Liquid Staking

What Is Liquid Staking?

Liquid staking is a DeFi mechanism that allows holders of proof-of-stake (PoS) assets to stake their tokens for network validation rewards without locking up their capital. When a user deposits ETH (or another PoS asset) into a liquid staking protocol, the protocol delegates those tokens to validators and issues a derivative token in return. This derivative, known as a liquid staking token (LST), represents a proportional claim on the staked assets plus any accrued rewards.

Traditional staking requires locking assets for the duration of the staking period, including an unbonding window that can last days or weeks. During this time, stakers cannot trade, lend, or use their tokens as collateral. Liquid staking removes this tradeoff: the LST is freely transferable and composable with other DeFi protocols, while the underlying assets continue earning staking rewards.

As of 2025, liquid staking represents approximately 27% of total DeFi TVL, with the sector reaching a record $86.4 billion in August 2025. Roughly 31% of all staked ETH flows through liquid staking protocols.

How It Works

The liquid staking process converts an illiquid staking position into a tradeable token through a series of steps:

1. A user deposits ETH (or another PoS asset) into a liquid staking protocol's smart contract
2. The protocol delegates those assets to a set of validators who participate in network consensus
3. The user receives an LST (such as stETH, rETH, or cbETH) at a ratio reflecting the current exchange rate
4. Staking rewards accrue at the protocol level and are reflected in the LST's value over time
5. The user can trade, lend, or use the LST as collateral across DeFi while rewards continue accumulating
6. To unstake, the user redeems their LST for the underlying asset plus accumulated rewards (subject to unbonding periods)

Reward Accrual Models

LSTs use two primary models to reflect staking rewards:

• Rebasing tokens: the token balance in the holder's wallet increases daily to reflect rewards. Lido's stETH uses this model. A user holding 10 stETH might see their balance grow to 10.001 stETH the next day. This is conceptually similar to how rebasing tokens work in other contexts.
• Value-accruing tokens: the token supply stays fixed, but each token becomes redeemable for more of the underlying asset over time. Rocket Pool's rETH uses this model. 1 rETH might be worth 1.05 ETH today and 1.06 ETH next month.

Smart Contract Architecture

A simplified view of how a liquid staking protocol manages deposits and validator delegation:

// Simplified liquid staking deposit flow
contract LiquidStakingPool {
    mapping(address => uint256) public shares;
    uint256 public totalShares;
    uint256 public totalPooledETH;

    function deposit() external payable {
        uint256 sharesAmount = (msg.value * totalShares) / totalPooledETH;
        shares[msg.sender] += sharesAmount;
        totalShares += sharesAmount;
        totalPooledETH += msg.value;
        // Protocol delegates ETH to validator set
    }

    function getExchangeRate() public view returns (uint256) {
        return (totalPooledETH * 1e18) / totalShares;
    }
}

Major Protocols

Several protocols dominate the liquid staking landscape, each with distinct trust models and validator selection approaches:

Lido (stETH)

Lido is the largest liquid staking protocol by TVL, holding approximately 8.7 million ETH (roughly 24% of all staked ETH). It operates a curated set of over 800 node operators globally. stETH uses a rebasing model where the token balance in a holder's wallet increases daily. stETH is widely integrated across DeFi: it can be used as collateral on Aave, traded on Curve, and supplied to various yield strategies.

Rocket Pool (rETH)

Rocket Pool differentiates itself through permissionless node operation: anyone can run a validator by posting a bond (reduced to 4 ETH per validator with the Saturn I upgrade in February 2026). This design prioritizes decentralization over capital efficiency. rETH uses a value-accruing model where 1 rETH becomes redeemable for an ever-increasing amount of ETH.

Centralized Providers

Coinbase (cbETH) and Binance (BETH) offer liquid staking through custodial models. Users deposit ETH with the exchange, which runs validators and issues receipt tokens. These products sacrifice self-custody for convenience and regulatory clarity. cbETH functions similarly to a wrapped asset: a centralized issuer holds the underlying and mints a transferable representation.

