In crypto, yield and liquidity often clash. One dilemma forces you to choose one or the other. Liquid staking answers this clash. It stakes tokens. It yields rewards. It gives you a liquid token that you can trade, lend, or use in DeFi.
This guide shows how liquid staking works, why it grows popular, and how you use it safely to boost returns without locking your capital.
What Is Liquid Staking?
Liquid staking lets you stake crypto on a PoS network and get a tradable token that stands for your stake.
In traditional staking you:
• Lock tokens in a validator.
• Face illiquid assets for a fixed time.
• Earn rewards but lose token use.
With liquid staking you:
• Deposit tokens into a trusted protocol.
• Let the protocol stake for you.
• Receive a liquid staking token (LST) – like stETH for staked ETH.
• Earn rewards, trade your LST, or use it in DeFi.
In short, staking splits ownership from token locking.
How Does Liquid Staking Work?
Liquid staking systems follow a common pattern.
1. You Deposit Tokens
You start by depositing a PoS token (ETH, SOL, MATIC, etc.) into a protocol. The deposit enters a smart contract or app from DeFi.
2. Protocol Stakes on Your Behalf
The protocol collects deposits. It assigns tokens to validator(s). It gathers rewards (minus fees). You need not run a validator or manage infrastructure.
3. You Receive a Liquid Staking Token (LST)
After deposit, you gain a token that stands for your stake. Two models operate:
• Rebasing tokens (e.g., some staked token forms) where your token balance grows as rewards show.
• Value-accruing tokens (non-rebasing, e.g., stETH, rETH) where your token number stays, yet each token gains extra value over time.
Both models grow in value thanks to staking rewards.
4. You Use LSTs Across DeFi
Your LST works in many ways:
• Trade it on DEXs.
• Use it as collateral for loans.
• Deposit it in liquidity pools.
• Leverage it in yield strategies.
This method earns staking yield and extra yield from DeFi use.
5. Redemption/Exit
To exit, you:
• Redeem your LST with the protocol for the underlying asset (subject to rules).
• Sell your LST on the market for base tokens or stablecoins.
Since your stake is tokenized, you avoid fixed lock-up terms and can exit when liquid.
Why Liquid Staking Matters
Liquid staking is a key part of modern DeFi. It matters because:
Unlocks Capital Efficiency
Instead of locking 100% of tokens for rewards, or keeping them liquid and earning nothing, you can stake all tokens, get LSTs, then use LSTs to earn more yield or leverage. Staking becomes a composable building block in DeFi.
Democratizes Validator Participation
You need not hold 32 ETH, deploy hardware, or ensure constant uptime. Protocols pool tokens and run validator operations so even small holders can earn rewards.
Enhances Network Security
A PoS chain grows secure as more tokens stake. Liquid staking lowers barriers, reduces token locking cost, and draws more participants. This helps boost decentralization and security.
Benefits of Liquid Staking
Returns vary by chain and protocol. Common benefits include:
1. Yield + Liquidity
You get yield and flexibility.
For example:
• Stake ETH to receive stETH.
• Earn 3–5% APR from staking.
• Trade or use stETH as needed.
2. DeFi Composability
LSTs are ERC-20 (or similar) assets that work with:
• Lending/borrowing platforms.
• Liquidity pools.
• Structured products like yield vaults.
This usage creates advanced strategies that begin with liquid staking.
3. Simpler User Experience
Running a validator is complex. Liquid staking needs one or two clicks through a dApp. You avoid hardware upkeep and slashing risk management.
4. Potential Yield Boost
By combining:
• Base staking rewards and
• Extra DeFi yields (from lending, liquidity mining, etc.),
you might reach higher returns than with standard staking, albeit with higher risk.
Key Risks of Liquid Staking
Extra yield and flexibility bring extra risks:
1. Smart Contract Risk
Liquid staking relies on code. Bugs or design flaws may cause loss of funds. To mitigate risk:
• Choose protocols with battle-tested contracts.
• Look for trusted audits.
• Check for bug bounty programs.
2. Slashing & Protocol Risk
Validators face penalties (slashing). This risk affects:
• The token backing your LST.
• The APY you earn.
A good protocol spreads stake and monitors risk.
