Liquid Staking Explained: How stETH and rETH Actually Work
Liquid staking lets ETH holders earn staking rewards while keeping a tradable token instead of a locked position. Here is how stETH and rETH work, and where the real risks hide.
Roughly a third of all the ETH that will ever exist is currently locked inside Ethereum’s proof of stake system, earning rewards for the validators that keep the network running. For most of Ethereum’s history as a proof of stake chain, that came with a catch: staking meant giving up access to your funds, sometimes indefinitely. Liquid staking removed that catch, and in the process built the largest single category of decentralized finance activity on Ethereum. The idea has since spread to Solana, Cosmos and other networks, spawned a second layer of financial engineering called liquid restaking, and pulled in regulators who spent the better part of three years arguing about whether any of it is even legal in the United States. Here is how liquid staking actually works, who runs the biggest programs, and where the real risk sits.
What Is Liquid Staking?
Proof of stake networks ask validators to lock up capital as collateral in exchange for the right to propose and attest to new blocks. On Ethereum, running a solo validator requires 32 ETH, reliable uptime and a fair amount of technical maintenance; get it wrong and the protocol can slash a portion of the stake as a penalty. Get it right, and the reward is a modest but steady yield paid out in ETH.
That 32 ETH minimum, combined with the fact that Ethereum did not support withdrawals at all until the Shapella upgrade in April 2023, made native staking a poor fit for most holders. Money that went in did not come out on demand, and anyone holding less than 32 ETH could not participate directly in the first place.
Liquid staking protocols solve both problems at once. A user deposits any amount of ETH into a smart contract, the protocol pools deposits and delegates them to node operators who run the actual validators, and in return the depositor receives a liquid staking token, or LST, representing a claim on the deposited ETH plus its future rewards. The LST can be held, sold, or plugged into other DeFi protocols while the underlying ETH keeps earning staking rewards in the background. Lido, which launched in December 2020 around the same time as Ethereum’s Beacon Chain itself, pioneered the model specifically because Ethereum’s own staking design left both of those gaps unfilled for years.
The category has since grown well beyond a niche workaround for retail depositors without 32 ETH. Institutions use liquid staking to avoid running their own validator infrastructure, DeFi protocols use LSTs as base layer collateral, and an entire secondary market of derivatives, vaults and leveraged strategies now sits on top of what is, underneath it all, still just staked ETH.
How Liquid Staking Actually Works
The mechanics are consistent across almost every protocol, even where the branding differs. A deposit goes into a staking contract, which batches it with other users’ deposits into roughly 32 ETH chunks and assigns each chunk to a validator run by a node operator, or in fully permissionless designs, by whoever posts the required bond directly. Those validators do the actual job of attesting to and proposing blocks, earning two kinds of income: the base consensus reward paid in newly issued ETH, and execution layer rewards from priority fees and MEV captured whenever a validator proposes a block.
There is one more layer of friction worth knowing about. New deposits do not start earning rewards the instant they arrive, since validators still have to work through Ethereum’s activation queue before they go live, and that queue moves faster or slower depending on how much new capital is trying to enter the system at once. Liquid staking protocols absorb this timing risk on behalf of depositors by pooling capital and cycling it through validator activation in the background, so an individual deposit does not sit exposed to the queue the way a solo staker’s would.
Both reward streams flow back to the protocol and are passed on to LST holders, minus a fee. Lido and Rocket Pool both charge close to 10% of rewards, split between node operators, a DAO treasury and, in some designs, an insurance buffer; Binance charges a similar 10% on its wrapped staked ETH product, while Coinbase’s cbETH takes a 25% cut, the highest fee among the major programs.
Getting back to plain ETH works one of two ways. Every protocol maintains a withdrawal queue that unstakes validators and returns ETH directly, fully backed but potentially slow, taking anywhere from hours to days depending on how many other users are exiting at the same time. Alternatively, holders can simply sell the LST on the open market through a DEX or aggregator, which settles instantly but exposes the seller to whatever premium or discount the token happens to be trading at in that moment.
