What is Liquid Staking? stETH and rETH Explained
Liquid staking has fundamentally transformed how Ethereum holders earn staking rewards. Instead of locking up 32 ETH and running validator infrastructure, you can now stake any amount and receive a tradeable token in return. This guide covers everything you need to know about liquid staking explained in practical terms—from basic mechanics to advanced DeFi strategies.
Whether you’re considering Lido’s stETH or Rocket Pool’s rETH, understanding how these protocols work is essential before committing your assets. We’ll examine the technical differences between rebasing and reward-bearing tokens, compare the major protocols, and explore both the opportunities and risks involved.
The Problem with Traditional Ethereum Staking
When Ethereum transitioned to proof-of-stake in September 2022, it introduced native staking as the mechanism for securing the network. Validators lock up 32 ETH as collateral, run specialized software, and earn rewards for proposing and attesting to blocks. While this system works well for network security, it creates significant barriers for individual participants.
The 32 ETH Requirement
The minimum stake of 32 ETH represents a substantial financial commitment. At current prices, this amounts to tens of thousands of dollars—far beyond what most retail investors can allocate to a single position. This high barrier effectively excludes the majority of ETH holders from participating in network validation and earning staking rewards directly.
Capital Inefficiency
Traditional staking locks your assets completely. Once you deposit ETH into the beacon chain, those funds cannot be used for anything else. You cannot trade them, use them as collateral for loans, or participate in DeFi protocols. In a fast-moving market, this illiquidity represents a significant opportunity cost.
Technical Complexity
Running a validator node requires technical expertise, reliable hardware, and consistent internet connectivity. Validators must maintain near-perfect uptime to avoid penalties. For most users, the operational overhead simply isn’t practical.
Withdrawal Delays
Even after Ethereum’s Shapella upgrade enabled withdrawals, exiting a validator position takes time. The withdrawal queue can extend to days or weeks during periods of high demand, leaving stakers unable to respond quickly to market conditions.
How Liquid Staking Works
Liquid staking protocols solve these problems through a elegant mechanism: they pool user deposits, stake the ETH with validators on your behalf, and issue you a derivative token representing your staked position. This liquid staking token (LST) can be freely transferred, traded, or used in DeFi while the underlying ETH continues earning staking rewards.
The Basic Process
- Deposit ETH: You send any amount of ETH to the liquid staking protocol’s smart contract.
- Receive LST: The protocol mints and sends you a corresponding amount of liquid staking tokens (like stETH or rETH).
- Earn Rewards: The protocol stakes your ETH with validators and accumulates staking rewards.
- Stay Liquid: Your LST can be traded, used as collateral, or deployed in DeFi protocols.
- Redeem Anytime: When ready, you can unstake by returning your LST to receive ETH plus accumulated rewards.
This structure transforms staking from a capital-locking commitment into a liquid, flexible position. You maintain exposure to ETH, earn staking yield, and preserve the ability to use your capital productively.
Token Mechanics: Rebasing vs. Reward-Bearing
Not all liquid staking tokens work the same way. Understanding the difference between rebasing and reward-bearing tokens is crucial for choosing the right protocol and avoiding unexpected behavior in DeFi applications.
Rebasing Tokens (stETH)
Rebasing tokens like Lido’s stETH adjust your token balance daily to reflect earned rewards. If you hold 10 stETH today, you might hold 10.001 stETH tomorrow as staking rewards are distributed.
How it works: The protocol automatically increases all holder balances proportionally based on the rewards earned by the underlying staked ETH. Your wallet balance grows without any action on your part.
Advantages:
- Intuitive—1 stETH always represents approximately 1 ETH
- Easy to track your position value
- Simple mental model for new users
Disadvantages:
- Some DeFi protocols don’t support rebasing tokens properly
- Can create complexities for tax reporting (daily balance changes)
- Requires wrapper tokens (wstETH) for certain applications
Reward-Bearing Tokens (rETH, wstETH)
Reward-bearing tokens maintain a fixed balance while increasing in value relative to ETH. Your token count stays the same, but each token becomes worth more ETH over time.
How it works: Instead of receiving more tokens, the exchange rate between the LST and ETH appreciates. If you hold 10 rETH and the exchange rate increases from 1.05 to 1.06, your position is now worth 10.6 ETH instead of 10.5 ETH—but you still hold exactly 10 rETH.
