Liquid staking solved one of crypto's biggest problems: the choice between earning staking rewards and using your assets in DeFi. With LSTs, you can do both. Stake your ETH, receive a liquid token representing your staked position, and use that token across DeFi—all while earning base staking rewards. This guide covers everything from basics to advanced LSTfi strategies.
We'll compare the major liquid staking protocols, explain how to stack yields with LSTs in DeFi, and cover the risks you need to understand. Whether you're new to staking or looking to optimize existing positions, this comprehensive guide has you covered.
📑 What You'll Learn
- • How liquid staking works
- • Major LST protocols compared (Lido, Rocket Pool, Frax, etc.)
- • LSTfi: stacking yields with liquid staking tokens
- • Restaking and EigenLayer
- • Risks of liquid staking
- • Optimal LST strategies by risk profile
How Liquid Staking Works
Traditional ETH staking requires locking 32 ETH with a validator. Your ETH earns rewards but is completely illiquid—you can't use it for anything else. Liquid staking protocols solve this by pooling user deposits, running validators, and issuing liquid tokens representing your share.
The Liquid Staking Process
1. Deposit ETH to liquid staking protocol
2. Protocol stakes ETH with validators
3. You receive LST (stETH, rETH, etc.) representing your stake
4. Staking rewards accrue to your LST (price increases or balance increases)
5. Use LST freely in DeFi while earning base staking yield
6. Redeem LST for ETH + rewards when desired
Rebasing vs Value-Accruing LSTs
Rebasing (stETH): Your token balance increases daily. Deposit 10 stETH, wake up with 10.001 stETH. Same value per token, more tokens.
Value-Accruing (rETH): Your token count stays constant, but each token becomes worth more ETH over time. 10 rETH today might be redeemable for 10.5 ETH in a year.
Value-accruing tokens are simpler for DeFi integrations (no rebasing logic needed) and may have tax advantages in some jurisdictions. Rebasing is more intuitive for users to understand.
💡 Key Insight
LSTs trade on secondary markets and can deviate from their "fair value" (1 stETH should equal 1 ETH + rewards). During market stress, LSTs have traded at discounts. This creates both risks (if you need to exit quickly) and opportunities (buying discounted LSTs).
Interactive: Liquid Staking Calculator
Compare different LST protocols and calculate your expected yields with and without additional DeFi strategies.
TVL: $15B • Decentralization: medium
Position Value
$20,000
Annual Yield (ETH)
0.600 ETH
Annual Yield ($)
$1,200
stETH can be used as collateral on Aave, in Curve pools, or for leveraged staking on Morpho. Stack yields: base staking + lending/LP returns. But more layers = more smart contract risk.
Major LST Protocols Compared
Lido (stETH)
The dominant liquid staking protocol with ~30% of all staked ETH. stETH is the most liquid and widely integrated LST.
Token: stETH (rebasing)
APY: ~3.5%
Fee: 10% of rewards
TVL: ~$15B
Decentralization: Medium (curated operator set)
DeFi Integration: Excellent (Aave, Curve, everywhere)
Pros: Best liquidity, widest DeFi support, battle-tested
Cons: Centralization concerns (validator concentration), rebasing complexity
Rocket Pool (rETH)
The most decentralized liquid staking option. Permissionless validator network—anyone can run a node with 8 ETH + RPL collateral.
Token: rETH (value-accruing)
APY: ~3.2%
Fee: ~14% of rewards (varies by node operators)
TVL: ~$3B
Decentralization: High (permissionless operators)
DeFi Integration: Good (growing adoption)
Pros: Most decentralized, value-accruing (simpler), ETH-aligned
Cons: Lower liquidity than stETH, slightly lower APY (more operators = more fees)
Frax Ether (sfrxETH)
Highest yield LST through a dual-token system. frxETH doesn't earn yield; users stake frxETH for sfrxETH to receive all staking rewards.
Token: sfrxETH (value-accruing)
APY: ~4.2%
Fee: 10% of rewards
TVL: ~$500M
Decentralization: Low (Frax validators only)
DeFi Integration: Good (Frax ecosystem, Curve)
Pros: Highest base APY, value-accruing, Frax ecosystem synergies
Cons: Centralized validators, smaller and newer
Comparison Table
| Protocol | APY | Liquidity | Decentralization |
|---|---|---|---|
| Lido (stETH) | 3.5% | Excellent | Medium |
| Rocket Pool (rETH) | 3.2% | Good | High |
| Frax (sfrxETH) | 4.2% | Medium | Low |
| Coinbase (cbETH) | 3.0% | Good | Low |
LSTfi: Stacking Yields
LSTfi (LST-based DeFi) lets you earn additional yield on top of base staking rewards. Your LST can work in DeFi while continuing to accrue staking yield.
