What Is Liquid Staking in Crypto? How It Works and Why It Matters

Key Takeaways

• Liquid staking enables users to stake crypto assets and still use them as a tradable asset. You get a receipt token for your stake that you can trade, lend, or use in DeFi.
• You continue to earn staking rewards (just like normal staking) while holding the liquid token. In effect, you get double use: rewards and liquidity.
• Major protocols like Lido, Rocket Pool, Marinade, and exchanges (Coinbase, Binance) offer liquid staking. They issue tokens like stETH, rETH, mSOL, cbETH, and others.
• Unlike traditional staking (which locks your crypto), liquid staking keeps your assets “active.” This means lower entry barriers (no need to run a node or meet high minimums).
• The flipped side: liquid staking carries risks, your stake is still exposed to things like validator slashing or smart contract hacks. Also, the price of the liquid staking token can drop if markets crash.

What Is Liquid Staking?

Liquid staking is a way to lock up (stake) your crypto for PoS networks while still keeping it available for trading or lending. Normally, when you stake coins (like ETH on Ethereum), those coins are locked, and you can’t use them elsewhere. Liquid staking solves this by giving you a new token in return. This token represents your stake and can be traded or used in DeFi, even though the original coins remain staked. For example, if you stake ETH via Lido, you get stETH back. You still earn the ETH staking rewards, and you can also use that stETH token to participate in DeFi (like providing liquidity or as collateral). In short, liquid staking provides all the benefits of traditional staking plus the bonus of liquidity.

How Liquid Staking Works With Different Cryptocurrencies

Liquid staking operates on many Proof-of-Stake blockchains, each with its own tokens. For example:

• Ethereum (ETH): Platforms like Lido and Rocket Pool let you stake ETH and issue tokens such as stETH or rETH that track your staked ETH. These tokens rise in value as you earn rewards, but can be traded or used in DeFi immediately.
• Solana (SOL): Protocols like Marinade or Jito let you stake SOL and get mSOL or jitoSOL tokens in return. These tokens let you keep earning Solana rewards while still using your funds in DeFi.
• Polygon (MATIC): Lido issues stMATIC for staked MATIC on Polygon.
• Others: Many chains support or are developing liquid staking. For example, Polkadot (DOT) has solutions like rDOT via StaFi, and Cosmos (ATOM) has liquid staking through partners. Even Cardano (ADA) and Avalanche (AVAX) have liquid staking projects. In general, if a blockchain has staking, chances are someone is working on a liquid staking service to enable users to stake their assets.

Each network’s liquid staking works on the same principle: you send coins to a staking pool and get a new liquid token back. That token earns the same rewards your coins would, but stays usable.

Liquid Staking vs. Traditional Staking

Traditional staking means locking your coins in a validator or node. Your coins are put to work securing the network, and you earn rewards, but you cannot touch them until you unstake (and often wait through an unbonding period). There are also high entry barriers: for example, Ethereum normally requires a 32 ETH minimum to run a validator node.

In contrast, liquid staking allows you to stake any amount (even small amounts) and still get rewards, while giving you a token you can use. The key difference is custody: traditional staking ties up your coins, whereas liquid staking gives you a tradable “receipt” of your stake. This means with liquid staking:

• Liquidity: You keep a tokenthat you can trade or lend.
• Flexibility: Liquid staking offers flexibility that traditional staking methods often lack. You can participate in DeFi and still earn staking rewards You can participate in DeFi and still earn staking rewards.
• Lower barriers: No need to run your validator or meet large minimums.

Put simply, with traditional staking, your money is locked away for a period. With liquid staking, you still lock the coins in the network, but you immediately get a liquid token back, so your value isn’t frozen.

Centralized vs. Decentralized Liquid Staking

Liquid staking can happen in a decentralized way or via a centralized service. In decentralized liquid staking, protocols like Lido or Rocket Pool use smart contracts and multiple node operators. You retain control through code (non-custodial). If something goes wrong (like a bug), the risk is smart contract exploits.

In centralized liquid staking, an exchange or platform runs the staking service. For example, Coinbase or Binance might let you stake and give you a token. In that case, the exchange holds your coins (custodial) and issues the token. The key difference is trust: decentralized services rely on code and multiple validators, while centralized services require trusting the company with your crypto assets. Each has trade-offs. Decentralized pools are “trustless” but carry smart-contract risk, whereas centralized providers can fail or freeze withdrawals.