Use Cases

Capital Efficiency in DeFi

The primary use case for liquid staking is composability. An LST holder can simultaneously earn base staking rewards (typically 3-4% APY for ETH) while deploying the derivative token across DeFi:

• Supply stETH as collateral on lending protocols to borrow stablecoins, effectively leveraging staking yield
• Provide stETH/ETH liquidity on AMMs to earn trading fees on top of staking rewards
• Use LSTs as margin for perpetual futures positions
• Deposit LSTs into liquid restaking protocols like EigenLayer to earn additional yield from securing external services

Liquid Restaking

Liquid restaking builds on top of liquid staking by allowing LST holders to "restake" their tokens into additional validation services. Protocols like EigenLayer accept stETH and other LSTs as collateral for Actively Validated Services (AVSs) such as oracle networks, rollups, and cross-chain bridges. This compounds capital efficiency but also compounds risk: restakers face all liquid staking risks plus additional smart contract exposure and slashing conditions from each AVS. For a deeper look, see our guide on yield-bearing mechanisms in DeFi.

Bitcoin Liquid Staking

Although Bitcoin uses proof-of-work and has no native staking, protocols like Babylon enable BTC holders to provide cryptographic stake weight to external PoS chains. Babylon uses Bitcoin timelock scripts to lock BTC directly on the Bitcoin network (without bridging or wrapping), while the locked BTC secures external "Bitcoin Secured Networks." Babylon reached over $5 billion TVL by late 2025.

Lombard's LBTC is the leading Bitcoin liquid staking token, with roughly $2 billion in circulation and over 40% market share in the BTC LST sector. Yields are modest (0.04-0.57% APR) because Bitcoin does not issue inflationary block rewards for staking: all yield comes from PoS chains paying for security. This emerging sector is part of the broader BTCFi landscape bringing DeFi primitives to Bitcoin.

Risks and Considerations

Slashing Risk

Validators can be penalized (slashed) for misbehavior such as double signing or extended downtime. In liquid staking protocols, slashing losses are socialized across all LST holders. Protocols like Lido and Rocket Pool maintain slashing insurance pools funded by protocol fees, but these reserves may not cover correlated slashing events affecting multiple validators simultaneously.

Smart Contract Risk

LSTs depend on protocol smart contracts for deposits, withdrawals, validator delegation, and reward distribution. Additional layers such as governance modules, bridges, and oracle integrations expand the attack surface. A vulnerability in any component could result in loss of staked assets. Unlike a synthetic asset backed by off-chain reserves, LSTs are entirely dependent on on-chain code.

Depeg Risk

LSTs trade on secondary markets and can deviate from their expected value relative to the underlying asset. In May-June 2022, stETH traded at a 5-6.5% discount to ETH on Curve during the Terra/Luna collapse and Three Arrows Capital liquidations. The depeg occurred not because Lido was insolvent, but because forced sellers overwhelmed secondary market liquidity. Any LST is structurally exposed to this risk during market stress, which can trigger cascading liquidations for users who borrowed against their LST collateral.

Centralization Concerns

Lido's dominance has been a persistent concern for the Ethereum community. At its peak, Lido controlled over 32% of all staked ETH, approaching the 33% threshold at which a single entity could theoretically disrupt consensus finality. While Lido's share has declined to roughly 24% as of early 2026, the concentration of stake in any single protocol raises questions about censorship resistance and the potential for MEV extraction through coordinated validator behavior.

Regulatory Uncertainty

The classification of LSTs under securities law remains an evolving area. In August 2025, the U.S. SEC issued guidance clarifying that certain liquid staking activities and receipt tokens do not constitute securities offerings, which boosted institutional adoption. However, regulatory frameworks vary by jurisdiction, and centralized LST issuers like Coinbase operate under different compliance regimes than decentralized protocols.

Liquid Staking vs. Traditional Staking

Why It Matters

Liquid staking fundamentally changed the economics of proof-of-stake networks by eliminating the opportunity cost of staking. Before LSTs, stakers had to choose between network security participation and DeFi yield. With liquid staking, they can do both, which has driven over 31% of all staked ETH into liquid staking protocols.

For Bitcoin users, the emergence of BTC liquid staking through protocols like Babylon introduces an entirely new yield source for an asset that traditionally offered none. As Bitcoin Layer 2 solutions like Spark expand Bitcoin's capabilities, the intersection of Bitcoin liquidity and staking economics represents a growing frontier. The composability that liquid staking enables on Ethereum is a template for what DeFi on Bitcoin could look like as the ecosystem matures.

This glossary entry is for informational purposes only and does not constitute financial or investment advice. Always do your own research before using any protocol or technology.