Liquid staking gained prominence when Ethereum initially restricted stake withdrawals. Even in the post-Merge era, it remains a hot topic—evolving from a temporary solution into a versatile instrument in digital finance and a prime example of DeFi's potential.
This guide introduces the concept, explains its benefits and pitfalls, and lists popular examples of supported blockchains and DeFi products.
Understanding Liquid Staking
Let’s break down the definition:
- 'Liquid' in finance refers to the ease of converting assets into cash without significant loss.
- Staking in crypto involves committing funds to a protocol to help secure it, earning rewards in return.
Liquid staking is staking that lets you use the staked funds while still earning rewards. Unlike traditional staking (which often locks assets), liquid staking maintains flexibility.
Why Liquid Staking Matters
From a security standpoint, lock-ups stabilize a protocol’s total value locked (TVL). However, for users, these restrictions can be limiting—especially for those who want to:
- Access DeFi opportunities.
- Quickly take profits or rebalance portfolios.
Liquid staking solves these issues by using third-party protocols to unlock liquidity without sacrificing rewards.
Liquid Staking vs. Traditional Staking
Key differences:
| Point of Comparison | Traditional Staking | Liquid Staking |
|---|---|---|
| Liquidity | Funds often locked | Funds remain usable |
| Security | Protocol-level | Depends on provider |
| Costs | Gas fees for deposit/withdrawal | Additional provider fees |
| Returns | Baseline staking rewards | Staking rewards + DeFi yields |
Important Considerations
- Assets go to a provider’s staking pool—research the provider thoroughly.
- Not all blockchains lock staked assets (e.g., Cardano).
- Gas fees and provider commissions reduce net returns.
How Liquid Staking Works
Step-by-Step Process
- Asset Deposit: Deposit your stake (e.g., ETH) into the protocol.
- Protocol Staking: The protocol distributes your stake across validators.
- Token Minting: Receive liquid staking tokens (LSTs) representing your stake.
- Reward Accumulation: LSTs accrue staking rewards, whether idle or used in DeFi.
Key Components
- Tokenization: LSTs represent ownership of staked assets.
- Smart Contracts: Handle staking, minting/burning LSTs, and reward distribution.
- Multi-Layer Structure: Combines staking infrastructure, tokenization, and DeFi utility.
How to Use Liquid Staking Tokens
LSTs unlock DeFi opportunities:
- Provide Liquidity: Earn trading fees on DEXs.
- Trade: Swap LSTs for other assets.
- Lend/Borrow: Use LSTs in lending protocols.
- Leverage: Restake tokens for compounded returns.
👉 Maximize your DeFi strategy with liquid staking
Benefits of Liquid Staking
- Liquidity: Use staked funds immediately.
- Flexibility: No unbonding periods.
- DeFi Integration: Participate in lending, trading, and more.
- Capital Efficiency: Earn rewards while using assets elsewhere.
Risks of Liquid Staking
- Centralization: Large staking pools may dominate networks.
- Liquidity Risks: Some LSTs trade at discounts during high demand.
- Smart Contract Vulnerabilities: Audits are crucial.
- Impermanent Loss: Market volatility can erode rewards.
👉 Secure your assets with trusted protocols
Popular Liquid Staking Protocols
1. Lido
- Supported Chains: Ethereum, Solana, Polygon.
- LST: stETH (rebasing model).
- Fees: 10% reward commission.
2. Rocket Pool
- Decentralized: No minimum ETH requirement.
- LST: rETH (appreciation model).
3. Binance-staked ETH
- LST: WBETH (tradable on Binance).
4. Jito (Solana)
- Focus: MEV optimization for higher yields.
Getting Started with Liquid Staking
Step 1: Choose a Protocol
Research APYs, fees, and LST utility.
Step 2: Set Up a Wallet
Ensure compatibility and fund gas fees.
Step 3: Stake Assets
Follow the protocol’s interface to deposit.
Step 4: Manage Position
Monitor validators and diversify across protocols.
Conclusion
Liquid staking bridges staking rewards and DeFi utility—offering flexibility but requiring due diligence. As the ecosystem evolves, staying informed is key to maximizing returns while mitigating risks.
FAQ
Q: Is liquid staking safe?
A: It involves smart contract and counterparty risks. Always use audited protocols.
Q: What are LSTs used for?
A: Trading, lending, liquidity provision, and more in DeFi.
Q: Which chains support liquid staking?
A: Ethereum, Solana, Polygon, BSC, and others.
Q: How do I unstake LSTs?
A: Redeem them via the original protocol or swap on DEXs.
Q: What’s the difference between stETH and rETH?
A: stETH rebases (balance increases), while rETH appreciates (redemption rate rises).
Q: Can I lose money with liquid staking?
A: Yes, via slashing, impermanent loss, or market downturns.