Liquid Staking
What is Liquid Staking
Liquid Staking is staking tokens while maintaining liquidity at the same time. It solves the liquidity lock problem of traditional staking.
Core concept:
- Deposit tokens to a protocol → Receive LST (Liquid Staking Token)
- LST represents a claim on staked tokens + rewards
- Use LST for DeFi activities (collateral, LP, etc.)
Deposit ETH to Lido → Receive stETH → Participate in DeFi with stETH → Also earn staking rewards
Why Liquid Staking
Limitations of Traditional Staking
| Problem | Description |
|---|---|
| Liquidity lock | Tokens unusable during unbonding period |
| Opportunity cost | Forfeit DeFi yield opportunities |
| Minimum amount | High entry barrier like Ethereum's 32 ETH |
| Technical barrier | Node operation required |
Liquid Staking Solutions
| Solution | Description |
|---|---|
| Maintain liquidity | LST tradable/usable anytime |
| Double yields | Staking rewards + DeFi yields |
| Low entry barrier | Small amounts possible |
| Simplicity | No node operation needed |
LST (Liquid Staking Token)
Concept
LST is a token representing staked assets.
- stETH: ETH staked on Lido
- rETH: ETH staked on Rocket Pool
- mSOL: SOL staked on Marinade
- sAVAX: AVAX staked on Benqi
Rebasing vs Reward-Accruing
Rebasing - stETH:
- Rewards reflected as token quantity increase
- 1 stETH → Over time becomes 1.001 stETH
- Incompatible with some DeFi protocols
Reward-Accruing - rETH:
- Token quantity fixed, value increases
- 1 rETH = 1.05 ETH (with accumulated rewards)
- Higher DeFi compatibility
Comparison
| Method | Token | Quantity | Value |
|---|---|---|---|
| Rebasing | stETH | Increases | Maintains 1:1 |
| Reward-accruing | rETH | Fixed | Increases |
Major Liquid Staking Protocols
Lido (stETH)
The largest liquid staking protocol
| Item | Details |
|---|---|
| TVL | ~$15B+ |
| Market share | ~30% of Ethereum staking |
| Fee | 10% (deducted from rewards) |
| Token | stETH (rebasing) |
| Supported chains | Ethereum, Polygon, Solana, etc. |
Pros:
- Highest liquidity
- Most DeFi integrations
- Easy to use
Cons:
- Centralization concerns (market share too high)
- Custody risk
Rocket Pool (rETH)
Decentralization-focused protocol
| Item | Details |
|---|---|
| TVL | ~$2B+ |
| Fee | 5-20% (varies by node operator) |
| Token | rETH (reward-accruing) |
| Feature | Anyone can be a node operator |
Pros:
- More decentralized
- Anyone can run a node with 8 ETH
- rETH value accrual method
Cons:
- Lower liquidity than Lido
- Fewer DeFi integrations
Coinbase (cbETH)
Provided by centralized exchange
| Item | Details |
|---|---|
| Fee | 25% |
| Token | cbETH (reward-accruing) |
| Features | Regulatory compliant, simple |
Pros:
- Trusted brand
- Regulatory compliance
- Very simple
Cons:
- High fees
- Centralized (censorable)
Comparison Table
| Protocol | TVL | Fee | Decentralization | Liquidity |
|---|---|---|---|---|
| Lido | $15B+ | 10% | Medium | Very high |
| Rocket Pool | $2B+ | 5-20% | High | Medium |
| Coinbase | $2B+ | 25% | Low | High |
| Frax | $1B+ | 10% | Medium | Medium |
LST Utilization Strategies
1. Simple Holding
Just holding LST in your wallet earns staking rewards.
- stETH: Token quantity automatically increases
- rETH: Token value automatically increases
2. Use as Collateral
Deposit LST as collateral on lending protocols.
Example: stETH as collateral on Aave
- ETH → Lido → stETH
- Deposit stETH on Aave
- Borrow USDC
- Earnings: Staking rewards + USDC utilization
3. Liquidity Provision
Provide LP for LST pairs on DEXs.