Benefits of Liquid Staking

• Unlocked Liquidity: Your staked coins normally would be locked up. Liquid staking gives you a token that you can still buy, sell, or use as collateral, enhancing the liquidity of your crypto assets. This unlocks the asset’s value, a key advantage of liquid staking.
• DeFi Composability: The receipt tokens (like stETH) can be used across DeFi – for example, in lending pools, AMMs, or yield farms. You can earn extra returns by putting that token to work, on top of base staking rewards.
• Earn Staking Rewards and More: You get all the base rewards for staking (block rewards, fees) and you can also earn additional yield using your LST in other protocols. In effect, you keep getting paid for staking while doing other things with the token.
• No Node Required: You don’t need to run a validator or keep 24/7 uptime. Liquid staking providers handle the infrastructure. That means anyone can stake and earn rewards without technical hurdles, and without needing large minimum amounts.
• Flexible Entry: This is one of the advantages of liquid staking compared to traditional staking methods. Since you receive a token for your stake, even small holders can join in. For example, Lido lets you stake even a fraction of 32 ETH and still get rewards, whereas traditional staking required 32 ETH per node.

Risks and Limitations of Liquid Staking

• Slashing Risk: Understanding slashing risk is crucial in evaluating the safety of various staking methods, including liquid staking. If the validator or staking service misbehaves or goes offline, your stake can be penalized or slashed. In that case, the value backing your LST token goes down. You’re still vulnerable to the underlying network’s penalties.
• Smart Contract Exploit: Liquid staking relies on smart contracts. A bug or hack in the protocol could drain funds, and users might lose their stake. Always assess the security of any staking service.
• Price Volatility: The liquid token is not guaranteed to always equal the value of the underlying asset. In a sudden market crash or liquidity crunch, the LST token’s price can drop below the crypto asset it represents. If many people try to exit at once, the token can trade at a discount, causing losses on sale.
• Protocol Risk: If a staking protocol is poorly managed or becomes insolvent, you could have trouble redeeming your tokens. In centralized offerings, there’s counterparty risk if the exchange holds your coins.
• Opportunity Cost of Rewards: Sometimes, liquid staking rewards can be slightly lower than pure staking rewards, since part of the yield may go to the service provider. Also, fees or dilution of the LST token may apply.

In summary, liquid staking adds flexibility at the cost of some new risks. Users must trust the protocol and be ready for market ups and downs.

Liquid Staking Tokens and Protocols

Liquid staking protocols are the service platforms, and Liquid Staking Tokens (LSTs) are the new tokens you receive when staking. Each protocol issues its tokens. Some key examples:

• Lido: Currently, the largest protocol for liquid staking enables users to maximize their crypto assets. It issues stETH (for staked ETH), stMATIC (for Polygon’s MATIC), and stSOL (for Solana’s SOL). Lido pools users’ coins and distributes rewards daily to stETH holders.
• Rocket Pool: A decentralized Ethereum staking protocol that issues rETH tokens A decentralized Ethereum staking protocol that issues rETH tokens. Anyone can stake ETH with Rocket Pool (no minimum) and get rETH in return.
• Marinade: A major Solana protocol A major Solana protocol. It lets you stake SOL and receive mSOL, which grows with rewards.
• Coinbase/TrustToken: Some centralized services issue their own LSTs. For instance, Coinbase issues cbETH for ETH staked through its platform.
• Others: Ankr, Frax, and many chains have their own liquid staking platforms (e.g. For example, stAVAX on Avalanche is a popular liquid staking asset. Each issues a token representing the staked asset plus accrued rewards.

These LSTs can be swapped, traded, or used like any other crypto. Behind the scenes, protocols like Lido or Rocket Pool run validators and keep your actual coins staked. You just interact with the tokens they mint.