Advantages:
- Compatible with all DeFi protocols
- Simpler tax treatment (single event at sale)
- No balance change surprises
Disadvantages:
- Less intuitive—must track exchange rate to know position value
- Requires calculation to determine actual ETH value
Lido Finance: The Market Leader
Lido Finance dominates the liquid staking landscape, controlling approximately 30% of all staked ETH on the Ethereum network. This market position makes stETH the most liquid and widely integrated liquid staking token available.
Protocol Overview
Launched in December 2020, Lido was the first major liquid staking protocol on Ethereum. It operates as a decentralized autonomous organization (DAO) governed by LDO token holders. The protocol works with a curated set of professional node operators who run validators on behalf of depositors.
Key Statistics:
- ~30% of all staked ETH
- Multiple professional node operators
- 10% fee on staking rewards (split between node operators and DAO treasury)
- No minimum deposit requirement
How to Stake with Lido
Staking through Lido is straightforward:
- Visit stake.lido.fi and connect your wallet
- Enter the amount of ETH you wish to stake
- Approve the transaction
- Receive stETH in your wallet
The process takes minutes, and you’ll immediately begin earning staking rewards reflected in your daily stETH balance increase.
stETH vs. wstETH
Lido offers two versions of its liquid staking token:
stETH (Staked Ether): The primary rebasing token. Your balance increases daily as rewards accumulate. Best for simply holding and tracking your staking position.
wstETH (Wrapped Staked Ether): A wrapped, non-rebasing version of stETH. Your balance stays constant while the value per token increases. Essential for DeFi protocols that cannot handle rebasing tokens, including many lending platforms and automated market makers.
You can wrap and unwrap between stETH and wstETH freely through Lido’s interface. Many users hold stETH for simplicity but convert to wstETH when interacting with DeFi.
DeFi Opportunities with stETH
Lido’s market dominance translates to exceptional DeFi integration:
- Lending: Use wstETH as collateral on Aave, Spark, and other lending protocols to borrow against your staked position
- Liquidity Provision: Provide stETH/ETH liquidity on Curve to earn trading fees on top of staking rewards
- Leverage: Borrow ETH against wstETH, stake the borrowed ETH for more wstETH, and repeat for leveraged staking exposure
- Restaking: Deposit stETH into EigenLayer to earn additional restaking rewards
Rocket Pool: The Decentralized Alternative
Rocket Pool positions itself as the most decentralized liquid staking protocol, operating with over 2,700 independent node operators compared to Lido’s curated operator set. This distributed architecture appeals to users prioritizing Ethereum’s decentralization ethos.
Protocol Overview
Launched on mainnet in November 2021, Rocket Pool uses a permissionless node operator model. Anyone meeting the requirements can run a Rocket Pool node, creating a diverse network of validators spread across the globe.
Key Statistics:
- 2,700+ independent node operators
- 0.01 ETH minimum deposit for stakers
- Variable commission rate (typically 5-20%, set by node operators)
- 8 or 16 ETH minimum to run a node (with RPL collateral)
How rETH Works
rETH is a reward-bearing token. When you deposit ETH into Rocket Pool, you receive rETH at the current exchange rate. As validators earn rewards, the rETH:ETH exchange rate increases. Your rETH balance stays the same, but it becomes redeemable for more ETH over time.
Current APY Range: Approximately 2.8-6.3%, varying based on network conditions, MEV rewards, and node operator performance.
Running a Rocket Pool Node
Unlike Lido, Rocket Pool enables individuals to run validator nodes with reduced capital requirements:
- Minipool Options: Run a validator with 8 ETH or 16 ETH (instead of 32 ETH)
- RPL Collateral: Node operators must stake RPL tokens worth at least 10% of their ETH value
- Enhanced Rewards: Node operators earn commission on staking rewards from matched ETH (from rETH holders)
- RPL Rewards: Additional RPL token rewards for node operators
This model makes running a validator accessible to users with 8+ ETH while still requiring meaningful collateral to ensure good behavior.
