Proof-of-stake (PoS) is a consensus mechanism used in blockchains to process transactions, create new blocks, and maintain the chain’s security. In PoS ecosystems, tokens are staked in order to provide security for the network.

In return for staking their tokens, users are compensated with block rewards from the network and fees paid by users. To stake tokens, users run validator nodes. Given the technicalities involved with this, validation is typically undertaken by professional node runners.

To increase accessibility to staking and liquidity, liquid staking protocols like Lido and Rocket Pool were developed.

What is Liquid Staking?

Liquid staking protocol Lido is by far the largest protocol in DeFi in terms of Total Value Locked (TVL), with over $20B as of 3 December 2023. Other leading DeFi protocols Uniswap and Aave have around $3.4B and $9.2B in TVL (according to their respective websites).

• Liquid staking is a software solution (protocol) that enables users to stake directly on a proof of stake network such as Ethereum

• In liquid staking, token holders stake their token and receive a receipt token, called a liquid staking token (LST), to evidence ownership of their staked token

• The LST can be transferred, stored, traded, and utilized in DeFi or supported dapps

Liquid staking within the ETH ecosystem is a growing category. Here is an overview from Redstone’s Q4 2023 report.

This story covers liquid staking on the Ethereum Blockchain as it currently holds the largest amount of liquid staking protocols by total value locked (TVL). Some other ecosystems have different and novel solutions for liquid staking which we will not cover today.

Types of Liquid Staking Tokens

Here are the three main liquid staking token (LST) architecture models:

Rebase tokens

Rebase tokens are tokens that automatically adjust their balance in response to deposits and rewards.

• This process, known as rebasing, typically happens daily

• During rebasing, there is no visible transactional activity for the token holders

Examples of such tokens include Lido’s stETH and Binance’s BETH, both of which are classified as rebase tokens. This type of LST is designed to be user-friendly, as the balance of your LST increases in line with your staking activities.

For example: staking 1,000 ETH at Lido will give you 1000 stETH, which, after one week, should amount to about 1,000.69 stETH (given a 3.6% APR).

Rewards-bearing tokens

Rewards-bearing tokens are tokens that increase in value over time, with the value and rewards determined by the changing exchange rate between the token and the staked asset.

• The quantity of LST stays the same, but its rate varies.

• This single-token model is convenient, but less straightforward than rebase tokens.

Holders benefit from rising rewards, examples of which include rETH, cbETH, swETH, osETH, and ETHx.

For example: staking 1,000 ETH at Stader will give you about 989.78 ETHx that after one week will be the same amount of ETHx, but worth about 1,000.68 ETH (at today’s 3.56% APR).

Wrapped tokens

Some LST are available in wrapped versions.

• After wrapping, these tokens no longer experience automatic balance adjustments and become reward-bearing tokens.

• Unlike rebasing, which occurs without any transactions, changes in the balance of wrapped tokens are achieved through actions like minting, burning, or transferring.

• The rewards are integrated into the exchange rate.

Wrapped LSTs, such as stETH and BETH, often see higher popularity and volume in DeFi and trading sectors because they aren’t subject to rebasing.

For example: wrapping 1,000 stETH at Lido will give you about 874.62 wstETH that after one week will be the same amount of wstETH but worth about 1,000.69 ETH (at today’s 3.6% APR).

Ethereum Staking Narratives

While centralized exchanges were how most ETH was staked in November 2020, liquid staking protocols caught up around February 2023 and have since taken a consistently expanding, now dominant lead.

As of December 2023, liquid staking protocols are the most popular way to stake ETH and account for just over 37% of staked ETH, with centralized exchanges coming in with ~28% of staked ETH.

The change is largely due to protocols like Lido having lower total fees compared to centralized leaders like Coinbase.

So — decentralization is winning? Yay! Well, kinda. While liquid staking is the largest category of staked ETH, the Lido protocol represents about 86% of that category at the time this story was written, meaning Lido is holding about 32% of all staked ETH.

The second largest holder of staked ETH is unidentified and represents about 17% of all staked ETH, with Coinbase coming in at 3rd and representing about 14% of all staked ETH.

Restaking

Ethereum restaking — often accredited to the middleware protocol Eigen Layer — is a hot topic innovation over the past year.

• Because LSTs are liquid and tradable, holders can simultaneously earn staking rewards and leverage additional liquidity using extra LSTfi protocols

• Restaking involves reusing staked or locked-up Ether tokens to earn fees and rewards. The restaked tokens can then help secure and validate other protocols

EigenLayer enables users to restake their ETH or LSTs, expanding security to multiple network applications and, thereby, earning extra rewards. Other protocols are starting to deploy testnet contracts on top of EigenLayer’s testnet to extract even more value from staked ETH.

At the time of writing this, nobody really knows where that will lead.

Ethereum co-founder Vitalik Buterin and a number of key devs worry that restaking is a house of cards that will inevitably tumble.

“We should instead preserve the chain’s minimalism and support uses of re-staking that do not seem like slippery slopes towards extending the role of Ethereum consensus,” Buterin suggested.

One thing is for sure, as the DeFi landscape continues to grow, liquid staking tokens will keep providing users with opportunities to earn rewards and participate in cryptocurrency staking with ease.

Fin

Summed up, liquid staking tokens offer users a simple way to earn rewards without having to run validator nodes.

• Liquid staking is a fancy word for staking tokens in a simple way

• Restaking is a hot narrative in the liquid staking world and will enable stakers to stake their LSTs

You can find live charts related to ETH Liquid Staking here: https://dune.com/hildobby/eth2-staking. As always, thanks for reading.

Sources

hildobby. Ethereum Staking (Lido, Coinbase, Kraken, Binance … — Dune, dune.com/hildobby/eth2-staking. Accessed 3 Dec. 2023.

Kazmierczak, Marcin. “Liquid Staking Tokens Are a Hot Ticket for 2024.” CoinDesk Latest Headlines RSS, CoinDesk, 29 Nov. 2023, www.coindesk.com/markets/2023/11/29/liquid-staking-tokens-are-a-hot-ticket-for-2024/.

Kian, Joo. “The Future of ETH Liquid Staking.” Delphi Digital, 15 Mar. 2023, members.delphidigital.io/reports/the-future-of-eth-liquid-staking.

Liquid Collective. “What Is Liquid Staking?” Liquid Collective, liquidcollective.io/liquid-staking/. Accessed 2023.

Parasol, Max. “Ethereum Restaking: Blockchain Innovation or Dangerous House of Cards?” Cointelegraph Magazine, 18 Oct. 2023, cointelegraph.com/magazine/ethereum-restaking-blockchain-dangerous.

RedStone. “LSTFI Report: The Ultimate Q4 2023 Market Overview — Redstone Blog.” RedStone Blog -, 6 Nov. 2023, blog.redstone.finance/2023/11/06/lstfi-report-the-ultimate-q4–2023-market-overview/.