A new term has entered the DeFi staking platform development space- Liquid Staking Derivatives (LSDs). In this blog, let’s understand what exactly LSD is and why it is taking the world by storm.
LSDs are a form of as issued by liquid staking platforms, empowering customers to open their illiquid staked assets to procure better returns. When staked on a Proof-of-Stake (PoS) network, the derivative token's price is tied to the asset that it represents.
By locking their assets through a protocol or platform with regular staking, users contribute to the security of PoS networks and receive staking rewards. However, stakers miss out on the opportunity to earn additional yield when their assets are locked up and illiquid, resulting in capital inefficiency.
Settles Capital Shortcomings
LSDs tackle this issue by offering users a liquid token addressing their staked asset. Stakers can continue to receive rewards for network staking by making use of their LSDs to participate in DeFi in additional ways, such as providing liquidity or acting as collateral.
Reduced the Barriers to Staking
LSDs even utilize pooled staking, which lowers the barriers for users to stake on a network because running a validator node typically costs a lot of money. This is especially useful for Ethereum, where the bare minimum required to operate a validator node and stake on the network is 32 Ether (ETH).
Increases Network Security and Stability
LSDs encourage user stake in the network by lowering entry barriers and incentivizing stake by reducing capital inefficiencies. Since more decentralization is achieved, the stability and security of PoS networks increase with the number of stakes.
There can be certain loopholes and barriers on the way with LSDs but it has a long way to go in the times ahead and become mainstream across DeFi enthusiasts. It's a win-win situation for DeFi enthusiasts to invest in the best DeFi staking platforms in the long run while taking their business to the next level.