Strategy 1: Lending
Deposit stETH/rETH as collateral on Aave or Compound. Earn lending yield on top of staking yield, or borrow against it.
Base staking: 3.5%
+ Aave supply: ~1%
= Total: ~4.5% APY
Strategy 2: Liquidity Providing
Provide liquidity in stETH/ETH pools on Curve or Balancer. Earn trading fees + incentives while maintaining staking exposure.
Base staking: 3.5%
+ Curve LP fees: ~2%
+ CRV/CVX incentives: ~3%
= Total: ~8.5% APY (with incentives)
Strategy 3: Leveraged Staking
Use LST as collateral, borrow ETH, stake borrowed ETH for more LST, repeat. Amplifies staking yield but adds liquidation risk.
Deposit 10 ETH worth of stETH
Borrow 5 ETH against it
Stake borrowed ETH for more stETH
Effective position: ~15 ETH of staking exposure
1.5x leverage on staking rewards
⚠️ Leverage Warning
Leveraged staking is risky. If the LST depegs (trades below fair value), you can get liquidated even though the underlying ETH value hasn't changed. Use conservative leverage (under 2x) and monitor closely.
Restaking & EigenLayer
Restaking lets you use your staked ETH to secure additional protocols, earning extra yield. EigenLayer pioneered this concept.
How Restaking Works
1. Stake ETH or deposit LST to EigenLayer
2. Your stake secures Actively Validated Services (AVS)
3. Earn additional rewards from AVS protocols
4. Risk: if validators misbehave, stake can be slashed
Liquid Restaking Tokens (LRTs)
Just as LSTs made staking liquid, LRTs make restaking liquid. Protocols like EtherFi, Renzo, and Puffer issue tokens representing restaked positions.
Stack: ETH → stETH (3.5%) → Restaked (+ AVS rewards) → LRT (liquid)
Potential total yield: 5-10%+ (highly variable)
Restaking is newer and riskier than standard LSTs. Additional smart contract risk, slashing risk, and complexity. Higher potential rewards come with higher risks.
Risks of Liquid Staking
Smart Contract Risk
LST protocols are complex smart contracts. A bug could result in loss of funds. Diversifying across protocols reduces single-point-of-failure risk.
Slashing Risk
If validators misbehave, staked ETH can be slashed. LST protocols have insurance mechanisms, but slashing is possible. Major protocols have never had significant slashing events.
Depeg Risk
LSTs can trade below ETH value during market stress. In June 2022, stETH traded at a 5% discount. If you need to exit during a depeg, you realize a loss.
Centralization Risk
Lido controls ~30% of staked ETH. High concentration creates systemic risk for Ethereum. Diversifying to rETH and others helps decentralization.
Frequently Asked Questions
Is liquid staking safe?
Major protocols (Lido, Rocket Pool) are battle-tested with billions at stake. Risk isn't zero—smart contract bugs, slashing, and depeg events are possible—but these are well-understood risks with mitigations. Newer protocols and restaking carry more risk.
Can I redeem my LST for ETH anytime?
Post-Shanghai upgrade, yes. You can redeem directly through the protocol (may take days) or sell on secondary markets (instant but may have slight discount). Liquidity is generally excellent for major LSTs.
Which LST should I choose?
For maximum liquidity and DeFi options: stETH. For decentralization: rETH. For highest yield: sfrxETH. Consider splitting across multiple LSTs to diversify protocol risk.
How is liquid staking taxed?
Tax treatment varies by jurisdiction and is unsettled. Some argue minting LSTs is a taxable exchange; others say it's just wrapping. Staking rewards are generally taxable income. Consult a crypto-savvy tax professional.
Should I restake or just hold LSTs?
Standard LSTs are lower risk with proven rewards. Restaking offers higher potential yield but adds smart contract risk, slashing risk, and complexity. Match your risk tolerance—restaking is more aggressive.
Continue Learning
Conclusion: LSTs as DeFi Foundation
Liquid staking tokens have become fundamental DeFi infrastructure. They let you earn staking rewards while maintaining liquidity and accessing additional yield through LSTfi strategies. For ETH holders, some form of liquid staking is almost always superior to simply holding native ETH.
Choose your LST based on your priorities: liquidity (stETH), decentralization (rETH), or yield (sfrxETH). Consider diversifying across protocols. And if you're yield-hungry and risk-tolerant, explore LSTfi strategies that compound on top of base staking rewards.
Just remember: more yield strategies mean more smart contract risk. Stack yields intentionally, not recklessly.