Liquid staking lets you stake ETH through a protocol and receive a token in return that represents your staked ETH plus its rewards. You keep earning staking rewards, but you can also trade, lend or use that token in DeFi instead of leaving your ETH locked. The main risks are smart contract bugs, slashing, the token trading below the value of the ETH behind it, and concentration of power in a few large providers.
Staking on Ethereum in one minute
Since the Merge in September 2022, Ethereum has used proof of stake. Instead of miners, validators lock up ETH as collateral and take turns proposing and attesting to blocks. In return they earn rewards: newly issued ETH, plus transaction priority fees and MEV (extra value from ordering transactions in a block).
Running a validator yourself has hurdles:
- It needs 32 ETH to activate a validator.
- It needs reliable hardware and uptime. Being offline costs rewards.
- Breaking the protocol rules, such as signing two conflicting blocks, gets you slashed: part of your stake is destroyed and the validator is forced out.
- Exiting takes time. Validators leave through an exit queue, which can take days or weeks when many are leaving at once.
Liquid staking protocols handle these problems for you and give you a token you can use in the meantime.
How liquid staking works
- You deposit ETH into the protocol's smart contract. There is usually no minimum close to 32 ETH.
- The protocol pools deposits and assigns them to node operators, who run the validators.
- You receive a liquid staking token (LST) representing your share of the pool.
- As validators earn rewards, the pool grows. The protocol takes a fee, and the rest accrues to LST holders.
- To exit, you either sell the LST on the market or request a withdrawal through the protocol, which waits for validators to exit if needed.
Withdrawals of staked ETH only became possible after the Shapella upgrade in April 2023. Before that, selling the LST was the only way out.
Two ways to pass on rewards
LSTs deliver rewards in one of two styles.
| Style | How it works | Examples |
|---|---|---|
| Rebasing | Your token balance increases over time; 1 token stays roughly equal to 1 ETH | stETH (Lido) |
| Value-accruing | Your balance stays the same; each token becomes redeemable for more ETH over time | wstETH, rETH (Rocket Pool), cbETH (Coinbase) |
Rebasing tokens are simple to read in a wallet, but many DeFi protocols handle changing balances poorly. That is why Lido also offers wstETH, a wrapped version whose balance is fixed while its exchange rate to ETH rises. Most lending markets and bridges use the value-accruing form.
The main providers
- Lido is the largest liquid staking protocol. Its stake is spread across a set of node operators chosen through its governance, and it charges a 10% fee on staking rewards, split between operators and the DAO treasury.
- Rocket Pool is designed to be more decentralized. Anyone can become a node operator by posting their own ETH as a bond, which gives operators their own money at risk.
- Centralized exchanges such as Coinbase and Binance offer their own LSTs, backed by validators they run. You trust the exchange as a custodian.
Protocols differ in how they choose operators, how much they charge, and who controls upgrades. Those choices shape the risks below.
The risks
Smart contract risk
Your ETH sits in contracts that mint LSTs, track rewards and process withdrawals. A bug could let an attacker drain funds or mint unbacked tokens. Major protocols are audited and battle-tested, but audits reduce risk rather than remove it. Many of these contracts are also upgradeable, so you are trusting whoever holds the upgrade keys, often a DAO or multisig, not to push a harmful change.
Slashing and operator risk
If node operators misbehave or make mistakes, such as running the same validator key on two machines, validators can be slashed. Losses are usually shared across all holders of the LST. Slashing penalties grow when many validators are slashed at the same time, so a bug in widely used software that hits many validators at once could be costly. Some protocols hold insurance funds or operator bonds to absorb losses, but coverage is limited.
Depeg and liquidity risk
An LST's market price can drop below the value of the ETH it represents. This happens when many holders want to sell at once and the protocol cannot redeem quickly enough.
In mid-2022, before withdrawals were enabled, stETH traded at a noticeable discount to ETH during a wave of forced selling by crypto lenders and funds. Holders who needed cash immediately had to accept the lower price. Withdrawals now give arbitrage traders a way to close the gap, but only as fast as the exit queue allows. During busy periods, a discount can persist.
Leverage and DeFi risk
A common strategy is looping: deposit an LST as collateral, borrow ETH, stake it for more LST, and repeat. This multiplies yield but also multiplies risk. If the LST's price slips against ETH, or borrowing rates rise above staking rewards, leveraged positions can be liquidated automatically. A small depeg can cascade into large forced selling.
Using an LST in other protocols also adds their risks on top: a lending market's bugs, an oracle that misprices the LST, or a bridge that fails.
Centralization risk
If one liquid staking protocol controls a large share of all staked ETH, it gains outsized influence over the network. Lido has at times held close to a third of staked ETH, which has drawn concern from Ethereum researchers. Thresholds such as one third and two thirds of stake matter for Ethereum's consensus: controlling one third could let a party stall finality, and controlling two thirds could let it decide what gets finalized and censor transactions. Lido spreads its stake across many independent operators, but those operators are selected by its governance, which becomes a point of influence in its own right.
Governance and regulatory risk
Protocol governance can change fees, operator sets or contract code. Governance tokens are often concentrated among a few holders. Rules on how staking services are treated also vary by country and can change. Centralized providers in particular may have to restrict or change their offerings in some countries.
Liquid staking vs. other ways to stake
| Option | Minimum | Liquidity | Main trust assumption |
|---|---|---|---|
| Solo staking | 32 ETH | None until exit | Your own setup |
| Liquid staking protocol | Very small | Tradable token | Contracts, operators, governance |
| Exchange staking | Very small | Depends on exchange | The exchange as custodian |
How to reduce the risks
- Understand the backing. Know which token you hold and whether it rebases or accrues value.
- Check exit routes. Look at how deep the market is for the LST, and how long protocol withdrawals currently take.
- Avoid heavy leverage unless you understand liquidation thresholds and can monitor them.
- Consider diversity. Spreading stake across smaller providers supports Ethereum's decentralization and limits exposure to any one protocol.
- Read governance details. Know who can upgrade the contracts and how quickly.
Key takeaways
- Liquid staking turns staked ETH into a tradable token that still earns staking rewards.
- LSTs either rebase (balance grows) or accrue value (exchange rate grows).
- Core risks are smart contract bugs, slashing, and the token trading below its ETH value.
- Leverage loops can turn a small depeg into forced liquidations.
- Large providers concentrate stake, which is a risk to Ethereum itself.
- Check exit liquidity, withdrawal times and upgrade controls before you stake.
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