Liquid staking lets you stake your crypto and receive a tradeable receipt token (like stETH or rETH) that represents your staked position plus accruing rewards. You earn staking yield while keeping the ability to trade, lend, or use your assets in DeFi, instead of having them locked and illiquid during the staking period.
What Is Liquid Staking?
3 min read
The short version
Normal staking is like putting money in a 1-year CD at the bank: you earn interest but cannot touch the money. Liquid staking is like a CD that gives you a transferable claim check: you still earn interest, but you can sell or borrow against the claim check any time you need the money back fast.
How It Works
Liquid staking protocols (Lido, Rocket Pool, Coinbase cbETH, Frax) pool user deposits, run validators on their behalf, and issue receipt tokens. These receipt tokens (LSTs, Liquid Staking Tokens) represent your proportional claim on the staked assets plus accumulated rewards. Two models: (1) Rebasing (stETH): your token balance increases daily as rewards accrue. 10 stETH becomes 10.001 stETH tomorrow. (2) Value-accruing (rETH, cbETH): your token count stays the same but the exchange rate increases. 1 rETH redeems for progressively more ETH over time. LSTs trade on secondary markets at or near the price of the underlying asset. You can use them in DeFi: as collateral on Aave, in liquidity pools on Curve, or as margin on lending platforms. This "stacking" of yield sources is called recursive or leveraged staking.
Using stETH in DeFi for compounded yield
You deposit 5 ETH into Lido, receive 5 stETH. Your stETH earns ~4% staking APR automatically. Now you deposit the 5 stETH into Aave as collateral and borrow 3 ETH against it (60% LTV). You stake the borrowed 3 ETH in Lido for 3 more stETH. Total exposure: 8 stETH earning staking rewards on 8 ETH worth of position, funded by only 5 ETH of your own capital. Effective APR: roughly 6-7% on your original 5 ETH (minus the Aave borrow rate of ~2%). Risk: if stETH depegs from ETH (as happened briefly in 2022), your collateral ratio drops and you face liquidation.
What People Get Wrong
Liquid staking tokens are always worth exactly 1 ETH
LSTs trade on open markets and can deviate from peg during stress. In June 2022, stETH traded at a 5% discount to ETH during market turmoil. The tokens are redeemable 1:1 eventually (through withdrawals), but market price can fluctuate short-term.
Liquid staking has no additional risk vs. native staking
You add smart contract risk (bugs in the protocol), governance risk (who controls upgrades), and potential slashing exposure across many validators. Native staking on your own validator carries less smart contract risk but requires more technical involvement.
All liquid staking protocols are equally decentralized
Lido controls ~28% of all staked ETH through a limited node operator set. Rocket Pool is more decentralized (permissionless node operators but smaller). Coinbase cbETH is fully centralized. The spectrum ranges from highly centralized to reasonably decentralized.
Keep Reading
Sources & Further Reading
- Lido Finance
The largest liquid staking protocol for Ethereum (stETH)
- Rocket Pool Docs
Documentation for the decentralized liquid staking protocol (rETH)
Questions People Also Ask
- Which liquid staking protocol should I use?
- For Ethereum: Lido (stETH, largest and most liquid), Rocket Pool (rETH, more decentralized), Coinbase (cbETH, simplest but centralized). Choice depends on whether you prioritize DeFi composability (stETH), decentralization (rETH), or simplicity (cbETH). Check current rates on DefiLlama.
- Can I unstake from liquid staking instantly?
- You can sell the LST on a DEX instantly (at market price, which may be slightly below redemption value). Or you can redeem through the protocol, which takes the same time as normal unstaking (1-5 days on Ethereum). The "liquid" part is the secondary market trading, not instant protocol redemption.
- Is liquid staking safe for large amounts?
- For established protocols (Lido, Rocket Pool) that have been operating for years with billions staked and multiple audits: reasonably safe, though smart contract risk never reaches zero. For newer or smaller protocols: higher risk. Never stake more than you can afford to have locked if something goes wrong.