3. Depeg & Liquidity Risk
Liquid staking tokens might trade at a discount or premium, particularly during stress. Risks include:
• Selling below 1:1 value.
• Lack of liquidity for quick exit.
• Temporary or long depeg episodes.
4. Centralization Concerns
If a few providers control most stakes, then governance, censorship, or cartel risks rise. Communities then promote diversified providers.
Popular Liquid Staking Platforms & Tokens
Platforms shift fast. Some known examples (as of 2024):
• Ethereum
– Lido (stETH)
– Rocket Pool (rETH)
– Coinbase (cbETH)
• Solana
– Marinade (mSOL)
– Jito (JitoSOL)
• Polygon
– Stader, Lido, and others (stMATIC variants)
Always verify:
• Official contract addresses.
• Current APY and fee details.
• DeFi integrations for each LST.
How to Start Using Liquid Staking (Step-by-Step)
Below is a general guide. Steps vary by network and protocol.
-
Choose Your Network and Asset
For example, Ethereum with ETH; Solana with SOL. -
Select a Liquid Staking Protocol
Choose based on:
• Track record and TVL.
• Security audits and transparency.
• Validator decentralization.
• DeFi integration breadth. -
Connect Your Wallet
Use a compatible wallet (e.g., MetaMask for Ethereum, Phantom for Solana).
Connect through the official site or a trusted aggregator. -
Deposit and Stake
Enter your token amount.
Approve the transaction in your wallet.
Receive your LST after confirmation. -
Put Your LST to Work (Optional)
Use it as:
• Collateral in lending protocols.
• A pair in liquidity pools.
• A deposit in yield strategies or vaults.
Or hold it for staking yield with liquidity. -
Monitor and Manage Risk
Watch:
• APY changes.
• LST market price versus underlying.
• Protocol updates and security.
Keep leverage low in volatile times. -
Exit When Needed
Swap LST for underlying tokens on a DEX, or
Redeem via the protocol’s withdrawal process (subject to availability).
Smart Ways to Use Liquid Staking in Your Portfolio
Your risk and goals vary. Common approaches include:
• Conservative approach
Stake major assets (ETH, SOL) via trusted protocols.
Hold LSTs or use them in blue-chip lending for modest extra yield.
• Moderate DeFi participation
Supply LST and underlying pairs in liquidity pools.
Use LST as collateral to borrow stablecoins and farm low-risk yields.
• Advanced / leveraged strategies
Engage in loop borrowing (borrow ETH against stETH, then redeploy).
Use yield aggregators and structured products.
The more complex the strategy, the more you must grasp liquidation thresholds, volatility, and liquidity.
Best Practices for Safer Liquid Staking
To optimize liquid staking while lowering risks:
• Diversify across multiple providers, networks, and assets.
• Use only official links and verified contract addresses.
• Favor protocols with long histories, transparent validators, and clear on-chain data.
• Keep leverage modest, especially amid volatility.
• Regularly review protocol health, token peg stability, and changes in APY or fees.
FAQ: liquid staking & Related Questions
-
What is liquid staking in crypto in simple terms?
Liquid staking lets you stake crypto on a PoS network. In exchange, you get a token that stands for your stake. This token stays liquid, letting you trade or use it in DeFi while you earn rewards. -
Is liquid staking safe compared to regular staking?
Liquid staking brings extra risks. Smart contract issues, depegs, and protocol risks add to the validator risks of traditional staking. It offers flexibility and yield but requires thorough evaluation of each protocol. -
How do liquid staking tokens (LSTs) make money?
LSTs claim your staked tokens and their rewards. They work either by growing your token balance (rebasing) or by making each token redeem for more over time (value-accruing). You profit from staking rewards, and possibly extra yield from DeFi strategies.
Liquid staking has moved from a niche idea to a central pillar of modern DeFi. It helps you earn rewards, keep liquidity, and unlock yield strategies absent in traditional staking. If you aim to make your crypto work harder without losing access, liquid staking deserves a closer look.
Take the next step. Pick a trusted protocol on your network. Start small. Learn how LSTs blend into your overall strategy. Early, careful use of these tools can position you well as PoS and DeFi grow.