Rebasing Tokens vs Value-Accruing Tokens
Liquid staking tokens are built around one of two designs. The first is a rebasing model, used by Lido’s stETH: the number of tokens sitting in your wallet actually increases every day to reflect accrued rewards, so the token is designed to always track 1:1 with ETH and the reward shows up as more tokens rather than a richer exchange rate. It is intuitive, but rebasing balances are awkward for smart contracts and tax accounting that expect a static balance, which is why Lido also issues wstETH, a wrapped, non-rebasing version whose token count never changes while its exchange rate against ETH climbs instead. wstETH, not raw stETH, is what actually circulates through most of DeFi.
The second design is the value-accruing, or reward-bearing, model used by Rocket Pool’s rETH, Coinbase’s cbETH and Binance’s wBETH. Here the number of tokens you hold never changes; instead, the exchange rate against ETH rises steadily as staking rewards accumulate inside the protocol. rETH has traded at a growing premium to ETH ever since Rocket Pool launched in November 2021, a premium that exists purely because of accrued rewards baked into the exchange rate rather than any market speculation.
Both designs end up delivering the same economic result. The difference is entirely about how that result is represented on-chain, and which one plays more nicely with a given wallet, tax jurisdiction or lending market.
Solo Staking, Liquid Staking or Exchange Staking: Picking a Lane
Anyone deciding how to stake ETH today is really choosing between three models that the SEC itself now formally recognizes as distinct: self, or solo, staking, where the owner keeps control of the asset at all times; self-custodial staking, where the owner keeps custody but delegates the validation work to a third-party operator, which is exactly what liquid staking protocols do; and custodial staking, where a custodian such as an exchange holds the asset directly and stakes on the owner’s behalf. That framing, laid out in the SEC’s 2025 staff statements discussed further down, maps neatly onto how the market has actually organized itself.
- Self (solo) staking: you run the validator and hold the keys, full control and full responsibility.
- Self-custodial staking: you keep the asset in your own wallet as an LST, but a third-party operator handles validation, which is the liquid staking model.
- Custodial staking: an exchange or custodian holds the asset directly and stakes on your behalf, in exchange for a share of the reward.
The practical differences come down to capital, custody, liquidity and who is exposed to what kind of risk. Solo staking demands the most capital and technical effort but keeps every key in the user’s own hands. Liquid staking needs no minimum at all and preserves a version of self-custody, since the LST sits in the user’s own wallet, while outsourcing the operational burden and, importantly, staying liquid. Custodial exchange staking is the easiest on-ramp but hands custody of the underlying asset to a third party, the same design that got Kraken into trouble with the SEC in 2023 and that our deeper look at crypto custody models covers in more detail.
Fees and tax treatment often end up mattering more than the headline APY. A protocol charging 25% of rewards can still net out ahead of one charging 10% if its underlying validator performance or MEV capture is meaningfully better, and how a given jurisdiction treats a rebasing token’s daily balance increases for tax purposes can differ from how it treats a value-accruing token’s rising exchange rate, one more reason wrapped, non-rebasing tokens like wstETH have become the default for anyone routing an LST through another protocol.
| Method | Typical minimum | Who holds custody | Liquidity | Approx. net yield | Primary risk |
|---|---|---|---|---|---|
| Solo (native) validator | 32 ETH | You, entirely | Locked until you exit the validator | Around 3% to 4%, including MEV | Slashing, uptime, key management |
| Liquid staking (Lido, Rocket Pool, etc.) | None | You hold the LST; the protocol delegates validation | Fully liquid, usable as DeFi collateral | Roughly 2.5% to 3.6% after fees | Smart contract risk, possible discount to peg |
| Custodial exchange staking (Coinbase, Binance, Kraken) | None | The exchange | Liquid only if a wrapped token is issued | Roughly 2% to 3.5% after a 10% to 25% fee | Counterparty and regulatory risk |
| Liquid restaking (EigenLayer via ether.fi, Kelp, Renzo) | None | You hold the LRT; operators hold staking and restaking duties | Liquid and composable | Variable, often higher, sometimes in the double digits | Stacked smart contract, bridge and slashing risk |
The Major Liquid Staking Protocols on Ethereum
Ethereum liquid staking is a big enough market to have its own leaderboard. Across all chains, liquid staking protocols hold somewhere in the neighborhood of $40 billion in deposits according to DefiLlama’s tracker, with Ethereum-based protocols accounting for the large majority of that figure. Lido remains the dominant player by a wide margin: DefiLlama puts its total value locked in the high teens of billions of dollars, spread across a curated set of professional node operators plus a newer permissionless module, the Community Staking Module, that lets independent operators join by posting a bond as small as roughly 2.4 ETH. In January 2026, Lido shipped its biggest architectural update yet, V3, built around isolated stVaults that let institutions, wallets and layer 2 networks run their own customized staking setup, complete with their own fee structure and compliance rules, while still tapping into Lido’s liquidity and stETH integrations. Linea, Nansen and P2P.org were among the first to plug into it.
