What it really is
Classic proof of stake staking has two annoying limitations. First, your staked ETH is locked — you cannot trade or use it while it is staking. Second, running a validator requires 32 ETH and ongoing technical operations. Most ETH holders cannot meet either bar, and even those that can usually do not want their capital sitting idle.
Liquid staking solves both. You deposit ETH (any amount) into a liquid staking protocol; the protocol pools deposits, runs the validators, and gives you a token representing your staked position. The token earns staking rewards continuously — its value grows or your balance grows, depending on the model — and you can move it freely on-chain. You can swap it back to ETH, use it as collateral in lending markets, provide liquidity in DEX pools, or deposit it in restaking protocols like EigenLayer.
Lido was the breakout product, and its stETH is the largest LST by a wide margin. The category that grew around it — LST tokens, restaking, and the DeFi infrastructure built on top — is one of the most consequential DeFi innovations of the past few years.
How it actually works
The Lido model (the dominant pattern) works like this:
- You deposit ETH into the Lido protocol smart contract. There is no minimum; you can stake 0.1 ETH or 10,000 ETH.
- Lido pools deposits and delegates them across a curated set of validator operators (currently dozens, voted in by Lido governance).
- Lido issues you stETH at a 1:1 ratio with your deposit at the moment of staking.
- stETH rebases daily — your balance increases as staking rewards accrue. If the underlying staking yield is 3%, your stETH balance grows by roughly 3% per year, distributed in small daily updates.
- You can swap stETH back to ETH at any time via withdrawals (Lido supports direct unstaking now) or on secondary markets (Curve, Uniswap, etc.).
- Lido takes a 10% fee on rewards; the rest goes to stETH holders.
Other liquid staking models (Rocket Pool, Coinbase Wrapped, Mantle, others) differ in details but follow the same core pattern: a protocol stakes ETH for you, gives you a tradeable token, and the token tracks your staked position. Some use a wrapped non-rebasing version (wstETH instead of stETH) for cleaner DeFi composability.
Simple example with numbers
You hold 10 ETH and want staking yield.
- You deposit 10 ETH into Lido and receive 10 stETH.
- One year later, assuming a 3.2% net staking APY, you hold about 10.32 stETH (Lido already netted out the 10% protocol fee from the gross ~3.55% staking yield).
- You can swap your 10.32 stETH back to roughly 10.32 ETH via Lido withdrawal or on Curve (with a tiny spread).
- Alternatively, throughout the year you could have used your stETH as collateral on Aave to borrow stables, provided stETH-ETH liquidity on Curve for additional swap fees, or deposited stETH into EigenLayer for restaking points and protocol incentives.
The same logic applies to staking SOL through Marinade (mSOL), Jito (jitoSOL), or other liquid staking products. SOL liquid staking is meaningful on Solana but smaller in dollar terms than Ethereum LSTs.
The mechanics behind
Rebasing vs wrapped LSTs
Lido issues two forms of its token:
- stETH rebases: the price stays close to ETH, and your wallet balance grows as rewards accrue. Familiar interest-style UX. Some DeFi protocols handle this badly (rebasing tokens break certain accounting models).
- wstETH wraps stETH at a fixed exchange rate, then lets the wrapped token's price appreciate over time relative to ETH. The balance stays constant. DeFi-friendly because the contract behaves like a normal ERC-20.
Most DeFi integrations now standardize on wstETH for composability, while stETH remains the user-facing form. They are 1:1 convertible.
The Lido dominance question
Lido has historically held a very large share of staked ETH — at one point around 30%+ of all staked ETH. This is a real concern for Ethereum decentralization: if any single liquid staking provider controls a majority of validators, the chain's censorship resistance and resilience are compromised. The community has actively discussed solutions (DVT — distributed validator technology, Lido's own staking module diversification, alternative LST competition). Holder concentration has eased somewhat as Rocket Pool, Coinbase Wrapped, Mantle, Frax, and others have grown.
Restaking and EigenLayer
Restaking, popularized by EigenLayer in 2024, lets you take an LST (or native ETH) and stake it again to provide security to other protocols — bridges, oracles, data availability layers, novel rollups. The reward is additional yield from those protocols (paid in their own tokens or in ETH). The risk is additional slashing: misbehavior of the secondary protocol can slash your underlying stake. EigenLayer launched, generated a huge wave of "restaking points" airdrop farming, and seeded a category called "AVSs" (Actively Validated Services) — but the model is still maturing and the actual long-term yields and slashing risks are not yet fully calibrated.
Liquid restaking tokens (LRTs) — eETH (ether.fi), rsETH (KelpDAO), ezETH (Renzo), pufETH (Puffer) — wrap restaked positions in their own tradeable token, adding another contract layer on top of the LST layer on top of the staking layer.
The risks worth knowing
- Smart contract risk. The liquid staking protocol holds your ETH via smart contracts. A bug in those contracts can result in losses. Lido and Rocket Pool have years of audits and operation; smaller LST providers vary widely.
- Slashing risk. If a validator misbehaves (double-signs, goes offline), some of the staked ETH can be slashed. Liquid staking pools spread this risk across many validators, but a coordinated event would still hit LST holders. Restaking adds slashing from secondary protocols.
- LST de-peg risk. Under stress, stETH (or other LSTs) can trade at a discount to ETH on secondary markets — historically 1-5% briefly, larger in extreme stress (June 2022 saw stETH at 0.95 ETH for weeks during Celsius / 3AC contagion). This matters if you hold LSTs as collateral in lending markets — a discount can trigger liquidations even when the underlying ETH is unaffected.
- Centralization risk. Lido's share of total staked ETH is a structural risk for Ethereum. The community has watched it carefully; no resolution has been forced but the concern is real.
- Restaking risk stacking. Liquid restaking tokens stack three layers of risk: the staking layer, the LST layer, and the restaking + AVS layer. Each is reasonable in isolation; together they have not yet been tested through a full market cycle.
- Withdrawal queue risk. Direct unstaking has a queue (varies with network conditions). If you need ETH out immediately, you use secondary markets — and the spot LST price may differ from NAV.
None of this is financial advice. Liquid staking is a real, productive innovation — but the "liquid" name can mislead users into thinking they get all the benefits with none of the costs. The costs are smart contract risk, LST de-peg risk, and (in stacked products) restaking risk.
Who it actually suits
Suits: ETH holders who want staking yield but also want their capital usable in DeFi; users with under 32 ETH who cannot solo stake; users comfortable with smart contract risk in exchange for liquidity and composability; users who want to swap or rebalance staking exposure without unstaking.
Does not suit: users who want minimum risk and are comfortable locking ETH directly with a solo validator or trusted institutional staker; users who do not understand or accept smart contract risk; users uncomfortable with one provider (Lido) holding a large share of network stake.
For a fuller treatment of staking generally, see what is staking; for the proof-of-stake mechanic that makes any of this possible, see what is proof of stake.
Watch the stETH discount, watch the news
LST prices can drift from NAV during stress events, and protocol risks (slashing incidents, oracle issues, restaking AVS launches) are best caught early. Zippfeed tracks DeFi, security, and protocol headlines with sentiment and importance scoring, so you can see Lido governance moves, restaking-related incidents, and LST de-peg signals early — useful whether you hold stETH, run an LST-collateralized leveraged position on Aave, or are evaluating how much of your ETH exposure should be liquid-staked.
