In normal staking in a PoS blockchain, your tokens are locked until they are staked. You cannot use these staked tokens for other purposed like trading, swapping, or in a DeFi protocol.
On the contrary in liquid staking your staked tokens are not locked and are kept in an escrow account. You can use them in DeFi protocols like Liquidity Pools or lend/borrow protocols.
Step 1
You stake your SOL tokens to a Liquid Staking Protocol (LSP) like Lido or Marinade.
Step 2
In return the LSP mints a derivative of the staked SOL tokens. You get tokenized version of your SOL tokens. mSOL from Marinade and stSOL from Lido.
Step 3
The LSP stakes your SOL tokens to the PoS smart contract of Solana. You get a percentage reward on the SOL tokens you have staked.
Step 4
Additionally, you also have access to the tokenized SOL (mSOL or stSOL). You can use these (mSOL or stSOL), for trading or in a DeFi protocol to receive additional returns.