Popular Cryptocurrencies That Support Liquid Staking

Several major crypto networks support liquid staking:

• Ethereum (ETH): Since Ethereum Since moving to PoS, liquid staking offers significant advantages to users, making it very popular. Tokens like stETH, rETH, and cbETH represent staked ETH on networks like Lido, Rocket Pool, and Coinbase.
• Solana (SOL): Protocols like Marinade issue mSOL for staked SOL. Solana’s fast network and DeFi ecosystem make mSOL widely used.
• Polkadot (DOT): Networks like Polkadot have liquid staking options (e.g. rDOT through StaFi) that allow staking DOT and using the derivative tokens in DeFi.
• Cardano (ADA): Cardano is PoS, and projects are emerging to offer liquid staking for ADA (for example, Indigo Protocol on Cardano). These give tokens representing staked ADA.
• Avalanche (AVAX): Avalanche users can stake AVAX on platforms like Benqi Finance and get staked-AVAX tokens. LSTs on Avalanche let you use AVAX liquidity while earning staking rewards.
• Cosmos (ATOM): Cosmos ecosystems (via IBC and DeFi) are also building liquid staking, issuing tokens that represent staked ATOM.

In short, any PoS chain can have a liquid staking service. Ethereum, Solana, Polkadot, Cardano, Avalanche, Cosmos, and many others are either live or preparing liquid staking solutions.

Future of Liquid Staking

Liquid staking is already a huge part of crypto, and it’s growing rapidly. Experts expect major expansion ahead: for example, industry projections see $40 billion in staking rewards by 2025, much of which will flow through liquid staking channels. Some notable trends:

• Explosive Growth and TVL: Liquid staking (and staking overall) now dominates DeFi. There are tens of billions locked in LST protocols. For example, the Lido protocol alone holds billions in staked ETH. This scale is raising awareness: Lido’s share of staked ETH (over 30%) has highlighted centralization risks.
• Restaking and Derivatives: New models like restaking are emerging. Restaking lets you use your LST or staked asset to secure another network (like EigenLayer), highlighting the advantages of liquid staking. Already over $18 billion has moved into restaking platforms (EigenLayer saw $400 million jump to $18.8 billion in a few months). Expect more multi-layer earning schemes, where staked funds pull double or triple duty.
• Cross-Chain Staking: Future protocols will likely link staking across chains. We’ll see more cross-chain liquid staking solutions and unified staking interfaces, making it easy to stake one asset and get rewards or tokens on another chain.
• Technology and Security: Innovations like Distributed Validator Technology (DVT) will make staking more secure and decentralized. Privacy-preserving staking and better smart contract audits will improve safety.
• Institutional Adoption: Big exchanges and institutions are pushing staking hard. Many platforms now offer dozens of staking assets, and yield curves (2–20% APY) look attractive compared to traditional finance. Liquid staking fits right in, since it adds liquidity to the institutional capital locked in staking.
• Regulation: As staking grows, clearer rules will likely appear. Regulators are looking at how to treat staking services and tokens. Future frameworks may standardize how protocols report rewards and protect investors. Better compliance and audit tools are on the way.

In summary, liquid staking is poised to become even more mainstream. New staking derivatives, restaking tokens, and deeper DeFi integration will make these assets more useful and widespread. As the market matures, expect greater scale (more TVL), better tools for safety, and ever-tighter links between staking and the rest of crypto finance.

FAQ

Is liquid staking worth it?

Liquid staking is an innovative approach that allows users to stake their assets while still earning staking rewards. Unlike traditional staking, where assets are locked up and inaccessible, liquid staking enables users to participate in the staking process via a liquid staking protocol. This method provides liquidity by issuing liquid staking tokens, allowing users to retain access to their staked assets and engage in decentralized finance (DeFi) activities.

What are the risks of liquid staking?

Liquid staking is a revolutionary concept in the decentralized finance (DeFi) market that allows users to participate in staking without locking up their assets. Unlike traditional staking, which requires a minimum staking amount and often ties up funds for a set period, liquid staking provides users with access to their staked assets through liquid tokens. This innovative approach enables users to earn staking rewards while still having the flexibility to trade or use their assets.

What is the difference between liquid staking and staking?

Liquid staking refers to a revolutionary method in the cryptocurrency space that allows users to participate in staking without the typical restrictions of traditional staking services. Unlike traditional staking where tokens are locked for a set period, liquid staking involves receiving liquid staking tokens that represent staked assets, enabling token holders to maintain access to their funds while still earning staking rewards.