What is Liquid Staking?
Liquid staking is a form of cryptocurrency staking that lets you earn rewards while keeping your tokens available for use.
Unlike traditional staking—which locks your assets for a set period—liquid staking gives you a derivative token in exchange for your staked assets.
This token represents your staked position and can be used in other DeFi protocols, traded, or reinvested, offering both staking rewards and liquidity.
How Liquid Staking Works?
Liquid staking protocols employ staking derivatives or staking tokens, which represent the staked assets but can be utilized freely in the crypto market.
Here's a breakdown of how it works:
Staking on a Network: Users stake their original tokens on a network, similar to traditional staking.
Issuance of Staking Derivatives: The staked tokens are then converted into liquid staking tokens, equivalent in value.
Utilization of Staking Tokens: These tokens can be traded, used in DeFi applications, or even re-staked on other platforms, offering flexibility and liquidity.
Benefits of Liquid Staking
Unlocked Liquidity
In traditional staking, tokens are locked and inaccessible. Liquid staking changes that by issuing tokens that represent your staked assets—allowing you to trade them or use them as collateral in DeFi protocols while still earning staking rewards.
Seamless Integration with DeFi
Liquid staking tokens are designed to be composable, meaning they can be used across a wide range of DeFi platforms—from lending pools to yield farms and prediction markets—maximizing the utility of your staked assets.
Dual Earning Potential
With liquid staking, users continue to receive staking rewards and can simultaneously generate additional yield by deploying their derivative tokens in DeFi applications. This opens the door to stacked income strategies.
No Infrastructure Requirements
Liquid staking lowers the barrier to entry. You don't need to run a node or hold a minimum amount of tokens (like 32 ETH for Ethereum validators). Providers handle the technical side, letting anyone participate and earn block rewards.
Risks around Liquid Staking
Slashing Risks
When using liquid staking, you're delegating the staking process to a third-party provider.
If the validator behaves maliciously or fails to follow network rules, the network may slash a portion of the staked funds. As a result, users indirectly share the risk of penalties caused by validator misbehavior.
Smart Contract and Protocol Exploits
Liquid staking relies heavily on smart contracts. If a vulnerability is exploited—such as a flaw in a node operator’s infrastructure or protocol code—funds deposited into the system could be lost. This makes robust auditing and trust in the provider essential.
Price Volatility on Secondary Markets
Liquid staking tokens are not always perfectly pegged to the value of the underlying asset. During times of low liquidity or market stress, their price can drop significantly, potentially diverging from the token they represent.
Market Liquidity Concerns
Because trading volume for staking derivatives is often lower than for the native assets, they can be more volatile and susceptible to slippage or pricing inefficiencies, especially during large or urgent transactions.
Popular Liquid Staking Protocols
Liquid staking protocols are platforms that allow users to stake their crypto assets while receiving a liquid token in return.
The landscape of liquid staking is expanding, with several key protocols leading the charge:
Lido Finance: One of the most renowned liquid staking platforms, it supports networks like Ethereum 2.0, Solana, and Terra. Users receive derivative tokens such as stETH when staking ETH.
Rocket Pool: A decentralized Ethereum 2.0 liquid staking pool that allows users to earn rewards while keeping their ETH liquid.
Centralized vs. Decentralized Liquid Staking
Liquid staking services can be provided by decentralized protocols or centralized exchanges, each with distinct trade-offs.
The main difference lies in asset custody: decentralized platforms like Lido or Rocket Pool are non-custodial, meaning users retain control of their assets through smart contracts.
Centralized platforms, on the other hand, hold full control of user funds, simplifying the experience but introducing custodial risks such as mismanagement or loss.
While decentralized systems may face smart contract vulnerabilities, centralized services expose users to the risks associated with entrusting their assets to a third party.
Liquid Restaking Tokens (LRTs) and Restaking
To go further with your staked assets, restaking allows you to reuse them to support other blockchain protocols and earn even more rewards.
By committing your already-staked tokens—or the liquid staking tokens (LSTs) you’ve received—you can contribute to the security of additional networks. In return, you may receive additional yield layered on top of your base staking rewards.
Some restaking platforms also issue liquid restaking tokens (LRTs), which represent your restaked position and can be traded or used in DeFi, enabling further compounding of your returns.