rETH in DeFi
While less liquid than stETH, rETH has growing DeFi integration:
- Collateral: Accepted on major lending platforms including Aave and Maker
- Trading: Available on decentralized exchanges including Uniswap and Balancer
- Compatibility: As a non-rebasing token, rETH works natively with all DeFi protocols
Lido vs. Rocket Pool: Detailed Comparison
| Feature | Lido (stETH/wstETH) | Rocket Pool (rETH) |
|---|---|---|
| Token Type | Rebasing (stETH) or Reward-bearing (wstETH) | Reward-bearing |
| Minimum Deposit | No minimum | 0.01 ETH |
| Protocol Fee | 10% of rewards | 5-20% (varies by node operator) |
| Node Operators | Curated professional set | 2,700+ permissionless operators |
| Decentralization | Lower (fewer operators) | Higher (distributed network) |
| Market Share | ~30% of staked ETH | ~3% of staked ETH |
| Liquidity | Highest (deep DEX pools) | Good (growing liquidity) |
| DeFi Integration | Extensive | Growing |
| Run Your Own Node | No (operator application only) | Yes (8+ ETH + RPL) |
| Governance | LDO token holders | RPL token holders + Protocol DAO |
Other Liquid Staking Protocols
While Lido and Rocket Pool dominate the market, several other protocols offer liquid staking with different characteristics:
Frax Ether (frxETH/sfrxETH)
Frax Finance offers a dual-token model. frxETH is pegged 1:1 with ETH and earns no staking rewards directly. Users who stake frxETH receive sfrxETH, which accumulates all staking rewards. This concentrates yield for sfrxETH holders, potentially offering higher returns than competing protocols.
Coinbase Wrapped Staked ETH (cbETH)
Coinbase’s liquid staking solution provides institutional-grade security and regulatory clarity. cbETH is a reward-bearing token available through the Coinbase platform. The familiar interface and Coinbase’s reputation make it attractive for users prioritizing ease of use over decentralization.
Binance Staked ETH (BETH)
Binance offers liquid staking through BETH, representing staked ETH on the exchange. While convenient for Binance users, BETH is primarily useful within the Binance ecosystem and has limited DeFi utility compared to decentralized alternatives.
Risks of Liquid Staking
Liquid staking offers significant benefits, but understanding the risks is essential before participating.
Smart Contract Risk
All liquid staking protocols rely on smart contracts to manage deposits, minting, and withdrawals. Bugs or vulnerabilities in these contracts could result in loss of funds. While major protocols undergo extensive audits, no smart contract is completely risk-free.
Mitigation: Use established protocols with long track records, multiple audits, and substantial total value locked (TVL). Consider diversifying across multiple protocols.
De-Peg Risk
Liquid staking tokens should trade near their fair value relative to ETH, but market conditions can cause temporary or extended de-pegs. During periods of market stress, LSTs have traded at discounts to their underlying value.
Mitigation: Only stake funds you can hold long-term. Avoid leveraged positions that could face liquidation during de-peg events.
Slashing Risk
Validators can be slashed (penalized) for misbehavior or errors, reducing the staked ETH. While slashing events are rare and protocols typically have insurance mechanisms, the risk exists.
Mitigation: Choose protocols with diverse operator sets and slashing insurance. Rocket Pool’s collateral requirements provide additional protection.
Centralization Risk
Concentration of staked ETH in a single protocol (particularly Lido’s ~30% share) raises concerns about network centralization. If one entity controls too much of the validator set, it could theoretically impact Ethereum’s security and censorship resistance.
Mitigation: Consider supporting more decentralized protocols like Rocket Pool, even if they have lower liquidity.
Regulatory Risk
The regulatory status of liquid staking tokens remains uncertain in many jurisdictions. Future regulations could impact the ability to use, trade, or hold LSTs.
Liquid Staking Strategies
Liquid staking enables various strategies ranging from simple to complex. Match your approach to your risk tolerance and DeFi experience.
Basic Strategy: Hold LST
The simplest approach is to stake ETH for an LST and hold it. You earn staking rewards (currently 3-4% APY) while maintaining liquidity if you need to exit. This strategy requires minimal management and exposes you only to the base risks of liquid staking.
Expected Return: 3-4% APY
Risk Level: Low (relative to other strategies)
Best For: Long-term holders who want yield without active management
Intermediate Strategy: Provide Liquidity
Provide liquidity in LST/ETH pools on decentralized exchanges like Curve or Balancer. You earn trading fees in addition to staking rewards, increasing your overall yield.
