What Is Liquid Staking?
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Liquid staking allows users to stake their tokens while still using them for DeFi activities, providing liquidity without unstaking.
Popular liquid staking platforms include Lido and Rocket Pool, which offer tokens like stETH and rETH, which represent staked assets.
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Liquid staking allows crypto holders to unlock the liquidity of their staked assets. While traditional staking locks up tokens, liquid staking lets users continue earning rewards while participating in other DeFi activities.
What is liquid staking?
Liquid staking is a service that allows users to stake their crypto assets while retaining the ability to use them in decentralized finance (DeFi) applications. When users deposit their tokens into a liquid staking protocol, they receive liquid staking tokens (LSTs) in exchange.
These tokens represent the underlying staked assets and can be traded or used as collateral in DeFi protocols. This allows users to maintain liquidity while earning staking rewards.
For example, a user might stake Ethereum (ETH) with Lido, receive stETH tokens in return, and then use those stETH tokens in DeFi projects like Aave to earn additional yield. This flexibility makes liquid staking an attractive option for users who want to maximize the potential of their staked assets.
Is liquid staking worth it?
Liquid staking offers several advantages, such as increased flexibility and the potential for higher returns. By unlocking the liquidity of staked assets, users can access additional yield opportunities in DeFi without needing to unstake their tokens. This can be particularly useful in volatile markets where liquidity is key to capitalizing on short-term opportunities.
However, liquid staking also comes with risks. These include the possibility of slashing, where a portion of the staked assets are penalized if the validator behaves maliciously, and secondary market volatility, which could cause the price of liquid staking tokens to drop below their underlying value. It’s important to weigh these risks carefully with any crypto investment.
What’s the difference between liquid staking and staking?
Traditional staking locks up tokens for a set period, preventing them from being used in other activities. In contrast, liquid staking allows users to continue using the value of their staked tokens while still earning staking rewards. With traditional staking, users face an opportunity cost—if their assets are locked, they cannot take advantage of new opportunities in DeFi. Liquid staking eliminates this barrier by providing liquid staking tokens that can be traded or used as collateral in other protocols.
Additionally, liquid staking removes the need for individuals to run their own validator nodes or meet the minimum token requirements for staking. Service providers like Lido and Rocket Pool take care of the technical aspects, making it more accessible to a broader range of users.
Learn more about staking crypto.
How does liquid staking work?
Liquid staking works by delegating users' assets to validators through a staking service provider. In return, the user receives a liquid staking token (LST) representing their staked assets and any accrued rewards. These LSTs can then be used in DeFi protocols, traded, or transferred while the staked assets continue to generate staking rewards.
For instance, if you deposit ETH into a liquid staking protocol, you receive stETH in return. You can use that stETH in DeFi applications like lending platforms or liquidity pools, all while your original ETH remains staked and earning rewards.
Can you make money with liquid staking?
Yes, liquid staking provides opportunities to earn rewards from multiple sources. Users can continue to earn staking rewards while also using their liquid staking tokens to participate in DeFi activities like lending or yield farming, potentially generating additional income. This dual-reward system allows for more efficient capital allocation.
That noted it’s essential to consider the risks. The value of liquid staking tokens may fluctuate based on market conditions, and users could lose money if the price of their LST drops or if the underlying assets are subject to slashing.
Learn more in our DeFi tax guide.
What are the benefits of liquid staking derivatives?
Liquid staking derivatives (LSDs) provide additional utility for staked assets by making them tradable and usable in various DeFi projects. These derivatives can be transferred, sold, or used as collateral, opening up new possibilities for capital efficiency. By using LSDs, users can continue to receive staking rewards while simultaneously engaging in yield-generating DeFi activities.
Moreover, the composability of LSDs within DeFi means that they can be integrated across multiple protocols, expanding the range of opportunities available to users.
Liquid staking tokens
Liquid staking tokens (LSTs) are the receipt tokens issued by crypto staking service providers. These tokens represent ownership of the underlying staked assets and any rewards they generate. For example, stETH is the LST issued by Lido for staked Ethereum, while rETH is issued by Rocket Pool. These tokens can be used in DeFi protocols or traded on secondary markets, allowing for liquidity without unstaking the original assets.
That noted, LSTs are not without risks. Their value can deviate from the underlying asset, particularly during extreme market volatility. Users should carefully manage the risks associated with using LSTs in DeFi.
Looking to calculate your crypto profit? Try our free crypto profit calculator.
Liquid staking platforms to consider
There are several platforms where users can participate in liquid staking. Some of the most popular include:
Lido: The most extensive liquid staking protocol, offering stETH, stSOL, and other LSTs across multiple blockchains.
Rocket Pool: A decentralized liquid staking protocol for Ethereum that offers rETH. It has a lower minimum deposit requirement, making it more accessible.
Coinbase: A centralized exchange that offers liquid staking for select assets, allowing users to earn rewards while maintaining liquidity.
Each platform comes with risks and rewards, so evaluating them carefully before choosing one is essential.
See our expert picks of the best crypto staking platforms.
Is liquid staking taxable?
Yes, liquid staking is typically taxable. When you stake your assets, any rewards from staking are considered taxable income. Any gains or losses are typically subject to tax reporting if you trade or use your liquid staking tokens in DeFi activities. Keeping accurate records of all your staking activities is essential to ensure proper tax compliance.
Learn more about crypto staking taxes.
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Liquid staking FAQs
What is liquid re-staking?
Is liquidity staking risky?
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