Liquid Staking

A staking mechanism on Ethereum where users receive derivative tokens representing their staked ETH, allowing them to use these tokens in DeFi activities while earning staking rewards.

What is Liquid Staking?

Liquid staking is a process in Ethereum’s proof-of-stake (PoS) ecosystem where users stake their ETH with a staking pool or protocol and receive derivative tokens (often called liquid staking tokens or LSTs) in return, which represent their staked assets. Unlike traditional staking, where ETH is locked in the Ethereum Beacon Chain and inaccessible until withdrawn, these derivative tokens (e.g., stETH from Lido or rETH from Rocket Pool) can be used in decentralized finance (DeFi) protocols for activities like lending, trading, or providing liquidity, offering greater flexibility and capital efficiency.

When users stake ETH through a liquid staking protocol, their ETH is pooled and delegated to validators to secure the Ethereum network, earning staking rewards (typically 3-5% APY as of 2025, depending on network conditions). The derivative tokens maintain a peg to ETH (e.g., 1 stETH ≈ 1 ETH) and accrue staking rewards, which are reflected in the token’s value or through rebase mechanisms. For example, Lido, the largest liquid staking protocol, held over 30% of staked ETH (approximately 10 million ETH) as of 2025, per DeFiLlama data, enabling users to stake as little as 0.01 ETH and use stETH in DeFi platforms like Aave or Uniswap. However, risks include smart contract vulnerabilities, slashing of validator funds, or temporary depegging of the derivative token during market volatility.

Liquid staking has become a cornerstone of Ethereum’s DeFi ecosystem, with platforms like X buzzing about its benefits, such as enabling small-scale investors to participate in staking without running a full validator node (requiring 32 ETH). Critics, however, warn of centralization risks, as protocols like Lido concentrate validator power. Users are advised to research platform security and fees, using tools like StakingRewards or Etherscan to evaluate options.