Liquid Staking Explained
Liquid staking explained: how liquid staking tokens like stETH and JitoSOL work, rebasing vs value-accruing designs, uses in DeFi and the risks involved.
Liquid staking lets you stake a proof-of-stake cryptocurrency, such as ETH or SOL, through a protocol that runs validators for you, and receive a tradable token in return, called a liquid staking token (LST), that represents your staked coins plus accumulated rewards. You keep earning staking rewards while still being able to sell, transfer or use the token in DeFi.
Traditional staking has a trade-off: your coins are locked or subject to an unbonding period, and you either run a validator or delegate to one. Liquid staking removes much of that friction, which is why liquid staking tokens have become some of the most widely used assets in DeFi. The convenience comes with additional risks, though, and they are easy to overlook.
How Liquid Staking Works
The basic flow is similar across protocols:
- 1You deposit coins, for example ETH, into the liquid staking protocol's smart contract.
- 2The protocol stakes them with a set of validators, which it selects and manages.
- 3You receive an LST representing your share of the staked pool.
- 4Rewards accrue as validators earn staking rewards, minus a protocol fee.
- 5You exit either by selling the LST on the market or by redeeming it through the protocol, which may involve a waiting period.
On Ethereum, withdrawals of staked ETH were enabled in 2023, which made redemption through protocols possible and helped LSTs track the value of ETH more closely. If staking itself is new to you, start with our guide to what staking is. For a deeper look, see Staking vs Lending.
Rebasing vs Value-Accruing Tokens
Liquid staking tokens pass on rewards in one of two ways:
| Design | How rewards appear | Examples |
|---|---|---|
| Rebasing | Your token balance increases periodically | Lido's stETH |
| Value-accruing (reward-bearing) | Your balance stays the same, but each token is redeemable for more of the underlying coin over time | Rocket Pool's rETH, Lido's wstETH, JitoSOL |
Value-accruing tokens are often easier for DeFi protocols and cross-chain bridges to handle. Tax treatment of the two designs may differ depending on where you live, so keep good records and check local rules. We cover this in more detail in How to Check Gas Fees Before You Transact.
Major Liquid Staking Protocols
- Lido (LDO) is one of the most widely used liquid staking protocols on Ethereum, issuing stETH and wstETH and delegating to a curated set of node operators.
- Rocket Pool issues rETH and allows independent node operators to run validators with a smaller bond. See our Lido vs Rocket Pool comparison.
- Exchange-issued tokens such as Coinbase's cbETH are issued by centralized companies, adding company risk.
- Jito (JTO) issues JitoSOL on Solana, passing on staking rewards plus a share of MEV tips.
- Marinade issues mSOL on Solana and spreads stake across many validators.
What You Can Do With Liquid Staking Tokens
- Hold them to earn staking rewards without running a validator.
- Provide liquidity in pools that pair the LST with the underlying coin.
- Use them as collateral in lending protocols.
- Restake them in protocols that reuse staked assets to secure other services, covered in our guide to restaking.
Each additional step stacks another layer of protocol risk on top of the last. See also: How to Stake Crypto.
The Risks of Liquid Staking
- 1Smart contract risk. A bug in the staking contracts or LST could cause losses.
- 2Slashing and validator risk. If the protocol's validators misbehave or go offline, penalties reduce the pool's value.
- 3Depeg risk. An LST can trade below the underlying asset's value, especially during market stress, when many holders sell at once or when redemption queues are long.
- 4Liquidation risk. If you borrow against an LST and it depegs, your position may be liquidated even if the underlying coin's price is stable.
- 5Centralization risk. When one protocol controls a large share of a network's stake, critics argue it could become a point of failure or influence for the network.
- 6Governance and admin risk. Protocol parameters, fees and validator sets may be changed by governance or a multisig.
- 7Counterparty risk for tokens issued by centralized companies.
The leverage loop trap
A common strategy deposits an LST as collateral, borrows the underlying coin, stakes it again and repeats. This magnifies rewards, but also magnifies losses if borrowing rates rise or the LST depegs. Our guide to liquidations in DeFi explains how quickly these positions can unwind.
How to Choose a Liquid Staking Token
Before depositing, check:
- How long the protocol has operated, and its audit and incident history.
- How many validators and operators it uses, and how they are selected.
- The protocol fee taken from rewards.
- How redemption works and how long exits usually take.
- How deep the market is for the LST, so you can exit without a large discount.
- That the token contract matches the one on the official website.
Bottom line
Liquid staking lets you earn staking rewards while keeping your stake usable, which is why LSTs sit at the center of many DeFi strategies. The trade-off is extra exposure to smart contracts, validator performance, depegs and governance. Use established protocols, understand how your token accrues rewards and how you can exit, and be cautious about stacking leverage on top. For related reading, explore our DeFi guides.
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What is liquid staking in simple terms?
Liquid staking lets you stake a proof-of-stake coin such as ETH or SOL through a protocol and receive a token in return that represents your staked position and its rewards. You can hold, trade or use that token in DeFi while your original coins keep earning staking rewards.
Is liquid staking safer than staking directly?
Not necessarily. It adds smart contract risk, the risk that the liquid staking token trades below the value of the underlying coins, and reliance on the protocol's choice of validators. In exchange, you gain flexibility and don't have to run a validator yourself. Which is better depends on your priorities.
Can a liquid staking token lose its peg?
Yes. A liquid staking token can trade below the value of the coins it represents, especially during market stress or when many holders want to exit at once. If you can redeem through the protocol, the gap usually narrows over time, but selling on the market during a depeg can lock in a loss.
What is the difference between stETH and wstETH?
stETH is Lido's rebasing token: your balance increases as staking rewards accrue. wstETH is a wrapped version whose balance stays fixed while each token becomes worth more stETH over time. Some DeFi protocols and blockchains prefer wstETH because rebasing balances are harder for smart contracts to handle.