Rocket Pool is the largest fully permissionless alternative: anyone can become a node operator, and in February 2026 its Saturn 1 upgrade cut the minimum bond a node operator needs to post from 8 ETH to just 4 ETH per validator inside a new megapool structure, with the remaining capital sourced from rETH depositors. That halved the capital barrier to running a validator, which protocol documentation frames as removing one of the biggest remaining obstacles to growing its node operator set beyond its current few thousand participants.
The rest of the field splits between centralized exchange products and independent DeFi-native protocols. Binance’s wBETH and Coinbase’s cbETH let exchange users stake without leaving the app, at the cost of custodial risk and, in Coinbase’s case, that 25% fee on rewards, part of the broader picture our comparison of how the major exchanges actually stack up covers. ether.fi’s weETH has grown into one of the largest LSTs of any kind by leaning into liquid restaking from day one. Smaller, more specialized entrants such as StakeWise’s osETH, Frax’s frxETH and sfrxETH, and Mantle’s mETH round out a field that now numbers dozens of tokens competing on fees, decentralization and yield.
- Fee: usually 10% of rewards, though it ranges from promotional periods at 0% up to 25% on some exchange products.
- Operator model: curated and vetted, fully permissionless, or a hybrid of both.
- Token design: rebasing balance or a rising exchange rate against ETH.
- Liquidity depth: how tightly the token holds its peg on secondary markets during stress.
- Withdrawal path: instant market swap versus a protocol-level exit queue.
| Protocol | Token | Token design | Approx. TVL (mid-2026) | Operator model | 2026 headline move |
|---|---|---|---|---|---|
| Lido | stETH / wstETH | Rebasing | High teens of billions of dollars | Curated plus permissionless (CSM) | V3 stVaults modular staking (Jan 2026) |
| Rocket Pool | rETH | Value-accruing | Roughly 850,000 ETH staked | Fully permissionless | Saturn 1 cuts bond from 8 to 4 ETH (Feb 2026) |
| ether.fi | weETH | Value-accruing, restaking-native | Multiple billions of dollars | Non-custodial, EigenLayer-linked | Among the fastest-growing LRTs by TVL |
| Binance | WBETH | Value-accruing | Multiple billions of dollars | Centralized, custodial | 10% fee on rewards |
| Coinbase | cbETH | Value-accruing (wrapped) | Billions of dollars | Centralized, custodial | 25% fee, the highest among majors |
| StakeWise | osETH | Value-accruing | Hundreds of millions of dollars | Mixed permissioned and permissionless | Vault-based risk isolation |
| Mantle | mETH | Value-accruing | Hundreds of millions of dollars | DAO treasury-backed | Tied to the Mantle Network ecosystem |
Liquid Staking Beyond Ethereum
Ethereum did not invent the idea of pooling stake for liquidity, and it is not the only chain where liquid staking has taken off. Solana’s ecosystem now runs on liquid staking tokens much the way Ethereum’s does: Jito’s JitoSOL is the largest, layering MEV revenue on top of base staking rewards for a net yield that has run somewhere around 7% to 8%, ahead of Marinade’s mSOL, which deliberately spreads stake across more than 100 validators with caps on any single operator to keep the network decentralized, trading a bit of yield for that safety margin. Sanctum has carved out a role as shared infrastructure, a liquidity hub that lets smaller Solana LSTs plug into a common pool of swappable liquidity rather than each building it from scratch.
Cosmos took a different approach, building liquid staking into the base layer rather than leaving it entirely to third parties. The Liquid Staking Module, originally built by Iqlusion and later folded into the Cosmos SDK, lets delegators on supporting chains convert bonded tokens directly into tradable, liquid representations without waiting out a full unbonding period. Stride functions as a dedicated liquid staking zone for IBC-connected app chains built on that same SDK tooling, and is in the process of adopting Cosmos’ Interchain Security system to borrow economic security from the wider Cosmos Hub validator set.