Expected Return: 4-8% APY (varies with trading volume)
Risk Level: Medium (impermanent loss risk, smart contract risk of DEX)
Best For: Users comfortable with DEX mechanics seeking enhanced yield
Advanced Strategy: Leveraged Staking
Use LSTs as collateral to borrow ETH, stake the borrowed ETH for more LSTs, and repeat. This leverages your staking exposure, amplifying both returns and risks.
Expected Return: 6-15%+ APY (depends on leverage and borrow rates)
Risk Level: High (liquidation risk, de-peg amplification, multiple protocol risks)
Best For: Experienced DeFi users with strong risk management
Warning: Leveraged positions can be liquidated during de-peg events. The 2022 stETH de-peg saw positions liquidated even though stETH was always redeemable 1:1 for ETH. Only use leverage with full understanding of the risks.
Tax Considerations
Liquid staking creates tax complexity that varies by jurisdiction. This section provides general considerations—consult a tax professional for advice specific to your situation.
Potential Taxable Events
- Receiving LSTs: Some jurisdictions may treat the exchange of ETH for LSTs as a taxable disposal
- Rebasing Rewards: Daily stETH balance increases may constitute taxable income in some jurisdictions
- Trading LSTs: Selling or trading LSTs typically triggers capital gains/losses
- DeFi Activities: Using LSTs in DeFi (providing liquidity, borrowing) may create additional taxable events
Rebasing vs. Reward-Bearing Tax Treatment
Reward-bearing tokens like rETH may offer simpler tax treatment in some jurisdictions. Since your balance doesn’t change, you may only realize gains when you sell. Rebasing tokens like stETH create daily balance changes that might be treated as income.
Record Keeping: Regardless of token type, maintain detailed records of all transactions, including dates, amounts, and values at the time of each transaction.
Frequently Asked Questions
Is liquid staking safe?
Liquid staking carries risks including smart contract vulnerabilities, de-peg events, and slashing. Major protocols like Lido and Rocket Pool have operated for years without significant losses, but past performance doesn’t guarantee future safety. Only stake what you can afford to lose and consider diversifying across protocols.
Can I unstake at any time?
Yes. You can either swap your LST for ETH on a decentralized exchange (instant but may have slippage) or request withdrawal through the protocol (may take days but at full value). Both Lido and Rocket Pool support direct withdrawals.
What returns can I expect from liquid staking?
Current Ethereum staking yields approximately 3-4% APY. Your actual return depends on the protocol’s fee structure and any additional strategies you employ. Rocket Pool’s variable operator commissions can result in slightly different yields than Lido’s fixed 10% fee.
Which is better: stETH or rETH?
Neither is objectively better—they serve different priorities. Choose stETH/wstETH if you value maximum liquidity and DeFi integration. Choose rETH if you prioritize decentralization and simpler tax treatment. Many users hold both for diversification.
Do I need 32 ETH for liquid staking?
No. Liquid staking protocols accept any amount. Lido has no minimum; Rocket Pool requires just 0.01 ETH. This accessibility is one of liquid staking’s primary benefits.
What happens if the liquid staking protocol fails?
Your underlying ETH remains staked on the Ethereum network. Protocol failure would complicate withdrawals but shouldn’t result in complete loss of the underlying assets. The LST might lose value or become illiquid while the situation is resolved.
Can I use liquid staking tokens as collateral for loans?
Yes. Major lending protocols like Aave accept wstETH and rETH as collateral. This enables you to borrow against your staked position without unstaking, maintaining staking rewards while accessing liquidity.
Conclusion
Liquid staking represents a significant evolution in how Ethereum holders can participate in network security while maintaining capital efficiency. By understanding the mechanics of protocols like Lido and Rocket Pool, the differences between rebasing and reward-bearing tokens, and the associated risks, you can make informed decisions about incorporating liquid staking into your strategy.
For most users, starting with a simple hold strategy using either stETH or rETH provides exposure to staking yields without excessive complexity. As you gain experience, DeFi integrations offer opportunities to enhance returns—but always with corresponding increases in risk.
The liquid staking ecosystem continues to evolve, with new protocols, improved decentralization, and deeper DeFi integration emerging regularly. Staying informed about developments in this space will help you optimize your approach over time.
Disclaimer: This article is for educational purposes only and does not constitute financial advice. Cryptocurrency investments carry significant risks. Always conduct your own research and consider consulting with financial and tax professionals before making investment decisions.
