Core Question

What are liquid staking tokens (lst) and what are the pros and cons?

What are LSTs?

LSTs are essentially a token that represent a claim on a certain amount of a token. The claim per one LST increase over time. So, say an LST is worth 1 of XXX token. After 5 years, it could represent 1.5 of the original XXX token, even though you still only have one of those LSTs. 

Now, at its core, it basically achieves this increase because it is really another way you can stake. For cryptos using PoS (like Ethereum and Solana), they pay out tokens to validators, or people who run hardware to process and secure the network. These LSTs allow you to stake you crypto without having to meet minimums. One of those minimums is that you need a little over 1 SOL in order to actually stake it into the blockchain. By trading your crypto for LST, you pay the issuer that crypto, which they add to their staked pool across one or multiple validators. This brings you the benefits of staking without any minimums.

Pros

There are multiple pros to using LSTs. The most prominent (which I somewhat mentioned up above), is fractional staking. Say you are doing some form of DCA (Dollar Cost Averaging) into a PoS token. But, you don't want your share to get diluted over time due to the ever increasing supply from the protocol paying validators with tokens they create out of thin air. So you want to stake, however, you don't meet the minimums. And, in order to avoid a wait and hold off, and potentially entering at a higher price point later down the road (or cheaper due to volatility), you can swap it for an LST and immediately have your tokens staked. 

Another advantage is that you can use them to sort of double your yield. You can first swap your token for an LST, and then lend that out. So, you capture increase of the LST while earning yield through lending. You are essentially double-dipping your earnings, letting you earn more, although there are risks to lending.

One final one is thar with regular staking, you have to wait for the current period to end to both stake and unstake. However, with LST, it is instant, or near it (depending on your network)

Cons

The con that most people get held back is risk. You are trusting the issuer that the validators they chose have a high uptime and good intentions. Another risk is that if the issuer gets hacked, then, they can lose their staked crypto, which is essentially yours, which creates a big squeeze, and the token depegs and then crashes, even though the original token is completely fine. When I say original token, I really mean the token in general and not your staked ones, as those are NOT fine.

Should you use them

Honestly, yes. You should definitely look into it. However, do not put all your crypto into it. If you can, put some into LST and some into either regular staking or just holding as is. That is what I do, and I have not really had any problems. Of course that may change in the future.

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