Not every chain needs this at all. Cardano’s delegation model never locks funds or transfers custody in the first place, so the liquidity problem liquid staking was built to solve simply does not exist there in the same form, a reminder that liquid staking is a workaround for a specific design choice rather than a universal requirement of proof of stake. The common thread across every chain that has grown a liquid staking market is the same one that built Lido in the first place: whenever a proof of stake network locks capital for meaningful periods to secure itself, someone builds a liquid wrapper around that lockup, because idle collateral sitting behind an illiquid staking position is capital DeFi will always find a way to route around.
Why Liquid Staking Tokens Became DeFi’s Favorite Collateral
Liquid staking tokens solved a specific problem for DeFi: they let capital earn a base yield from staking while still being usable everywhere else. That combination made LSTs, especially stETH and wstETH, the default collateral of choice on lending markets like Aave and Spark, and among the deepest trading pairs on Curve and Balancer, both purpose-built for assets that are supposed to trade close to a stable exchange rate against each other.
That preference is not automatic. Curve’s stableswap-style pools and Aave’s risk parameters both assume the paired assets trade close to a known exchange rate; an LST that regularly deviates from its peg is much harder to integrate safely than one that does not, part of why Lido’s stETH, with the deepest liquidity and the longest track record, still anchors most of these integrations even as newer tokens compete on fees and yield.
That composability also enabled leveraged staking, sometimes called a staking loop: deposit ETH for an LST, post the LST as collateral, borrow ETH against it, convert that ETH into more LST, and repeat. Done conservatively, it multiplies the underlying staking yield; done aggressively, it multiplies exposure to the one risk that matters most for this kind of collateral, which is what happens if the LST’s exchange rate slips below its expected peg to ETH while the position is leveraged. That is exactly the mechanism that turned a market wobble into a solvency crisis in 2022, covered in the next section.
The scale involved is large enough that liquid staking now functions as infrastructure rather than a niche DeFi strategy, which is one reason exchanges, asset managers and even Ethereum’s own restaking ecosystem all built directly on top of it rather than around it.
Liquid Restaking: EigenLayer, LRTs and the Next Layer
Liquid staking secures exactly one thing: the base proof of stake chain it was issued for. Restaking, pioneered by EigenLayer, which rebranded to EigenCloud as it expanded beyond pure restaking, lets the same staked or liquid-staked ETH be pledged again as economic security for other services, things like oracles, bridges and data availability layers, known as actively validated services, in exchange for additional yield on top of the base staking reward.
Liquid restaking tokens, or LRTs, wrap that restaked position into another tradable token the same way an LST wraps a staking position: ether.fi’s weETH, Kelp’s rsETH and Renzo’s ezETH are the best known. They behave like LSTs in every practical sense, tradable and usable as collateral, but carry an extra layer of smart contract and slashing risk on top, since the same capital now backs multiple, independently coded systems at once. SSV Network takes a different design path with its Based Applications model, covered in our explainer on how SSV’s approach to restaking differs from EigenLayer’s, keeping the original 32 ETH unslashable and layering optional delegated commitments on top instead.
Restaking TVL has been far more volatile than plain liquid staking. EigenLayer’s restaked deposits peaked at close to $20 billion before a broader market drawdown and a strategic pivot toward off-chain, verifiable cloud services pulled that figure down to roughly $4.7 billion by early July 2026, based on DefiLlama’s tracking. The category’s growing pains have shown up in sharper ways too, which is where the next section picks up.
The Risks: Depegs, Bridges and Slashing
Liquid staking is not staking with a free option attached; every convenience layered on top of the base yield adds a corresponding risk. The clearest historical example is Lido’s stETH depeg in June 2022. stETH is not meant to trade below 1 ETH, since it always remains redeemable at that rate eventually, but after Terra’s UST collapsed that May, two large holders, Celsius Network and Three Arrows Capital, pulled a combined figure close to $780 million out of the main stETH and ETH Curve pool within a single day, draining the liquidity that had kept the secondary market price near parity, according to CoinDesk’s reporting at the time. stETH’s market price fell to a notable discount against ETH, both firms were left short of liquidity to meet redemptions, and both collapsed within weeks, a case study in how a liquid staking token’s liquidity depends on the depth of secondary markets, not just on the protocol’s own solvency.
