What is Liquid Staking?
Liquid staking represents one of DeFi's most elegant innovations. A solution that eliminates the traditional trade-off between earning staking rewards and maintaining liquidity. When you stake tokens normally, they're locked up for days or weeks. Liquid staking changes this by giving you a tradeable derivative token that represents your staked position, allowing you to earn staking rewards while still using your assets across DeFi.
The concept has grown explosively since Ethereum's transition to Proof of Stake in 2022. Today, liquid staking protocols like Lido hold over $25 billion in staked assets, making it the largest sector in DeFi. For users seeking passive yield with maximum capital efficiency, liquid staking offers a compelling middle ground between the safety of native staking and the flexibility of active DeFi strategies.
How Liquid Staking Works
The liquid staking process is elegantly simple from a user perspective, though the mechanics behind the scenes are sophisticated:
Step 1: Deposit Native TokensYou deposit your native tokens (ETH, SOL, ATOM) into a liquid staking protocol. Unlike solo staking on Ethereum which requires exactly 32 ETH, liquid staking protocols accept any amount. Even fractions of a token.
Step 2: Receive Liquid Staking TokensThe protocol issues you a liquid staking token (LST) that represents your staked position. For example, deposit ETH into Lido and receive stETH. This token is your claim on the underlying staked assets plus accumulated rewards.
Step 3: Staking Rewards AccrueBehind the scenes, the protocol stakes your deposited tokens with professional node operators. As staking rewards come in (typically 3-5% APY for ETH), your LST reflects these earnings. Either through rebasing (your balance increases) or value accrual (the token becomes worth more relative to the underlying asset).
Step 4: Use LSTs Across DeFiHere's where the magic happens. Your LSTs are fully liquid ERC-20 tokens that can be:
- Traded on decentralized exchanges
- Used as collateral for borrowing on Aave or Compound
- Deposited into liquidity pools to earn trading fees
- Supplied to yield aggregators for enhanced returns
Types of Liquid Staking Tokens
Rebasing Tokens (stETH)Rebasing tokens like Lido's stETH automatically increase your balance as rewards accrue. If you hold 10 stETH today, you might have 10.001 stETH tomorrow. This happens automatically. No claiming or compounding required. However, some DeFi protocols don't support rebasing tokens, which is why wrapped versions (wstETH) exist.
Value-Accruing Tokens (rETH, cbETH)Value-accruing tokens like Rocket Pool's rETH maintain a constant balance, but each token becomes worth more ETH over time. If rETH starts at 1.00 ETH, it might be worth 1.05 ETH after a year. This design is more compatible with DeFi protocols and doesn't create taxable events with each rebase (in some jurisdictions).
Yield-Bearing Tokens with Points (eETH, ezETH)Newer liquid staking tokens from protocols like EtherFi and Renzo not only accrue staking rewards but also accumulate points from restaking on EigenLayer. These points may convert to valuable airdrops, adding another yield layer on top of base staking returns.
