Liquid Staking

A liquid staking service allows users to stake cryptocurrency without locking it up. Users deposit coins and receive a liquid token (e.g., stETH) that automatically accumulates staking rewards. The token can be traded, lent, or used in decentralised applications, providing liquidity while earning yield.

How liquid staking works

1. User deposits. A user deposits cryptocurrency (e.g., ETH) to a liquid staking service.
2. Service stakes. The service pools users’ deposits and runs validators.
3. Service issues token. The user receives a liquid token (e.g., stETH representing their stake).
4. Token appreciates. The token’s value increases as staking rewards accumulate. 1 stETH might be worth 1.02 ETH after a year.
5. User can trade. The user can trade stETH for other assets, lend it, or use it in DeFi applications.
6. User redeems. To withdraw their original ETH + rewards, the user exchanges stETH back to the service.

Major providers

Lido Finance: The largest liquid staking provider, managing 30% of Ethereum stake ($10+ billion). Users deposit ETH and receive stETH.

Rocket Pool: A decentralised liquid staking protocol. Users can become node operators (running validators for Rocket Pool) or deposit directly and receive rETH.

Coinbase Staking: Coinbase’s staking service (also liquid) for exchange users.

Advantages

Liquidity. Unlike solo staking (where funds are locked for weeks to exit), liquid staking tokens can be traded immediately. If you need cash, you can sell stETH.

Accessibility. No minimum amount required (unlike Ethereum solo staking, which requires 32 ETH).

Simplicity. No need to run validator software; the service handles it.

Composability. stETH can be lent, collateralised, or used in smart contracts, creating additional yield opportunities.

Disadvantages

Fee. Liquid staking services take 5–10% of rewards, reducing net yield from ~4–6% to ~3.6–5.4%.

Service risk. If the staking service gets hacked or mismanages funds, you could lose deposits.

Centralisation risk. Large providers like Lido control significant portions of network validation, potentially threatening decentralisation.

Smart contract risk. If the liquid staking contract has a bug, staked funds could be locked or lost.

The Ethereum Shanghai impact

Before Ethereum Shanghai (April 2023), staking rewards were locked — validators could earn rewards but not withdraw them. Liquid staking emerged as a workaround.

After Shanghai, staking withdrawals became possible, reducing the advantage of liquid staking. However, liquidity benefits remain: you can trade stETH without waiting for a withdrawal.

Centralisation and protocol risk

Lido’s dominance (>30% of Ethereum stake) has sparked concerns:

1. Single point of failure. If Lido is compromised, a significant portion of Ethereum is affected.
2. Governance risk. Lido’s governance decisions affect the entire network.
3. Slashing risk. If Lido makes a mistake that results in slashing, depositors lose funds.

To address this, some have proposed capping Lido’s share or encouraging competition from other providers.

Restaking on liquid staking

Advanced protocols (like Eigenlayer) enable restaking — using staked coins (or liquid staking tokens) to secure multiple networks simultaneously. This increases yield but introduces new risks:

• If a restaked application is compromised, your Ethereum stake could be slashed.
• Multiple layers of slashing risk compound the danger.

Comparison with solo staking

Solo staking is better if you want maximum rewards and can tolerate lock-up. Liquid staking is better if you want immediate liquidity or have small amounts to stake.

DeFi opportunities

stETH is used in numerous decentralised applications:

• Lending. Lend stETH to earn interest.
• Collateral. Use stETH as collateral to borrow other assets.
• Liquidity pools. Provide stETH/ETH liquidity and earn trading fees.

These opportunities create additional yield but introduce smart contract risk.

See also