The world of decentralized finance is evolving at lightning speed, and one of the most exciting developments in recent years is the rapid rise of liquid staking across major DeFi protocols. If traditional staking locks your crypto and makes it unusable, liquid staking flips that concept entirely. It lets you stake your tokens to earn rewards while simultaneously using a representative token in other DeFi activities like lending, borrowing, or trading.
Think of it this way: imagine depositing money in a savings account that earns interest, but instead of your money being locked, the bank gives you a special voucher worth the same amount. You can use that voucher to shop, invest, or pay bills while your original deposit keeps growing. That is essentially what liquid staking in DeFi does for crypto holders, and it is quickly becoming the backbone of modern blockchain finance.
In this comprehensive guide, we will explore the adoption trends driving liquid staking forward, examine how major protocols are implementing it, and understand why both individual users and institutional players are embracing this technology at an unprecedented rate.
What Is Liquid Staking and Why Does It Matter?
To understand liquid staking, you first need to understand traditional staking. In proof of stake blockchains like Ethereum, users lock their tokens in a validator to help secure the network and earn rewards. The problem? Those tokens are completely locked and cannot be used for anything else during the staking period.
Liquid staking solves this problem by issuing a derivative token (called a Liquid Staking Token or LST) in exchange for your staked assets. This LST represents your staked position and accrues value over time as staking rewards are earned. Meanwhile, you can use the LST across the DeFi ecosystem for lending, borrowing, providing liquidity, and more.
Tokens are locked in a validator. You earn rewards but cannot access or use your tokens until the unbonding period ends.
You stake tokens and receive an LST (like stETH). You earn rewards AND can use the LST across DeFi simultaneously.
The Growth of Liquid Staking: By the Numbers
The adoption of liquid staking has been nothing short of explosive. It has grown from a niche concept to the single largest category in all of DeFi by total value locked. Let us look at the numbers that tell this story:
This meteoric rise is driven by a simple value proposition: why lock your capital when you can put it to work in multiple places at once? For both retail users and institutional players, liquid staking offers a way to maximize returns without sacrificing flexibility.
How Liquid Staking Works: A Step by Step Guide
Understanding the mechanics of liquid staking is straightforward once you see the flow. Here is exactly what happens from the moment you decide to liquid stake your tokens:
You send your native tokens (like ETH, SOL, or MATIC) to a liquid staking protocol through its smart contract or user interface.
The protocol pools your tokens with other users and delegates them to network validators. Your tokens begin earning staking rewards immediately.
You receive a derivative token (for example, stETH from Lido or rETH from Rocket Pool) that represents your staked position plus accruing rewards.
Your LST can be used as collateral for borrowing, deposited in yield farms, traded on DEXs, or supplied to lending pools for additional returns.
When you want your original tokens back, you return the LST to the protocol and receive your staked tokens plus earned rewards (minus any protocol fees).
Native tokens sent to protocol
Tokens pooled and delegated to node operators
Derivative token minted representing staked position
Earn additional yield while staking rewards compound
Full cycle complete
Major Liquid Staking Protocols Driving Adoption
The liquid staking landscape is dominated by a handful of powerful protocols, each offering unique features and operating across different blockchain networks. Let us explore the key players shaping this market:
The largest liquid staking protocol with over 70% market share on Ethereum. Issues stETH, which is widely accepted as collateral across Aave, MakerDAO, Curve, and dozens of other platforms.
Ethereum • Polygon • Solana
A decentralized alternative to Lido that allows anyone to run a node with just 8 ETH. Issues rETH, known for its permissionless and trust minimized architecture.
Ethereum
Offers institutional grade liquid staking with regulatory compliance. cbETH is popular among users who prefer a centralized, regulated approach to staking.
Ethereum • Base
The leading liquid staking protocol on Solana, issuing mSOL. Known for distributing stake across hundreds of validators to promote decentralization.
Solana
A Solana based liquid staking protocol that captures MEV (Maximal Extractable Value) rewards for stakers, offering higher yields than traditional staking approaches.
Solana
A pioneering restaking protocol on Ethereum that allows liquid staked ETH to be used for securing additional services, creating a new layer of utility and yield.
