Traditional staking locks your tokens for an unbonding period that can range from a few hours to several weeks, during which you cannot trade, transfer, or use them as collateral. Liquid staking solves this by issuing you a receipt token — a liquid staking token (LST) — when you deposit into the protocol.
That receipt token, such as stETH (Lido), mSOL (Marinade), or jitoSOL (Jito), represents your staked position plus accruing rewards. Because it's a normal tradable token, you can sell it, use it as collateral in lending markets, or provide it to liquidity pools — all while the underlying assets keep earning staking rewards in the background.
The trade-off is added smart-contract and protocol risk. You're now trusting the liquid staking protocol's code, its validator set, and (for some tokens) its price peg holding steady against the underlying asset during periods of stress. LST prices can and do trade at a discount to the underlying asset during market dislocations, even though they are typically redeemable near 1:1 over time.
Liquid staking has become the dominant way large holders and DeFi users stake ETH and SOL in particular, precisely because it keeps capital productive in more than one place at once.