Major pools:
- Curve: stETH/ETH pool (low slippage)
- Balancer: rETH/WETH pool
- Uniswap: Various LST pairs
Returns:
- Staking rewards
- LP fees
- Liquidity incentives (if available)
4. Leveraged Staking
Strategy covered in DeFi Leverage.
- ETH → stETH
- stETH collateral → Borrow ETH
- Borrowed ETH → stETH
- Repeat (looping)
Profit structure:
- Staking rewards × Leverage
- Minus borrowing interest
- Profitable if staking APY > borrowing APY
5. Restaking
Restake LST on platforms like EigenLayer.
- ETH → stETH (Lido)
- stETH → Restake on EigenLayer
- Ethereum rewards + EigenLayer rewards
Caution:
- Additional risks (slashing, etc.)
- Increased smart contract risk
- Uncertainty as a new domain
Depegging Risk
What is LST Depegging
When an LST deviates from its exchange ratio with the underlying asset.
Normal: 1 stETH ≈ 1 ETH Depegged: 1 stETH = 0.95 ETH (5% discount)
2022 stETH Depegging
Background:
- Terra/Luna collapse
- Celsius, 3AC bankruptcies
- Massive stETH selling pressure
Result:
- stETH traded at ~5% discount to ETH
- Leveraged position liquidations
- Panic spread
Recovery:
- Gradual recovery over several weeks
- Full recovery after Shanghai upgrade (withdrawals enabled)
Causes of Depegging
1. Liquidity Imbalance:
- Sell pressure > Buy pressure
- Price distortion in DEX pools
2. Divergence from Underlying Asset:
- Unstaking not immediately possible (queue)
- Arbitrage restricted
3. Market Fear:
- Protocol problem rumors
- Cascading liquidations
Responding to Depegging
Holders:
- Avoid panic selling (selling at discount = confirmed loss)
- Verify if it's a fundamental problem
- Wait for recovery if long-term holding is possible
Opportunity:
- Buy LST at discounted prices during depegging
- Realize gains upon recovery
Centralization Controversy
Lido's Dominance
Concerns about centralization have been raised as Lido holds ~30% of Ethereum staking.
Concerns:
Censorship Risk:
- Can Lido censor certain transactions?
- Potential abuse through governance attacks?
Network Security:
- Single point of failure
- Ethereum impact if Lido is hacked
Decentralization Undermined:
- Contradicts PoS principles
- Power concentration in few validators
Mitigation Efforts
Lido's Response:
- Distributing across multiple node operators
- Lido DAO governance
- Discussions on self-imposed market share limits
Ecosystem Response:
- Growth of alternatives like Rocket Pool
- Expanded support for various LSTs
- Encouraging user diversification
Selection Guide
| Priority | Recommendation |
|---|---|
| Liquidity/Compatibility | Lido (stETH) |
| Decentralization | Rocket Pool (rETH) |
| Simplicity/Regulation | Coinbase (cbETH) |
| Diversification | Mix of multiple protocols |
Risk Summary
| Risk | Description | Mitigation |
|---|---|---|
| Depegging | LST price falls relative to underlying asset | Long-term holding, diversification |
| Smart contract | Protocol bugs, hacks | Verified protocols, diversification |
| Slashing | Losses when validators are penalized | Protocols with distributed validators |
| Centralization | Protocol censorship/failure | Use multiple protocols |
| Regulatory | Possible securities classification | Monitor regulatory developments |
LST Checklist
When Choosing a Protocol
- Check TVL and track record
- Verify audit history
- Check validator distribution
- Compare fees
- Verify DeFi integration support
While Holding LST
- Monitor depegging status
- Manage health factor if using leverage
- Follow protocol news
- Consider diversified holdings
Summary
Liquid staking solves the liquidity lock problem of staking, allowing you to earn staking rewards while participating in DeFi. Lido (stETH) is the largest with highest liquidity but has centralization concerns, while Rocket Pool (rETH) is more decentralized. LST enables collateral usage, liquidity provision, and leveraged staking, but you must be aware of depegging risk and smart contract risks. Diversifying across multiple protocols is safer.
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