Ethereum • Restaking
Protocol Comparison: Liquid Staking Leaders
| Protocol | Blockchain | LST Token | Approx. APY | Decentralization |
|---|---|---|---|---|
| Lido | Ethereum, Polygon | stETH | 3% to 4% | Medium (curated set) |
| Rocket Pool | Ethereum | rETH | 3% to 3.5% | High (permissionless) |
| Coinbase | Ethereum, Base | cbETH | 2.5% to 3.5% | Low (centralized) |
| Marinade | Solana | mSOL | 6% to 7% | High (400+ validators) |
| Jito | Solana | JitoSOL | 7% to 8% | Medium |
| EigenLayer | Ethereum | Various (restaked) | Variable + bonus | Medium |
Key Adoption Trends Shaping Liquid Staking in 2025 and Beyond
The liquid staking landscape is not static. Several powerful trends are accelerating adoption and reshaping how the entire DeFi ecosystem operates. Here are the most significant trends to watch:
LSTs Becoming DeFi Money
Liquid staking tokens like stETH are increasingly being treated as a superior form of collateral across DeFi. Major lending platforms now accept LSTs, and many users prefer holding stETH over regular ETH because it earns yield passively. This trend is turning LSTs into the default “productive” version of popular crypto assets.
Multi Chain Expansion
Liquid staking was initially an Ethereum focused innovation, but it has rapidly expanded to Solana, Cosmos, Avalanche, Polygon, BNB Chain, and numerous Layer 2 networks. Each chain is developing its own liquid staking ecosystem with unique protocols and LST tokens.
Rise of Restaking (LRTs)
Restaking protocols like EigenLayer allow already staked ETH to be used for securing additional middleware services. This creates Liquid Restaking Tokens (LRTs) that offer compounded yield layers. Restaking has quickly become one of the fastest growing subsectors in DeFi.
Institutional Adoption
Institutional players, including hedge funds, asset managers, and corporate treasuries, are entering the liquid staking space. They are attracted by the combination of staking yield and maintained liquidity, which fits well with traditional portfolio management strategies.
Push for Decentralization
As Lido controls a significant share of Ethereum staking, the community is actively pushing for more decentralized alternatives. This has fueled growth of permissionless protocols like Rocket Pool, SSV Network, and Diva Staking that distribute validator power more broadly.
Traditional Staking vs Liquid Staking vs Restaking
| Feature | Traditional Staking | Liquid Staking | Restaking (LRTs) |
|---|---|---|---|
| Liquidity | Tokens locked, no access | LST freely usable in DeFi | LRT usable with added layers |
| Yield | Single staking reward | Staking + DeFi yield | Staking + DeFi + restaking rewards |
| Complexity | Simple | Moderate | Advanced |
| Risk Level | Low (validator slashing) | Medium (smart contract + depeg) | Higher (multiple layers of risk) |
| Capital Efficiency | Low | High | Very High |
| Best For | Long term holders | Active DeFi users | Yield maximizers |
Benefits of Liquid Staking for the DeFi Ecosystem
Liquid staking is not just a convenience feature. It fundamentally improves how capital flows through the DeFi ecosystem. Here are the core benefits driving its adoption:
- ✓Capital Efficiency: Your tokens work in two places at once: staking and DeFi. This dramatically improves the return on each unit of capital deployed.
- ✓Network Security: More users are willing to stake when liquidity is preserved, which increases the total amount staked and strengthens network security.
- ✓DeFi Composability: LSTs integrate seamlessly with lending, DEXs, yield aggregators, and other protocols, creating powerful composable strategies.
- ✓Lower Barrier to Entry: Users do not need 32 ETH to stake on Ethereum. Protocols let you stake any amount and still participate in network validation.
- ✓Passive Income: Staking rewards accrue automatically in the LST value, requiring no active management from the holder.
- ✓Flexibility: Users can exit their staking position by simply selling the LST on a DEX, avoiding the traditional unbonding periods that can last days or weeks.
