Overview
A key limitation of traditional staking is that funds become locked and illiquid, preventing users from accessing or utilizing their assets until the unstaking period ends.
Liquid staking solves this by allowing users to stake their tokens while maintaining liquidity, enabling them to use their staked assets in DeFi for additional yield.
When users deposit ETH into a liquid staking protocol, they receive a tokenized receipt representing their staked ETH. This receipt, known as a Liquid Staking Token (LST), can be used in various DeFi strategies while continuing to earn staking rewards. For example, Lido and Rocket Pool are liquid staking protocols that issue LSTs known as stETH and rETH, respectively.
On the backend, the liquid staking platform stakes ETH on behalf of the user and issues an LST (e.g., stETH or rETH) in return. This token accrues staking rewards and can be used across DeFi, including:
- Liquidity Provision: Depositing LST into a liquidity pool to earn trading fees and rewards.
- Lending & Borrowing: Lending out LST to earn interest or using it as collateral to borrow USDC.
- Automated Yield Farming: Engaging in leveraged staking, which involves borrowing ETH against stETH, restaking it, and repeating the process to amplify rewards.
How Liquid Staking Tokens Work
Given that most DeFi users are not actual validators, there’s a need to provide users with the ability to access the additional yield that restaking can provide easily.
Liquid restaking projects like Kelp and Ether.Fi are built on top of Ethereum and enable users to deposit Liquid Staking Tokens (LSTs) such as stETH or rETH, which are then allocated to validators that have opted into EigenLayer’s restaking marketplace.
In return, users receive Liquid Restaking Tokens (LRTs) like rsETH, which accrue both a) Ethereum staking rewards and b) additional restaking yield while remaining liquid for DeFi use.
The above graphic illustrates that an LST is restaked to an LRT project like Kelp, which is then delegated to EigenLayer in return for restaking rewards.
Key Considerations
- Passive Income from Staking Rewards: Users earn rewards for staking, with higher returns for validators but lower technical complexity for delegated stakers. Validators take a small commission in return for providing staking services.
- Liquidity Lock-up Periods: Traditional staking locks funds, making them inaccessible for a set period (e.g., Ethereum’s 32 ETH staking requirement).
- Smart Contract & Protocol Risk: Liquid staking protocols rely on smart contracts, which can be vulnerable to exploits, governance failures, or depegging risks.
- Slashing Risk: Validators can be penalized for poor performance, potentially impacting stakers relying on them.
Liquid Staking Key Projects
In general, there are Staking Providers who stake funds on behalf of users, but it’s liquid staking protocols that act as the interface for users to easily interact with Staking Providers and receive rewards in return.
Therefore, we will exclusively cover popular liquid staking projects.
A few notable ones include:
- Lido: Lido is the largest liquid staking protocol, supporting Ethereum and 4 other networks (including Solana, Polygon, and Polkadot).
- Rocket Pool: Similar to Lido, but with a stronger focus on decentralization by supporting a larger network of node operators across multiple jurisdictions. Only supports Ethereum.
- Jito: A Solana-based liquid staking protocol. Solana does not use PoS for security and things work slightly differently on the backend, with validators instead auctioning off blockspace to receive rewards that are shared with stakers.
Different networks may have their own leading liquid staking protocols, but the above are a few of the most established in the space.