Bridges are the newer version of the same lesson. In April 2026, an attacker exploited a cross-chain messaging misconfiguration in Kelp DAO’s bridge, releasing 116,500 rsETH, worth about $292 million and roughly 18% of the token’s entire circulating supply, to an attacker-controlled address. Aave froze rsETH markets within hours to contain the fallout, since the exploit had effectively created unbacked collateral inside its lending pools. Aave founder Stani Kulechov moved quickly to reassure users the exploit sat outside Aave’s own contracts, posting on X that “rsETH has been frozen on Aave V3 and V4, the asset does not have any borrowing power as a measure due to KelpDAO bridge exploit that happened outside of Aave,” adding that both Aave V3 and V4 carried no further exposure to rsETH. Kelp and its partners eventually made holders whole and the protocol has since begun migrating away from the bridge design involved.
There is also a quieter risk in how lending markets price LST collateral at all. Because LSTs are not always liquid enough to derive a reliable spot price from trading alone, many lending protocols rely on oracles that reference a protocol’s own internal exchange rate rather than the open market price, an approach that works well in calm markets but can misprice collateral during exactly the kind of liquidity crunch that caused the 2022 stETH discount in the first place.
Beyond depegs and bridges, there is the more mundane risk every pooled staking model shares: a node operator that misbehaves or goes offline can trigger slashing, and depending on how a given protocol distributes losses, that penalty may be socialized across all LST holders rather than isolated to the operator at fault. Reputable protocols mitigate this with audits, bonded collateral from operators, and insurance funds, the same landscape our rundown of who actually audits DeFi walks through, but no audit removes the risk entirely; it only lowers the odds.
Lido’s Dominance and Ethereum’s Centralization Debate
Ethereum’s consensus design has two uncomfortable thresholds built in. Its finality mechanism needs at least two thirds of all staked ETH to agree before a block can be treated as irreversible, which means any single entity controlling more than one third can stall that finality indefinitely without needing anything close to a majority, and an entity above two thirds could theoretically finalize its own version of history. Lido’s share of all staked ETH has hovered for years in a range Ethereum researchers describe as too close for comfort, generally estimated between roughly a quarter and a third of the total depending on when and how it is measured.
Vitalik Buterin has called this out directly. In his essay on what he named the Scourge, one of several planned phases of Ethereum’s roadmap, he described staking centralization as one of the biggest risks facing the base layer, warning that “if there are economies-of-scale in participating in core proof of stake mechanisms, this would naturally lead to large stakers dominating, and small stakers dropping out to join large pools,” a dynamic he tied to a higher risk of 51% attacks and transaction censorship. His proposed fixes, capping how much any one entity can stake and splitting stake into slashable and unslashable tiers, remain proposals rather than shipped protocol changes.
Lido’s own response has been structural rather than a voluntary cap on growth. Its Community Staking Module opened the previously curated operator set to permissionless entrants, and in mid-2025 the DAO activated dual governance, which gives stETH holders themselves a check on LDO token holders: locking stETH in an escrow contract can delay a proposal by days, and if enough holders object, the DAO enters what Lido calls a rage quit state, where no new proposal can execute until dissenting stakers exit or the proposal is withdrawn. It is a market-based check on governance capture rather than a hard cap on market share, and it does not by itself resolve the concentration Buterin flagged.
The Regulatory Picture: The SEC’s Reversal on Staking
Few corners of crypto have had as sharp a regulatory reversal as staking. In February 2023, the SEC settled charges against Kraken over its staking-as-a-service program, forcing the exchange to pay $30 million and shut the product down for US customers entirely, on the theory that pooling customer assets and promising a return made it an unregistered securities offering. Commissioner Hester Peirce dissented sharply at the time: “Today, the SEC shut down Kraken’s staking program and counted it as a win for investors. I disagree and therefore dissent.” She argued that regulating an emerging product through enforcement rather than rulemaking was neither efficient nor fair to the industry.