Risks and Challenges in Liquid Staking
Despite its many advantages, liquid staking is not without risks. Understanding these challenges is essential for making informed decisions:
Liquid staking protocols rely on complex smart contracts. Any bug or vulnerability could put staked assets at risk. Always verify that the protocol has undergone multiple security audits from reputable firms.
LSTs should trade close to the value of the underlying staked asset. However, during market panic or liquidity crises, LSTs can temporarily trade at a discount (depeg), causing paper losses for holders.
When one protocol like Lido controls a large percentage of all staked ETH, it raises concerns about network centralization. This concentration of validator power could theoretically threaten the blockchain’s security model.
If a validator node behaves maliciously or has downtime, a portion of staked tokens can be “slashed” (penalized). While protocols mitigate this by diversifying across validators, the risk exists and users should be aware of it.
Real World Use Cases of Liquid Staking
Liquid staking is not just theoretical. It powers real strategies used by thousands of DeFi participants every day. Here are some practical examples:
Leveraged Staking
A DeFi user stakes 10 ETH on Lido and receives 10 stETH. They deposit the stETH on Aave as collateral and borrow more ETH. They stake that borrowed ETH again on Lido to create a leveraged staking position, multiplying their staking yield. This strategy is commonly called “recursive staking” or “looping.”
Treasury Yield for DAOs
A DAO holds millions of dollars in ETH in its treasury. Instead of letting it sit idle, the DAO liquid stakes its ETH and uses the stETH to earn additional yield in DeFi lending pools. This way the treasury grows passively while remaining liquid for governance proposals and operational expenses.
Institutional Portfolio Management
A crypto fund holds a large Ethereum position for a client. By using liquid staking, the fund earns 3 to 4% annual staking yield while keeping the position liquid enough to sell if market conditions change. The cbETH token from Coinbase is often preferred in these cases due to its regulatory compliance.
Industry and Business Relevance
Liquid staking is not just relevant to individual crypto holders. It is becoming a foundational infrastructure layer for the entire blockchain industry. Startups building DeFi products, exchanges looking to offer staking services, and enterprises exploring blockchain based treasury management all need reliable liquid staking infrastructure.
Building or integrating liquid staking functionality requires deep expertise in smart contract development, validator management, tokenomics design, and cross chain interoperability. This is where experienced blockchain solution providers make a significant difference.
Nadcab Labs, as a global Web3 and blockchain company, helps businesses design and implement custom liquid staking solutions, LST integration layers, and DeFi protocol architectures. Their expertise spans from smart contract auditing and deployment to building complete staking platforms tailored to specific business requirements.
Define yield model, LST mechanics, target chains
Build staking pool, LST minting, reward distribution
Multiple audits, bug bounty, testnet deployment
Get LST accepted on lending, DEX, yield platforms
Go live with real time analytics and risk monitoring
Future Outlook: Where Is Liquid Staking Heading?
The liquid staking sector is still in its early growth phase despite already being the largest DeFi category. Here is what industry experts and trends suggest about its future trajectory:
- ➤LSTs as Default Assets: Industry observers expect LSTs to eventually replace native tokens as the standard holding across wallets and DeFi platforms.
- ➤Regulated Staking Products: With growing institutional demand, we will likely see regulated liquid staking offerings from licensed financial entities.
- ➤Cross Chain LST Bridges: Seamless movement of LSTs between different blockchains will unlock new DeFi strategies and liquidity pools.
- ➤Decentralized Validator Technology (DVT): Technologies like SSV Network will make liquid staking more decentralized and resilient by splitting validator duties across multiple operators.
- ➤Integration with Real World Assets (RWAs): The convergence of liquid staking with tokenized real world assets could create entirely new financial products bridging traditional and decentralized finance.
Conclusion
Liquid staking across major DeFi protocols has emerged as one of the most transformative innovations in decentralized finance. By solving the fundamental tradeoff between network security and capital efficiency, it has unlocked billions of dollars in previously idle capital and created entirely new categories of financial products and strategies.
The adoption trends are clear: liquid staking is growing across every major blockchain, LSTs are becoming foundational DeFi assets, institutional interest is accelerating, and the restaking revolution is adding new layers of utility and yield. For beginners, understanding these trends is essential for navigating the modern crypto landscape. For builders and businesses, liquid staking infrastructure represents a massive opportunity to create products that serve the next generation of DeFi users.
