The Flexible Way to Stake Cryptocurrency 🔐
Liquid staking protocols offer new opportunities for traders to earn yields while staking their assets on proof-of-stake (PoS) blockchains.
By issuing receipt tokens pegged 1:1 to the value of staked assets, liquid staking solves a major issue for stakers, particularly on Ethereum, by providing liquidity during lock-up periods.
However, these decentralized finance (DeFi) services come with risks that users should understand before participating.
When Ethereum introduced staking with the Beacon Chain in December 2020, it allowed ETH holders to become validators. But there were challenges: a high entry barrier of 32 ETH (worth around $19,000 at the time, and much more today in 2025), and uncertainty about when staked ETH could be withdrawn—until the Shanghai upgrade in April 2023 enabled withdrawals.
This illiquidity led to the rise of liquid staking, a DeFi solution that improves capital efficiency for stakers.
What Is Liquid Staking? 💧
Liquid staking allows users to stake their assets on proof-of-stake blockchains like Ethereum while still using those assets in other DeFi activities, such as yield farming or lending.
Here’s how it works in three steps:
- A user deposits their tokens into a liquid staking protocol.
- The protocol stakes those tokens on the user’s behalf on the blockchain.
- The user receives a receipt token (e.g., stETH or rETH) at a 1:1 ratio to the value of their staked assets, which can be used in other DeFi protocols to earn additional yields.
To withdraw their original assets, users have two options:
- Since the Shanghai upgrade (April 2023), users can burn their receipt tokens to withdraw their staked ETH directly, thanks to Ethereum Improvement Proposal (EIP) 4895.
- Alternatively, they can swap their receipt tokens for the original asset (e.g., ETH) using a DeFi liquidity pool that supports the pair, such as stETH/ETH.
Examples of Liquid Staking Protocols 🤔
Several liquid staking protocols have emerged, with two leading the market as of 2025, alongside newer players gaining traction.
Lido Finance
Lido Finance was the first major liquid staking protocol, launching shortly after the Beacon Chain in January 2021.
Its receipt token, Lido Staked ETH (stETH), dominates the liquid staking market, with daily trading volumes reaching up to $1 billion in 2025, reflecting its widespread adoption. Lido also supports staking on other blockchains, including:
Rocket Pool
Rocket Pool, a key competitor to Lido, launched in late 2021 and focuses exclusively on Ethereum staking.
Its receipt token, Rocket Pool ETH (rETH), has seen daily trading volumes peak at around $30 million in 2025. Rocket Pool is known for its decentralized approach, allowing users to run their own nodes with as little as 8 ETH (lowered from 16 ETH in a 2024 update), making it more accessible than solo staking.
Emerging Protocols
Newer protocols like Swell Network (with its swETH token) and StakeWise (offering sETH2) are also gaining popularity, focusing on user-friendly interfaces and competitive yields. These platforms often integrate with a broader range of DeFi ecosystems, expanding opportunities for stakers.
Differences Between Liquid Staking and Traditional Staking 👀
To understand how liquid staking differs, let’s first look at the other ways to stake crypto assets on proof-of-stake blockchains, excluding liquid staking:
- Solo Staking: Ideal for tech-savvy users who run their own validator nodes. Solo stakers need to maintain consistent uptime and manage their equipment, keeping 100% of their rewards but risking slashing penalties for downtime.
- Staking as a Service (SaaS): Users delegate their staking to a third-party service that runs the validator node. The user retains custody of their wallet but pays a fee (fixed or a percentage of rewards) to the service provider.
- Centralized Exchanges: Many exchanges, like Binance or Coinbase, offer staking services by pooling user funds. This lowers entry barriers but requires trusting the exchange with your assets, often with fixed staking periods.
Liquid staking, as a fourth option, differs from these in three key areas: liquidity, rewards, and risks.
Liquidity
Liquid staking protocols issue a receipt token (e.g., stETH) pegged 1:1 to the value of the staked assets. When you deposit your tokens, you lose custody of the original assets but gain custody of the receipt token.
For example, if Alice deposits 5 ETH into Lido, she receives 5 stETH in return. The stETH isn’t directly tied to ETH’s price but relies on arbitrage trading in secondary markets to maintain its peg. Alice can swap her stETH for ETH anytime using a DeFi liquidity pool (e.g., stETH/ETH on Uniswap), even before withdrawals were enabled by the Shanghai upgrade. This flexibility makes liquid staking more liquid than traditional staking methods.
Rewards
With liquid staking, users can earn additional yields by using their receipt tokens in other DeFi protocols. For instance, Alice can stake her stETH in a lending platform like Aave to earn extra returns on top of her ETH staking rewards (paid in stETH via Lido).
This ability to compound yields isn’t available with solo staking, SaaS, or exchange staking, where rewards are typically limited to the staking yield alone.
Risks
Liquid staking carries risks similar to other DeFi protocols, including:
- Smart Contract Risks: Bugs or exploits in the protocol’s smart contracts can lead to losses.
- De-Pegging Risk: The receipt token may lose its 1:1 peg to the original asset. For example, during market turmoil in 2022, stETH briefly de-pegged from ETH due to panic selling and loss of confidence in DeFi, highlighting a systemic risk.
- Impermanent Loss: If you use receipt tokens in liquidity pools, you may face impermanent loss during price fluctuations.
- Staking Risks: Liquid staking also inherits traditional staking risks, like slashing penalties for validator downtime or fraud by the protocol.
The 2022 Terra/Luna collapse and Celsius Network’s liquidity crisis caused significant de-pegging issues for tokens like stETH, as investors lost trust in pegged assets. While the market has since stabilized, these events underscore the importance of caution when using liquid staking protocols.
Summary: Is Liquid Staking Right for You?
Liquid staking is a powerful DeFi tool that enhances capital efficiency, especially for blockchains with lock-up periods like Ethereum before the Shanghai upgrade. It allows stakers to maintain liquidity and earn compounded yields, making it a flexible alternative to traditional staking.
However, it’s a relatively new area in the crypto space, and risks like smart contract vulnerabilities, de-pegging, and staking penalties remain. Always research thoroughly and only stake what you can afford to risk.
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