Major Liquid Staking Protocols
| Protocol | Token | Network | TVL | Unique Feature |
|---|---|---|---|---|
| . . . . . | . . . - | . . . . - | . . - | . . . . . . . . |
| Lido | stETH | Ethereum | $25B+ | Largest, most liquid |
| Rocket Pool | rETH | Ethereum | $3B+ | More decentralized |
| Coinbase | cbETH | Ethereum | $2B+ | Institutional trust |
| EtherFi | eETH | Ethereum | $5B+ | Native restaking |
| Marinade | mSOL | Solana | $1B+ | Leading on Solana |
| Jito | JitoSOL | Solana | $2B+ | Includes MEV rewards |
Benefits of Liquid Staking
Capital Efficiency: Your assets work twice. Earning staking rewards while remaining available for other DeFi opportunities. Use stETH as collateral to borrow stablecoins, effectively leveraging your staking position. No Minimum Requirements: Solo Ethereum staking requires 32 ETH (~$80,000). With liquid staking, you can stake any amount. This democratizes access to staking yields. Professional Node Operation: Liquid staking protocols work with vetted, professional node operators who maintain 99%+ uptime. You get validator-level returns without running infrastructure. Instant Liquidity: Need your funds quickly? Swap your LST on any DEX instead of waiting through unbonding periods. The deep liquidity of tokens like stETH means minimal slippage on trades. DeFi Composability: LSTs plug into the broader DeFi ecosystem. Supply stETH to Aave to borrow, deposit into Pendle to trade future yield, or LP in Curve for trading fees on top of staking rewards.Risks to Consider
Smart Contract Risk: Liquid staking protocols are complex smart contracts. While major protocols like Lido have extensive audits and years of battle-testing, the risk of bugs or exploits exists. Never stake more than you can afford to lose. Depegging Risk: LSTs should trade near 1:1 with their underlying asset, but they can depeg during market stress. In June 2022, stETH traded at a 5% discount to ETH during market turmoil. If you need to exit during a crisis, you might receive less than expected. Slashing Risk: If validators misbehave, a portion of staked funds can be slashed. Reputable protocols have insurance mechanisms and spread stake across many validators to minimize this risk. Centralization Concerns: Lido controls ~30% of all staked ETH, raising concerns about Ethereum's decentralization. Some users prefer protocols like Rocket Pool that emphasize decentralized validator sets. Tax Complexity: Rebasing tokens create unique tax situations in many jurisdictions. Each rebase might be considered a taxable event. Consult a crypto-savvy tax professional.Getting Started with Liquid Staking
For Ethereum (Recommended):- Get ETH in your wallet (MetaMask, Rabby, or hardware wallet)
- Visit stake.lido.fi or rocketpool.net
- Connect your wallet and enter the amount to stake
- Approve the transaction. You'll receive stETH or rETH
- Your LSTs appear in your wallet, automatically earning rewards
- Get SOL in Phantom or Solflare wallet
- Visit marinade.finance or jito.network
- Stake your SOL and receive mSOL or JitoSOL
- Use your LSTs across Solana DeFi
Liquid Staking Strategies
Simple Hold: Just hold your LST and earn base staking yield (3-5% for ETH). Simplest approach with lowest risk. Leveraged Staking: Deposit LST as collateral on Aave, borrow ETH, stake again. Repeat to multiply your staking yield. But also your risk. LST/ETH Liquidity: Provide liquidity to stETH/ETH pools on Curve. Earn trading fees plus staking rewards with minimal impermanent loss risk since the assets move together. Yield Trading: Use Pendle to lock in fixed yields on LSTs or speculate on future staking rates.Track your liquid staking positions across protocols with Fensory. Compare yields, monitor rewards, and discover the best LST opportunities in one dashboard.
Frequently Asked Questions
What is the difference between stETH and rETH?stETH rebases. Your balance increases daily as rewards accrue. RETH appreciates in value. Your balance stays constant but each token is worth more ETH over time. Both represent the same underlying staking yield; they just account for it differently.
Can I unstake my liquid staking tokens instantly?You can swap LSTs on DEXs instantly, but you might receive slightly less than the fair value during high-demand periods. Protocol-based unstaking requires waiting through withdrawal queues (days to weeks for ETH).
Is liquid staking safe?Major protocols like Lido and Rocket Pool have extensive audits, years of operation, and billions in TVL. However, smart contract risk always exists in DeFi. Start small and use established protocols.
How do LST yields compare to regular staking?LST yields are typically 0.1-0.2% lower than native staking due to protocol fees (usually 10% of rewards). The trade-off is liquidity and convenience.
Should I use stETH or wstETH?Use wstETH for DeFi protocols that don't support rebasing tokens. Use stETH if you want to see your balance grow daily. The underlying value is the same.
Risk Disclaimer
Liquid staking involves smart contract risk, depegging risk, and potential slashing. Past yields do not guarantee future returns. Never invest more than you can afford to lose. This content is educational and not financial advice.
. -
Ready to put your ETH to work? Fensory is the crypto wealth super app that makes liquid staking simple and helps you discover the best LST opportunities across DeFi.[Get Started with Fensory →](https://www.fensory.com)