Liquid staking is a process where staked assets are used as collateral to mint a separate token that can be used for other purposes, while still earning rewards from the staked assets. In other words, liquid staking allows users to earn staking rewards while also having liquidity for their staked assets.
In a traditional staking model, once a user stakes their assets, they are locked in and cannot be moved or traded until the staking period is over. With liquid staking, the staked assets are used as collateral to mint a separate token, often called a "wrapped" or "liquid" version of the original token. This liquid token can be traded or used in other decentralized finance (DeFi) applications, while the original staked asset continues to earn staking rewards.
For example, if a user stakes their ETH on the Ethereum network, using Lido, the user will receive stETH (staked ETH). This stETH can then be used in other DeFi applications, such as providing liquidity on a decentralized exchange or used as collateral for a loan, while the original staked ETH continues to earn staking rewards.
Liquid staking is becoming increasingly popular because it provides a way for users to earn staking rewards while also having access to liquidity for their assets. It also helps to increase the overall liquidity of staked assets, making them more accessible to a wider range of users and applications - and has already become the leading DeFi niche, due to how fundamentally important ETH liquidity is to the crypto ecosystem.