As this ecosystem continues to mature, working with experienced partners like Nadcab Labs ensures that your liquid staking solutions are secure, scalable, and built for long term success. Whether you are staking your first ETH or building the next major DeFi protocol, the liquid staking revolution is just getting started
Frequently Asked Questions
Yes, it is possible. If the liquid staking protocol suffers a smart contract exploit, or if validators are slashed for misbehavior, a portion of the underlying staked tokens could be lost. Additionally, protocol fees and potential LST depeg events can reduce your effective returns even if the base token price remains unchanged.
No, that is one of the biggest advantages of liquid staking. The protocol handles all validator operations on your behalf. You simply deposit your tokens and receive the corresponding LST. The technical infrastructure, validator management, and reward distribution are all managed by the protocol and its node operators.
Traditional liquid staking is designed for proof of stake networks. However, protocols like Babylon are pioneering Bitcoin staking by allowing BTC holders to stake their Bitcoin to secure proof of stake chains while receiving liquid representations. This emerging category is sometimes called “Bitcoin restaking” and is gaining significant attention.
Tax treatment varies significantly by jurisdiction. In many countries, staking rewards are treated as income at the time they are received or become accessible. For rebasing LSTs like stETH, each rebase event could technically be a taxable event. For value accruing LSTs like rETH, the gain is typically realized upon selling. It is strongly recommended to consult a crypto tax specialist in your region.
A rebasing LST like stETH increases in quantity in your wallet as rewards accrue (your stETH balance grows daily). A value accruing LST like rETH maintains the same quantity but increases in value relative to the base asset over time. Both methods deliver the same economic result, but they handle reward distribution differently, which can affect DeFi composability and tax treatment.
Yes, this is one of the most popular uses of LSTs. Major lending platforms like Aave, Compound, Spark, and MakerDAO accept LSTs like stETH, rETH, and cbETH as collateral. This allows you to borrow stablecoins or other assets against your staked position without having to unstake, effectively earning yield and accessing liquidity at the same time.
There are typically two options. The fastest way is to simply swap your LST for the native token on a decentralized exchange, which is instant. The alternative is to use the protocol’s official withdrawal queue, which on Ethereum can take anywhere from a few hours to several days depending on network conditions and demand. Solana based protocols usually offer faster withdrawal times.
Most liquid staking protocols have no minimum or an extremely low minimum deposit requirement. Unlike traditional Ethereum staking that requires 32 ETH (a significant investment), liquid staking platforms allow you to stake any amount, even fractions of a token. This makes staking accessible to everyone regardless of their portfolio size.
If the protocol’s smart contracts are exploited, the impact depends on the nature of the hack. In a worst case scenario, the underlying staked tokens could be drained, making the LST worthless. Some protocols maintain insurance funds or have emergency governance mechanisms, but there is no guarantee of full recovery. This is why choosing audited, battle tested protocols and diversifying across multiple platforms is critically important.
While liquid staking was originally designed for native blockchain tokens used in proof of stake consensus, the concept is expanding. Some protocols are exploring liquid versions of governance token staking, where users lock tokens for voting power and receive a liquid derivative in return. This is still an emerging area, but it shows how the liquid staking model is being adapted for broader use cases beyond just network validation.
Reviewed & Edited By
Aman Vaths
Founder of Nadcab Labs
Aman Vaths is the Founder & CTO of Nadcab Labs, a global digital engineering company delivering enterprise-grade solutions across AI, Web3, Blockchain, Big Data, Cloud, Cybersecurity, and Modern Application Development. With deep technical leadership and product innovation experience, Aman has positioned Nadcab Labs as one of the most advanced engineering companies driving the next era of intelligent, secure, and scalable software systems. Under his leadership, Nadcab Labs has built 2,000+ global projects across sectors including fintech, banking, healthcare, real estate, logistics, gaming, manufacturing, and next-generation DePIN networks. Aman’s strength lies in architecting high-performance systems, end-to-end platform engineering, and designing enterprise solutions that operate at global scale.
