What is liquid staking?
In native staking, you lock tokens with a validator. Those tokens earn rewards, but they're frozen — you can't sell, lend, or use them as collateral until you unbond, and unbonding can take anywhere from a few hours to almost a month depending on the chain.
Liquid staking solves that by handing you a receipt token (an LST — Liquid Staking Token) the moment you deposit. The protocol stakes your asset on your behalf, and the LST in your wallet represents your claim on the staked balance plus accruing rewards. You can transfer it, lend it, swap it, or post it as collateral while the underlying continues to earn.
An LST is a tokenised IOU for staked assets — it should always be redeemable 1:(1+rewards) for the underlying, but in the open market it trades at whatever someone will pay for it.
How an LST actually works
Behind the scenes, the protocol runs (or selects) a set of professional validator operators, splits incoming deposits across them, monitors performance, socialises slashing penalties across all LST holders, and exposes a withdrawal queue that obeys the chain's native unbonding rules. The user only ever sees the LST balance and an exchange rate.
Major liquid staking providers
Liquid staking is now a mature category. A handful of protocols dominate per chain. Sizes are approximate as of April 2026.
| Provider | Chain | Token | TVL | Mechanism |
|---|---|---|---|---|
| Lido | Ethereum | stETH / wstETH | $28.4B | Curated operator set, rebasing |
| Rocket Pool | Ethereum | rETH | $3.9B | Permissionless mini-pools, reward-bearing |
| Coinbase | Ethereum | cbETH | $2.6B | Custodial, reward-bearing |
| Frax Ether | Ethereum | sfrxETH | $680M | Two-token system (frxETH + sfrxETH) |
| Mantle | Ethereum | mETH | $1.1B | Reward-bearing, treasury-backed |
| Marinade | Solana | mSOL | $1.4B | Stake auction across all SOL validators |
| Jito | Solana | jitoSOL | $2.1B | MEV-aware, reward-bearing |
| Stride | Cosmos hub-and-spoke | st<asset> | $210M | IBC-based, reward-bearing |
| Liquid Collective | Ethereum | LsETH | $520M | Institutional, reward-bearing |
Lido alone has historically held more than a quarter of all staked ETH, which is itself one of the most-debated risk vectors in the ecosystem — see centralisation risk below.
Where the yield comes from
An LST's headline APY is just a pass-through of validator rewards minus a protocol fee, typically 5–15%. On Ethereum, those rewards have three sources:
- Consensus rewards — issuance paid for attesting and proposing blocks. Roughly 2.5–3.5% APY today.
- Execution / priority fees — tips users pay to be included in a block. Highly variable; correlated with on-chain activity.
- MEV — revenue from block-building auctions (e.g. via MEV-Boost). Some LSTs (Jito, Lido with MEV-Boost) capture and redistribute this; others don't.
The fee taken by the protocol funds operator payments, insurance, and protocol governance. Higher fees aren't always worse — an LST that pays its operators more may have more reliable performance and a better operator pool.
Rebasing vs reward-bearing
There are two ways to express staking rewards in a token:
Rebasing (e.g. stETH)
Your LST balance grows over time. If you held 10 stETH and earned 3% in a year, you now hold 10.3 stETH. Easy to reason about, but breaks many DeFi integrations: lending markets, AMMs and CEXes often wrap rebasing tokens (wstETH) so the share count stays fixed and the exchange rate floats.
Reward-bearing (e.g. rETH, cbETH, jitoSOL)
Your LST balance is constant; the exchange rate against the underlying drifts upward. 10 rETH today might be redeemable for 10.3 ETH in a year. Plays nicely with all of DeFi, but obscures realised yield from end users and is more sensitive to market mispricing.
If you see an LST trading below its fair exchange rate on a DEX, that's a "depeg" — usually a liquidity event, not insolvency. Always compare the AMM mid-price to the protocol's official redemption rate before assuming the worst (or buying the dip).
The risks of liquid staking
LSTs let you have your cake and eat it — until they don't. Every benefit (composability, no lock-up, fungibility) layers a new risk on top of the underlying staking position.
Smart contract risk
The protocol's deposit, mint and redemption contracts are a single point of failure. A bug here can wipe out the entire pool, regardless of how well the validators perform.
Validator slashing pass-through
If a validator in the pool is slashed for double-signing or going dark, that loss is socialised across all LST holders. You don't pick the operators — the protocol does.
Depeg / market risk
The LST's market price can drift below redemption value during stress (e.g. stETH-ETH in June 2022 hit ~94%). If you're leveraged on the LST, you can be liquidated long before withdrawals open.
Governance & centralisation
Many LSTs concentrate validator selection, fee policy and even key custody under a small DAO or company. That entity becomes a censor, a slashing target, and a regulatory single point.
Withdrawal queue risk
Native unbonding is enforced at the chain level. During a run, the protocol can't pay out faster than the chain releases stake — LST holders may wait days or weeks while the secondary market trades at a discount.
Oracle & integration risk
Lending markets price LSTs via oracles. A bad feed during a depeg can trigger cascading liquidations — the LST is solvent, but borrowers who used it as collateral are not.
Bridged LST risk
An LST native to one chain becomes a wrapped IOU when bridged. The KelpDAO incident showed how a single-verifier bridge configuration can mint hundreds of millions of unbacked LST tokens. Read the case study →
Regulatory risk
The SEC has gone back and forth on whether LSTs are securities. A future enforcement action against a major issuer could freeze withdrawals, force delistings, or trigger a forced wind-down.
Evaluation checklist
Before depositing into any liquid staking protocol, work through these questions:
- Is the operator set permissionless or curated? Curated sets reduce slashing variance but concentrate trust.
- Where does fee revenue go? Operators, insurance fund, treasury, token-holders — all four answers are legitimate, but you should know.
- Is the contract upgradeable, and by whom? A multisig that can replace the staking logic at will is a different beast than an immutable contract.
- What's the audit history? Multiple firms, recent reviews after every major upgrade, and a public bug bounty are the bare minimum.
- How deep is on-chain liquidity? Shallow LST/native pools mean you can't exit at fair value during a crisis.
- Is the redemption queue funded and observable? Look for a public dashboard showing pending withdrawals, time-to-pay, and buffer.
- What's the chain-level concentration? If your LST plus its competitors push beyond ~33% of total stake, the chain itself is at consensus risk.
- If it's bridged, who runs the bridge? A 1-of-1 verifier or a small multisig is the highest-impact attack surface in your stack.