liquidity. Liquid staked derivatives work by creating a derivative token that is identical to the value of underlying staked token. This derivative representation can be freely traded, invested and used for a variety of things, giving it’s user the best of both worlds: rewards of traditional staking and liquidity of trading.

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