LSD - an acronym for Limited Slip Differential.
Used in permanent four wheel drive or, as vehicle manufacturer marketing departments call them, all wheel drive vehicles.

An LSD is essential for permanent four wheel drive vehicles to be able to drive on high friction surfaces like tarmac without damaging the gear box or drive train. In a standard four wheel drive, the front and rear differentials are directly driven from the gear box. When a car turns a corner, all four wheels turn at different speeds and the average rotation of the front and rear pairs of wheels is also different.
On dirt, mud, sand, snow and gelatine this is not a problem as loss of traction on one or more wheels will compensate for these differences.
On a sealed surface, however, the better traction doesn't allow for the difference between front and back pairs of wheels, causing a great deal of stress from the gear box to the differentials.
A solution to this problem is the use of a third differential between the front and rear of the vehicle. Unfortunately, a conventional differential allows one axle to take all of the energy from another. That is, if one of the driving wheels of a two wheel drive is removed from the road, all the power will go into that wheel and ideally you could put the car in top gear and not move. Placing two differentials between the gear box and the axle means that if one wheel out of four was to leave the road surface or lose traction, all the power of the vehicle would be wasted.

Enter the limited slip differential.
By placing differentials that allow a certain amount of difference in rotation between the front and rear of the vehicle while ensuring that both outputs always turn, the vehicle is always being powered, no matter what the driving condition. It gives protection to the gear box and drive train, while not significantly reducing performance. It also lends a car far better road holding on all surfaces.

There are many kinds of LSD, from complex mechanical devices to viscous liquid coupling, to electronic traction control, each having their fare share of pros and cons, but in general, especially in rally cars, LSDs provide the best solution for all round safety and improved handling so far.

A limited slip differential is a kind of differential gear used in automobiles.

Cars need a differential gear. They make up for the fact that as a car turns, the wheels on the left and right must rotate at different speeds. The front wheels on a rear wheel drive car is no problem, as the wheels can simply not be attached to each other. But the rear wheels on a rear wheel drive car (or the front wheels in a front wheel drive car) must be attached to the drive train, and therefore attached to each other. A differential gear allows these connected wheels to rotate at different speeds, while still being attached to the drivetrain (the engine and such).

The problem with a conventional, or 'open' differential is that when one of the wheels slips, the drivetrain is not able to provide power to the other wheel. Basically, if one of the wheels starts to spin (not gripping the road), and additional power travels through the past of least resistance - the spinning wheel. Though this is usually not a problem, cars designed to go fast (race cars and sports cars) could go faster if this didn't happen.

Thus, the limited slip differential. The construction is such that even if one of the connected wheels starts to slip, some power from the drive train is applied to the non-slipping wheel. This allows more power to be translated into speed in these conditions. Cars with limited slip differentials (or LSD) tend to accelerate faster, but are harder to turn, than non-equipped cars.

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