That enforcement-first posture did not survive a change in leadership. Kraken itself relaunched staking for customers in dozens of US states in January 2025, covering 17 assets including ETH, SOL, DOT and ADA, as the broader legal picture shifted. The SEC’s Division of Corporation Finance then went considerably further with two staff statements: in May 2025, it concluded that self staking, self-custodial staking and custodial staking are all administrative or ministerial activities rather than securities transactions under the Howey framework, and in August 2025 it extended that logic specifically to liquid staking and the receipt tokens those programs issue, so long as the arrangement does not involve a provider guaranteeing a specific return.
None of this rewrites the law. Both statements are staff views, not formal rules, and both stress that the analysis depends heavily on the specific facts of a given program, exactly the kind of nuance our look at how SEC crypto enforcement actually changed walks through in more detail. But the direction of travel is unmistakable: a product the agency once treated as an unregistered security is now, under the same statute, described in official guidance as merely administrative, and the practical result has been exchanges reopening staking products and regulators warming to the idea of staking yield flowing through mainstream investment products.
Where Liquid Staking Goes From Here
The next phase of liquid staking looks less like competition between individual tokens and more like infrastructure consolidation. Lido’s stVaults push toward letting institutions and other protocols build custom staking products on shared rails rather than each reinventing validator operations from scratch. Rocket Pool’s bond cuts are pulling in a wider set of independent operators just as regulatory clarity in the United States removes one of the biggest reasons institutions stayed away from staking products in the first place.
The clearest sign of where this is heading is the slow convergence of liquid staking with regulated finance. With the SEC’s 2025 statements in place, exchange-traded product issuers have spent 2026 working through how to route staking rewards to fund holders rather than leaving that yield on the table, a shift that would have looked unthinkable during the Kraken enforcement era just a few years earlier. Whether that yield ever reaches a mainstream brokerage account in full, and how regulators define a guaranteed return once real products are on the line, is still being worked out case by case.
At the same time, the centralization debate is not going away, restaking has shown that stacking yield also stacks risk, and every new integration between staking, DeFi lending and cross-chain bridges creates one more place for something to break. Liquid staking solved the illiquidity problem convincingly. What it does with the trust, concentration and cross-chain risk it created along the way is the story still being written.
Frequently Asked Questions
What is liquid staking in crypto?
Liquid staking is a way to earn Ethereum, or another proof of stake network’s, staking rewards without locking up your funds. You deposit any amount of crypto with a protocol like Lido or Rocket Pool, and in return you receive a liquid staking token, such as stETH or rETH, that represents your deposit plus accumulated rewards. You can hold, trade or use that token in DeFi while the underlying assets keep earning staking rewards in the background.
What is the difference between staking and liquid staking?
Regular, solo or native staking locks your funds directly with the network, typically requiring a large minimum, 32 ETH on Ethereum, and leaving you with no access to that capital until you exit the validator. Liquid staking pools deposits from many users, has no practical minimum, and immediately hands back a tradable token representing your position, so you keep both the staking yield and the ability to use or sell that position at any time.
Is liquid staking safe?
Established protocols with years of operating history and multiple audits are generally considered relatively low risk as far as crypto strategies go, but safe does not mean risk-free. Liquid staking tokens can trade at a discount to their underlying asset during periods of market stress, as stETH did in 2022, and the smart contracts, bridges and node operators involved can all fail or be exploited, as happened to Kelp DAO’s rsETH bridge in 2026. Spreading deposits across protocols and understanding each one’s fee structure, operator model and audit history reduces, but never eliminates, that risk.
Does the SEC consider liquid staking tokens to be securities?
As of the SEC Division of Corporation Finance’s August 2025 staff statement, the agency’s staff view is that liquid staking activities and the receipt tokens they issue generally do not involve the offer and sale of securities, provided the protocol is not guaranteeing a specific return. That is a staff statement rather than a binding rule, and it marks a reversal from the SEC’s 2023 enforcement action against Kraken’s staking program, which was settled as an unregistered securities offering.
What is the difference between liquid staking and liquid restaking?
Liquid staking secures a single proof of stake network and pays that network’s base staking reward. Liquid restaking, built on protocols like EigenLayer, takes an already-staked or liquid-staked position and pledges it again to help secure additional services in exchange for extra yield. That extra yield comes with extra risk, since the same capital is now exposed to the code and conditions of multiple independent systems rather than just one.
Written by the HOGE Wire research desk.