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Knowledge

Is There A Difference Between LSD And LST Terms? Which Right?

July 29, 2023 - Around 6 mins mins to read
In addition to the hype of Liquid Staking after the 2nd largest network Ethereum market successfully implemented the Shanghai upgrade, LSD and LST present unprecedented new opportunities in the DeFi market, something that every stakeholder of DeFi will need to understand to keep up. However, many people still need to understand these two concepts well and need to know which term is correct. So let’s find out in the article below.

The concept of LSD and LST appeared

Is There A Difference Between LSD And LST Terms? Which Right?

If you hold a staking cryptocurrency (e.g., Ethereum, Tezos, Cosmos, Solana, Cardano or others), you can stake a portion of your holdings and earn rewards.

Your cryptocurrency earns you staking rewards because the blockchain makes it work. Cryptocurrency staking uses a “consensus mechanism” known as Proof of Stake, which allows them to ensure that all transactions are verified and secure without needing an intermediary bank or payment processor. If you lock it, your cryptocurrency is part of the process.

LSD and LST have emerged due to the growing popularity of the Liquid Staking market among crypto investors. This hype must make us reiterate the Ethereum network’s transition to Proof-Of-Stake on September 15, 2022, and at this point it is still not possible to cancel the already staked ETH staking. This is a pretty big deal, as some bettors have been waiting since December 2020 to start claiming their rewards. However, this issue was resolved with the Shanghai Upgrade, which took place on April 12, 2023. The Shanghai Upgrade allows validators to cancel their ETH staking at any time, providing family of higher liquidity options.

This creates a dilemma for ETH validators. By keeping their ETH staked, they lost the opportunity to use it for other profitable activities, however, by canceling the staking, they lose the passive income they received from transaction fees. In an ideal world, they would be able to keep their ETH staking, while still having the liquidity to deploy it in additional revenue-generating DeFi operations.

Is There A Difference Between LSD And LST Terms? Which Right?

You may have noticed that two competing terms are being thrown around: Liquidity Staking Derivatives (LSD) and Liquidity Staking Tokens (LST). It refers to encrypted representations of staking assets in the blockchain network, providing flexibility and liquidity while earning staking rewards. LST can be traded or used in DeFi protocols.

Liquid Staking Tokens (LST) could be tokens issued on another layer or chain (e.g., an Ethereum token representing staked assets on a different Proof-of-Stake blockchain). These LSTs would be traded on decentralized exchanges (DEXs). They can be used as collateral or participate in other DeFi (Decentralized Finance) applications, offering more flexibility to token holders while their original staked tokens continue to earn staking rewards.

Liquid Staking Derivatives (LSD) might refer to financial instruments or derivatives products built on top of Liquid Staking solutions. These derivatives would be linked to the underlying staked assets and their associated rewards. By using derivatives, investors can gain exposure to the staking benefits without directly participating in staking themselves.

Many long-term crypto holders see staking as a way to put their assets to work by generating rewards rather than letting crypto wallets collect dust. Staking also contributes to the security and efficiency of the blockchain projects you support. Blocking some of your funds makes the blockchain more resistant to attacks and enhances its transaction processing capabilities.

Is there a difference between LSD and LST?

LSD is the most widely used term today, so we included it in this introductory article, but everyone agrees that the word is not technically correct.

The idea of LSD as derivatives has helped many users understand the concept by being similar to traditional financial derivatives. One could speculate that the familiarity of the acronym due to a well-known hallucinogen also contributed to the enduring strength of the moniker.

In practice, however, the analogy with derivatives is not entirely accurate, and the Proof Of Stake Alliance has called for a switch to using the more technically correct term “Liquid Staking Tokens” (LST) instead of LSD.

One of the main goals of this change is to have greater adoption of liquid staking technology and blockchain innovation. The name of the liquid staking receipt token should accurately reflect its underlying asset – it is incorrect to name a liquid staking token an LSD or liquid staking derivative.

Is There A Difference Between LSD And LST Terms? Which Right?

LSTs act as a blockchain-based record verifying that the holder has staked the corresponding token, owns that token, and can present the record to unstake it whenever required. With the lack of regulatory and tax clarity surrounding liquid staking tokens, it is important to avoid using phrases like LSD and instead use accurate and clear terminology to describe the nature of activities.

The Proof of Stake Alliance (POSA) published two landmark white papers in February 2023, providing the first legal research and analysis that identifies and examines key questions around regulation and taxation for liquidity staking in the United States.

The articles, created by the first working group to bring together policy and legal experts, business leaders, and competitors to address key liquidity staking issues, were published and released together with LST-related industry best practice guidelines.

Research by the working group of legal, policy, and industry experts reason that:

  • Liquid staking receipt tokens (LSTs) for digital commodities should not be considered investment contracts or notes, and, therefore, should not be treated as securities under the U.S. federal securities laws;
  • LSTs should not be considered swaps under U.S. federal commodity law;
  • The conversion of cryptoassets for receipt tokens should not be considered a taxable transaction for U.S. federal income tax purposes;
  • It is important to name tokens appropriately based on the reality of the nature of the relationship between the underlying token and the receipt token. The group recommends accurately and appropriately describing liquid staking receipts as “Liquid Staking Tokens”or “LSTs” instead of the inaccurate but commonly used term “Liquid Staking Derivatives” or “LSDs.”

Conclusion

In short, LSD or LST are both terms that unlock the staked tokens held by stakers and allow them to be traded and used as collateral in DeFi protocols. The terms LST and LSD have the same meaning and can be used interchangeably. However, regulatory uncertainty encourages the community to use the word LST.

2023 will see LSD/LST go from hype to the foundation of the new DeFi economy. To achieve this, new options must emerge to unlock only revenue-generation opportunities that LSD/LST offers.

LSD/LST offers one of the most exciting new opportunities for DeFi investors right now, offering the opportunity to receive passive income from staking ETH while also putting it to work in operations and other profit through LSD/LST.

The key to increasing the TVL of staking ETH lies in expanding the utility of LSD/LST. While the liquidity provided by LSD/LST, in principle, offers limitless potential, the options available to put them to work in profitable operations are still limited at the moment.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.