Ethereum is a proof of stake (PoS) blockchain that allows anyone to validate transactions by staking ETH, contributing to overall network security. Yet the minimum threshold to run a validator is set at 32 ETH, making it inaccessible to the average user. 

Pooled staking lowers staking entry barriers, allowing you to stake less than the threshold amount and still receive a share of staking rewards. But staked Ethereum, whilst locked up, cannot traditionally be used for other purposes. 

Enter liquid staking, where your staked positions are tokenized into Liquid Staking Tokens (LSTs), otherwise known as Liquid Staking Derivatives (LSDs), and these derivative tokens can be used elsewhere while your ETH continues to generate yield. This makes staking more accessible while unlocking new dimensions of capital efficiency in the ecosystem. But how did we get to this point, and are LSTs equivalent to the underlying asset?

The evolution of staking: from locked to liquid ETH

To understand liquid staking and restaking, it's helpful to understand conventional staking mechanics. In PoS systems, participants lock up their assets to be able to validate transactions and earn block rewards. This model comes with inherent limitations:

1. Capital inefficiency: Staked assets are only committed to one thing. That same capital can not be used in other economic contexts.
2. High entry barriers: The requirement of significant capital (like Ethereum's 32 ETH) excludes many potential participants.
3. Lack of flexibility: Long unbonding periods make it difficult for stakers to respond to market conditions or meet personal financial needs quickly.

Liquid staking addresses these limitations by tokenizing your staked position. When you stake through a liquid staking protocol such as Lido, Rocket Pool, StakeWise, and so on, you receive a derivative token representing your staked ETH. This token is called a liquid staking token (LST), and it represents a claim on the underlying staked ETH plus any accrued rewards. Each platform provides its own derivative token (e.g. stETH, rETH, and osETH, for the three mentioned above), which we'll get into later.

As long as you hold an LST, the token continues to accrue yield from the staked ETH. And on top of that, LSTs can be traded or used to interact with decentralized apps (dApps). In general, an LST has a lot in common with an LP token, which represents liquidity provision in tokenized form, in that it frees up capital, ensuring that users who provide benefits to the network or project are not put at a disadvantage. 

Liquid staking tokens bring several net-positive benefits for the ecosystem and liquid staking solutions have grown to represent a majority of all staked ETH. You don’t need 32 ETH to stake through a staking pool or liquid staking protocol. With much lower minimums, more participants can engage in network security and earn staking rewards without completely locking up their assets.

With liquid staking tokens, your staked assets are no longer idle. The liquid representation of your stake can be used across various DeFi protocols: you can trade LSTs on Matcha, use your staked position as collateral, bridge to other networks, restake to secure other networks, and so on, without needing to unstake. This gives you much greater flexibility and improves liquidity across the crypto space. 

How does liquid staking work?

If you want to start using liquid staking for yourself, here’s how it works. There are four stages to understand before you begin:

• Staking: You will deposit your ETH into a liquid staking protocol. These protocols operate validator nodes or distribute the ETH across a network of node operators to secure the underlying network.
• Tokenization: In return for your deposited ETH, you will receive a proportional amount of liquid staking tokens issued by the pool operator. For instance, if you stake with Lido you will be given stETH, while Rocket Pool issues rETH. These tokens represent a claim on the staked ETH plus any accrued rewards. LSTs can be traded on Matcha across EVM networks. 
• Earn yield: The protocol's validators earn rewards for any validated blocks, and this is distributed to the stakers in proportion to the amount they committed to the stake pool. This value is accumulated by the staked token in the form of a better exchange rates between the LST and the underlying ETH, so when you unstake you wil get the ETH you deposited plus the equivalent ETH representing your accrued rewards. 
• Unstaking: If you wish to unstake and exchange your LST in return for ETH, you can unstake through the protocol’s platform, which may include a wait time, or you can trade your liquid staking tokens on the open market immediately using Matcha.

This system creates a self-sustaining cycle: as more ETH is staked, the network becomes more secure, potentially increasing the value of ETH. This in turn, would make the value represented by the liquid staking tokens increase, and any rewards they acquired. LSTs also make the network more liquid, improving utility across the space as a whole!

Differences between Staked ETH and Wrapped Staked ETH 

Staked ETH tokens and wrapped staked ETH differ from the traditional understanding of native tokens and wrapped tokens. With Staked ETH, the amount of token you hold will increase over time in proportion to your original stake (through a process known as rebasing), whereas with wrapped stake ETH, the token amount remains the same while the exchange rate of the asset will change to account for staking rewards.

This key difference makes wrapped staked ETH practical in contexts where it is inconvenient for the balance of tokens to increase; in general, dApps are built to work with a constant amount of tokens and cannot support tokens that increase over time. 

What can you do with liquid staked ETH?

