7 March 2025

Liquid Staking 101: Everything You Need to Know

Introduction: The Evolution of Staking with Liquidity

Staking has become an essential part of the cryptocurrency ecosystem, offering investors a way to earn passive income by securing blockchain networks. Traditionally, staking required users to lock up their tokens for a fixed period, limiting their ability to trade or use their assets. However, liquid staking changes the game by allowing users to stake their tokens while maintaining liquidity.

In this guide, we will explore what liquid staking is, how it works, its advantages and risks, and the top platforms offering liquid staking services.

What Is Liquid Staking?

Liquid staking is an innovative staking mechanism that allows users to stake their crypto assets while retaining access to their funds in the form of derivative tokens. These derivative tokens represent the staked assets and can be used in DeFi applications, providing increased flexibility and liquidity compared to traditional staking.

Unlike conventional staking, where tokens are locked and inaccessible, liquid staking enables users to earn staking rewards without sacrificing their ability to trade or use their funds.

How Liquid Staking Works

Liquid staking operates through a staking service provider that handles the staking process and issues liquid staking tokens (LSTs) in return. These LSTs can then be traded, used as collateral, or deployed in DeFi protocols.

Step-by-Step Process of Liquid Staking

Deposit Tokens: Users deposit their tokens into a liquid staking platform.
Receive Staking Derivatives: The platform issues staked tokens (LSTs) representing the locked assets.
Earn Rewards: Users continue to receive staking rewards based on their initial deposit.
Use Liquid Tokens: LSTs can be traded, used in DeFi lending, borrowing, or yield farming.
Redeem for Original Assets: Users can convert their LSTs back to the original assets, often with a slight delay depending on the protocol.

Benefits of Liquid Staking

Liquid staking introduces several advantages over traditional staking, making it an attractive option for crypto investors.

1. Unlocked Liquidity

Traditional staking locks tokens, making them inaccessible until the staking period ends.
Liquid staking allows users to access their capital via liquid staking tokens (LSTs).

2. Increased DeFi Utility

LSTs can be used in liquidity pools, lending platforms, and yield farming strategies.
Users can compound earnings by staking and simultaneously participating in DeFi.

3. Reduced Opportunity Cost

Investors no longer have to choose between staking rewards and liquidity.
Allows for active portfolio management without sacrificing staking benefits.

4. Enhanced Yield Strategies

Liquid staking enables multiple income streams through staking rewards and DeFi incentives.
LSTs can be used in liquidity mining, automated market makers (AMMs), and lending protocols.

Risks and Considerations of Liquid Staking

Despite its benefits, liquid staking comes with risks that users should be aware of before participating.

1. Smart Contract Vulnerabilities

Liquid staking platforms rely on smart contracts, which may have security risks.
Ensure the platform has undergone audits from reputable cybersecurity firms.

2. Counterparty Risk

Users depend on staking service providers to issue and manage LSTs.
A failure in governance or security could lead to loss of funds.

3. Market Volatility of Staking Derivatives

LSTs may not always maintain a 1:1 peg with the underlying staked asset.
Market fluctuations can lead to price deviations, causing liquidity risks.

4. Slashing Risk

If validators act maliciously or fail to meet network requirements, staked assets may be penalized.
Choose platforms with reliable validator sets and insurance mechanisms.

Top Liquid Staking Platforms

Several platforms offer liquid staking services, each with unique features and supported assets.

1. Lido (LDO)

Supports Ethereum (ETH), Solana (SOL), Polygon (MATIC), and Polkadot (DOT).
Issues stETH, stSOL, and similar LSTs.
One of the most widely adopted liquid staking solutions in DeFi.

2. Rocket Pool (RPL)

Decentralized Ethereum liquid staking solution.
Allows node operators to stake ETH with lower requirements.
Issues rETH, a liquid staking derivative.

3. Coinbase Staking

Offers liquid staking for Ethereum (ETH).
Provides cbETH, a tradable ETH staking derivative.
Backed by Coinbase’s security and compliance measures.

4. Frax Finance (sFRAX)

Introduces a new model for stable staking rewards.
Provides a liquid staking token sFRAX with built-in DeFi integrations.

5. Ankr (ANKR)

Offers multi-chain liquid staking solutions.
Supports BNB, ETH, AVAX, and more.
Provides aLST tokens with staking rewards.

Liquid Staking vs. Traditional Staking

Feature	Liquid Staking	Traditional Staking
Liquidity	Available via LSTs	Locked until unstaking
DeFi Utility	Can be used in lending, farming, and liquidity pools	No DeFi compatibility
Reward Access	Continuous, can be compounded	Available only after unbonding
Flexibility	High, with multiple earning strategies	Limited to staking rewards only
Risk Level	Smart contract and slashing risks	Network security risk only

Liquid staking provides greater capital efficiency but comes with added risks due to smart contract dependencies and counterparty reliance.

How to Get Started with Liquid Staking

If you want to participate in liquid staking, follow these steps:

Choose a Platform: Research reputable liquid staking providers like Lido, Rocket Pool, or Coinbase.
Connect Your Wallet: Use a non-custodial wallet such as MetaMask or Ledger.
Deposit Tokens: Stake assets through the platform and receive staking derivatives.
Utilize LSTs: Deploy your LSTs in DeFi protocols for additional yield opportunities.
Monitor Market Conditions: Keep track of market fluctuations and staking performance.

The Future of Liquid Staking

Liquid staking is poised to become a major innovation in crypto finance, bridging the gap between staking rewards and DeFi accessibility. As Ethereum and other proof-of-stake blockchains continue to grow, liquid staking protocols will likely gain further adoption.

New developments in cross-chain staking and decentralized validator networks will further improve the security and efficiency of liquid staking. Additionally, institutional adoption of staking services may lead to regulated liquid staking solutions, increasing confidence in the space.

Final Thoughts: Should You Use Liquid Staking?

Liquid staking presents an opportunity for crypto investors to earn staking rewards without sacrificing liquidity. While it offers increased flexibility and DeFi utility, users must consider the risks associated with smart contracts, validator slashing, and market fluctuations.

For those seeking passive income and enhanced capital efficiency, liquid staking is an attractive alternative to traditional staking. However, proper research and risk management strategies are essential before committing assets to liquid staking protocols.