Liquid staking solves a fundamental tension in proof-of-stake blockchains: earning staking rewards requires locking assets, but locked assets cannot be used in DeFi. Liquid staking protocols (Lido, Rocket Pool, cbETH, jitoSOL) let users deposit assets, continue earning staking rewards, and receive a liquid token representing their staked position — that token can then be deployed in DeFi as if the underlying asset were not staked. Liquid staking has grown into the largest DeFi category by TVL.
How It Works
The Traditional Staking Problem
On Ethereum, standard staking requires:
- Exactly 32 ETH (no partial staking)
- 21-day unstaking period on some networks (Polkadot, Cosmos)
- Technical knowledge to run a validator
- Capital fully locked for months
These constraints prevent most users from staking and prevent staked capital from participating in DeFi.
Liquid Staking Solution
- User deposits ETH into Lido’s smart contract
- Lido mints stETH (Staked ETH) at 1:1
- Lido delegates the ETH to professional node operators
- stETH balance increases daily as staking rewards accrue (rebasing)
- User can use stETH as collateral on Aave, provide stETH/ETH liquidity on Curve, or simply hold and earn
Key Liquid Staking Tokens
| Token | Protocol | Asset | Network |
|---|---|---|---|
| stETH | Lido | ETH | Ethereum |
| cbETH | Coinbase | ETH | Ethereum |
| rETH | Rocket Pool | ETH | Ethereum |
| jitoSOL | Jito | SOL | Solana |
| mSOL | Marinade | SOL | Solana |
| stDOT | Lido | DOT | Polkadot |
Rebasing vs. Reward-Bearing
- Rebasing (stETH): Token balance increases to reflect rewards. 1000 stETH today → 1040 stETH after a year (at 4% yield).
- Reward-bearing (wstETH, rETH, cbETH): Token quantity stays fixed, but price increases. 1000 rETH today → 1000 rETH after a year, but each rETH is worth 1.04 ETH.
DeFi protocols generally prefer non-rebasing tokens (wstETH, cbETH, rETH) as they’re simpler to account for.
History
| Year | Event |
|---|---|
| Dec 2020 | Ethereum Beacon Chain launches; withdrawal not yet enabled; staking “one way” |
| Dec 2020 | Lido launches as solution to Beacon Chain’s locked staking |
| 2021 | Rocket Pool, Stakewise launch as decentralized alternatives |
| Jun 2022 | stETH de-peg to 0.935 ETH during Celsius/3AC crisis; cascading liquidations |
| Sep 2022 | Ethereum Merge: PoW → PoS; all ETH now runs on staked Beacon Chain |
| Apr 2023 | Ethereum Shanghai upgrade: withdrawals enabled; stETH immediately pegs back |
| 2023 | Lido captures ~30% of all staked ETH; centralization debates intensify |
| 2024 | EigenLayer restaking extends liquid staking to provide security for other protocols |
Common Misconceptions
“Liquid staking tokens are risk-free.” stETH carries smart contract risk (Lido contract bug), slashing risk (validator misbehavior), and liquidity risk (de-pegging in secondary markets). The June 2022 de-peg demonstrated real liquidity risk.
“Liquid staking doubles your yield.” Liquid staking allows you to earn staking yield while also using the LST in DeFi — but those DeFi strategies carry their own risks. Combined leverage (stake → use LST as collateral → borrow → re-stake) amplifies risk.
Criticisms
- Lido’s 30%+ share of Ethereum staking approaches the 33% threshold for network-level attacks
- Recursive leverage on LSTs (loop staking) can trigger cascading liquidations
- Centralized liquid staking (cbETH, Binance ETH) uses trusted custody rather than smart contracts
Social Media Sentiment
Liquid staking is universally viewed as a major DeFi innovation but Lido’s dominance is controversial within the Ethereum community. Vitalik Buterin has explicitly expressed concern about Lido’s market share. Rocket Pool (decentralized, requires 8 ETH per mini-pool node operator) is favored by decentralization advocates. EigenLayer’s restaking narrative extended liquid staking discourse into 2024.
Last updated: 2026-04
Related Terms
Sources
Schwarz-Schilling, C., et al. (2022). Time to Bribe: Measuring Block Construction Markets in Ethereum Post-Merge. arXiv.
Heimbach, L., Wang, Y., & Wattenhofer, R. (2022). Ethereum’s Proof of Stake Consensus: Participation and Decentralization. arXiv.
Wang, Q., et al. (2022). Exploring the Risks of Liquid Staking. DeFi Security Workshop.
Lido Finance. (2020). Lido: Liquid Staking for Ethereum. Lido.fi.
EigenLayer. (2023). EigenLayer: The Restaking Collective. EigenLayer Whitepaper.