Liquid staking tokens can be used in much the same way as other tokens in DeFi, though they may need to be wrapped beforehand. Here are some ways Liquid Staking Tokens extend the utility of staked ETH and can compound the overall value extracted from your staked positions:

• Collateral on lending platforms: Many LSTs including Lido stETH and Rocketpool rETH can be deposited as collateral on platforms like Aave, in order to borrow other assets like USDC or DAI. This means you can exchange your LSTs for more liquid assets like stablecoins while continuing to earn staking rewards. 
• Providing liquidity on DEXs: Many decentralized exchanges have LST pools to meet trading demand, enabling Matcha to get the best prices on LST trades. By depositing LSTs into a pool, you may be able to benefit from pool fees as well as the staking rewards. 
• In yield aggregators: Many yield optimizers allow you to deposit LSTs into their vaults, where the platform will automatically allocate funds across different DeFi protocols to maximize returns. 
• Liquid staking In governance protocols: While LSTs are generally not used as governance tokens, some protocols have begun exploring a liquid staking model that would allow tokens committed to vote, to remain liquid and usable in other contexts, helping to align incentives for voters.

The best Liquid Staking platforms

As liquid staking has become more popular, the number of liquid staking apps has also grown. This has somewhat helped decentralized liquid staking, as less ETH is controlled by one entity. We’ll cover some of the most popular decentralized platforms, in terms of ETH staked through the platform.

Lido and stETH

Lido has long held the top position in terms of TVL, with over 300,000 validators amounting to almost 30% of all ETH being staked through its platform, and stETH seeing as much as $200M in onchain trading volume (accounting for 70%+ of all LSD volume). That said, Lido’s market share has decline by around 5% in 2024 as competitors have grown, a trend that helps assuage fears of too much centralization in ETH staking.

RocketPool and rETH

RocketPool is a smaller but popular platform that has around 22,000 validators amounting to 2% of all staked ETH. RocketPool’s rETH token differs from stETH in that there is no wrapped version. Instead, rETH itself increases in value as rewards are earned instead of quantity of tokens changing, mirroring the mechanics of wrapped stETH. RocketPool has around 4% market share among LSD tokens. 

Mantle mETH

Mantle is a Layer-2 network with its own staking derivative, mETH. This serves as a receipt token that can be redeemed for accumulated staking rewards plus the initial staked ETH. mETH accounts for around 4% of LSD market share, just behind rETH. 

Frax and sfrxETH

Frax offers multiple products but is mostly focused on stablecoins. frxETH is an asset pegged to Ethereum that serves as a supplement for WETH, and it can be staked in return for sfrxETH to accrue yield. As with rETH or wstETH, the sfrxETH to frxETH exchange rate increases over time as staking rewards are earned. Around 1% of the LSD marketshare is sfrxETH.

wBETH, cbETH and others

Some centralized exchanges that offer pooled staking have also launched liquid staking tokens of their own. wBETH from Binance accounts for over 11% of LSD market share and cbETH by Coinbase around 3%. As users will want to redeem these tokens for ETH at some point, it is generally preferable not to have to depend on a centralized custodian, but since both of these tokens accrue rewards in terms of an increasing exchange rate you can trade them directly to ETH on a DEX like Matcha, allowing CEX users contributing to the overall staking ecosystem.

Restaking

Liquid staking has been tremendously important for Ethereum and other ecosystems by unlocking the value that was previously solely committed to securing a network. Restaking takes this a step further, pushing the boundaries by allowing LSTs to be staked in order to secure additional chains. 

Protocols like EigenLayer are among restaking’s pioneers. With restaking, you lock up the liquid tokens that represent your staked position in another staking protocol, allowing you to commit that liquid capital to secure additional networks. Your original original deposit is now contributing to validation of two networks, meaning greater capital efficiency and potentially entitling you to more rewards. 

As well as liquid staking tokens, staking protocols have been quick to offer Liquid Restaking tokens (LRTs), where your restaked position is tokenized and can be used in other contexts, just like an LST. This means that as well as the other benefits listed here, you can continue to interact with DeFi protocols using your LRT despite the fact that your capital has been staked twice! 

Restaking amplifies economic potential for the ecosystem in a number of ways:

1. Layered security: By restaking your liquid staking tokens, you’re able to use the same base capital to secure multiple infrastructure layers. This could include layer 2 (L2) solutions, cross-chain bridges, or even separate blockchain networks. This does however introduce additional risk due to complex dependencies.  
2. Compounded yields: Restaking allows you to simultaneously earn rewards from multiple sources. You could earn staking rewards from Ethereum, additional rewards from securing another network, and potentially also use the liquid tokens in DeFi – all with the same initial capital. Of course, these also introduce the potential for exploits, failures or other issues which could lead to you losing your initial deposit. 
3. Enhanced network effects: As restaking allows capital to be more efficiently allocated across the ecosystem, it can accelerate the growth and security of nascent protocols that might otherwise struggle to bootstrap their security.
4. Risk diversification: You can diversify your risk exposure by distributing staked assets across multiple protocols or use cases. However, it's important to note that this may also introduce additional smart contract risks.

Difference between liquid staking and restaking: liquid staking can improve capital efficiency by minting new derivative assets for use across DeFi, while the initial assets are locked in a staking protocol. Restaking lets you compound returns by taking those derivative assets and committing them to be staked elsewhere, securing other protocols. 

The best Restaking platforms

Restaking is a fairly new service but the number of platforms has grown rapidly. The largest is EtherFi which offers several direct routes to restake directly from native ETH, with eETH being the most common LRT in circulation.

EtherFi and eETH

As mentioned, EtherFi is the leading staking platform with over $5.5B in TVL. eETH is the LRT issued by EtherFi which is used to distribute restaking rewards, though EtherFi also offer retaking via Symbiotic or Karak, which issue the weETHs and weETHk LRTs, respectively. One point to note is that the eETH APR shown by EtherFi is inclusive of both staking and restaking yields, and therefore the cumulative total of rewards you will receive. eETH maintains a 1:1 rate with ETH, instead increasing in amount to reflect rewards.

Puffer and pufETH

Puffer is the second-largest staking platform with around 1.4B in TVL. It distributes staking rewards through the pufETH token. Puffer’s platform gives access to combined rewards from Ethereum, as well as EigenLayer and Puffer points, which accrue over time.

Renzo and ezETH

Renzo is another popular platform for restaking, and provides a choice of ezETH via EigenLayer, pzETH via Symbiotic, or ezEIGEN which uses EIGEN token instead of ETH. ezETH exchange rate with ETH increases to reflect accrued rewards.

Are there any risks to liquid staking?

As with any system, there are risks to liquid staking, and these risks increase when the liquid staking derivative is restaked. One of the main risks is slashing, a way to penalize bad actors that serves as an essential part of most staking protocols. 

Slashing: 

PoS systems are dependent on validators. If validators misbehave, the network can slash them (penalize them). Slashing is a penalty for validators or stakers who engage in malicious activity or fail to perform their duties. If a staker is slashed, all or part of the staked assets may be:

• Simply removed from their holdings.‍
• Burnt and permanently removed from circulation.
• Redistributed to other stakers or the network as a form of compensation or incentive for good behavior.

Many liquid staking protocols have safeguards in place to avoid slashing but it remains a risk to be aware of as slashing can occur on the underlying protocol (i.e. Ethereum mainnet) as well as on at the “restaked” layer. 

Other risks:

Other risks of staking tokens take a more general character:

1. Smart contracts: Liquid staking protocols often rely on complex smart contracts. Any vulnerabilities in these contracts could lead to loss of funds. There’s no simple or sole solution to this, though protocol auditing can help minimize risk.  
2. Market risks: The value of liquid staking tokens can fluctuate based on market conditions causing LSTs or LRTs to lose their peg in a broader way. 
3. Complexity: Especially when it comes to restaking, the added layers of complexity can make it difficult for users to understand their risk exposure fully.

Despite these risks, the speculative benefits of liquid staking have led to rapid adoption of LSTs and LRTs. As of 2024, 28% of all staked assets are liquid staked through Lido, demonstrating the market demand for LSTs.

Different liquid staking platforms

While Ethereum has been at the forefront of liquid staking innovation, the concept has rapidly spread to other proof-of-stake networks. Cosmos, Polkadot, and Solana, among others, all leverage liquid staking platforms to improve capital efficiency within their respective ecosystems. The total market cap for staked tokens across Web3 is $60 Billion at the time of publication.

Popular liquid staking platforms include:

• Ethereum: Lido is the most popular LST platform in the Ethereum ecosystem, followed by Rocketpool and Renzo. ETH LSTs are leading the way. 
• Solana: Marinade Finance is the leading liquid staking platform. Marinade issues mSOL tokens that represent staked SOL. mSOL can be used across the Solana DeFi ecosystem.
• Cosmos: pSTAKE is a liquid staking protocol that unlocks liquidity for staked assets across various proof-of-stake chains, including Cosmos. Stride also provides liquid staking services for the Cosmos ecosystem.
• Polkadot/Kusama: Bifrost focuses on providing a unified liquid staking solution across multiple blockchains like Polkadot and Kusama. Their vTokens (vDOT, vKSM, etc.) represent staked assets on these networks.
• Multi-Chain: Ankr offers liquid staking for a variety of blockchains, including Ethereum, Avalanche, BNB Chain, Polygon, and Fantom. Their aETH tokens (and equivalents for other chains) provide access to DeFi applications across the supported network.

Should you liquid stake or restake?

Liquid staking has provided an unexpected economic boom for the Ethereum ecosystem. Unlocking staked assets' liquidity and crypto-economic power redefines the crypto economy's concept of assets. For stakers, liquid staking and restaking offer better ways to participate in network security and promises potentially higher yields. Whether you have 0.1 ETH or 1000 ETH, fractionalized staking allows anyone to have a place in this new staking paradigm. 

If you want to own LSTs or LRTs but don’t have access or patience to stake, you can always use Matcha. Likewise, to trade LSTs or LRTs for the underlying ETH with no fees, you can simply trade them using matcha.xyz. Try it now for all your liquid staking and staking needs!