Staking & Liquid Staking
Also known as: stETH, LSD / LST, Staked ETH, Restaking (frontier)
Earning the blockchain's own interest rate — and the token that made locked collateral liquid, basis risk included.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat is it, really?
Proof-of-stake blockchains like Ethereum replace mining with a deposit system: lock up the network's own coin as stake, run a validator that helps confirm transactions, and earn rewards — currently around 3–4% a year on ETH. Misbehave (or go offline badly) and the protocol slashes part of your deposit. Staking yield is the blockchain's native interest rate: paid by the protocol itself, in its own currency, for securing it.
Direct staking has frictions: 32 ETH minimum per validator, hardware and uptime, and your coins locked while staked. Liquid staking dissolves them: deposit any amount of ETH with a protocol like Lido and receive a token — stETH — that represents your staked position and accrues the yield automatically. The token trades freely: you can sell it, lend it, or post it as collateral while the underlying ETH keeps earning. Locked capital, made liquid.
The construction should sound familiar from this atlas: a claim on an interest-bearing pool, trading at market price around its underlying value — a money-market-fund share crossed with a stablecoin's peg mechanics, denominated in a volatile asset. All three inherit the same core question: what happens when everyone wants out at once?
a paymentsomething deliveredonly if a condition is met
The receipt token in your wallet and the stake behind it can part company in price, because only one of the two can be sold in a hurry.
When you stake
- You → The protocol Handed to a contract that pools them and delegates them to operators.
- The protocol → You Tradeable, which is the innovation. It represents a claim on the stake and it is not the stake.
Continuously
- The protocol → You The operator takes a commission and the protocol takes a fee before anything reaches the receipt's value. The advertised rate is usually the gross one.
If an operator misbehaves
- The protocol → You Slashing is automatic and falls on the stakers behind that operator. Concentration among a few of them is a real exposure and not a theoretical one.
If everybody wants out at once
- The protocol → You Unstaking has a queue measured in days. The receipt can be sold instantly — at a discount that is precisely the price of that queue.
Who actually runs the validator, and the exit queueafter the trade
something deliveredonly if a condition is metnot a payment
Continuously
- The protocol → Validators Chosen by the protocol's own governance. How many there are, and who they are, is the thing worth reading before staking.
- Validators → The network Rewards are paid by the network for doing this correctly and reliably.
Unstaking
- The network → The protocol The network limits how fast stake can leave, deliberately. That limit is what the receipt's discount is pricing.
- Asset class
- Digital assets (yield-bearing)
- Instrument type
- Staked positions & liquid staking tokens
- Traded
- On-chain 24/7; stETH the dominant instrument
- Typical users
- ETH holders, DeFi users, institutions via ETPs
Which risks decide the outcome
Not how risky this is, and not a rating — there is deliberately no total. It says which of five failure modes drives what happens here, in the same order on all 129 products so they can be compared. This publication's own reading; see the notice below.
- Marketmatters
- Creditmatters
- Liquiditydecides it
- Fundingmatters
- Operationaldecides it
What decides it here. The receipt can be sold instantly and the stake cannot, so the discount between them is the price of an exit queue. Slashing falls on whoever backed the wrong operator.
3 · IntermediateHow it works in practice
Where the yield comes from
What the symbols mean
- ythe yield to maturity
Issuance scales inversely with total stake (more stakers → thinner slices), while fee and MEV income scale with network activity. ETH staking yields have drifted from ~5% toward 3% as the staked share climbed past a quarter of supply — an endogenous rate, like every interest rate.
stETH mechanics and the peg-that-isn't
- Accrual: stETH rebases (or, in wrapped form wstETH, appreciates) daily with rewards — holding it is the yield.
- Redemption: post-2023 ("Shapella" upgrade), stETH can be redeemed for ETH through a withdrawal queue — days in normal times, longer if exits crowd. Before withdrawals existed, stETH traded purely on secondary liquidity: in the June 2022 deleveraging (Celsius, 3AC), it fell to a 0.93–0.95 discount — not a broken promise, but the market price of exiting early through a thin pool.
- The leverage loop: deposit stETH as collateral, borrow ETH, stake it, repeat — levered staking built on the assumption the discount stays small. The 2022 episode was that assumption unwinding: discount widens → collateral marks fall → liquidations sell stETH → discount widens. A textbook basis-trade squeeze, on-chain and fully visible.
The centralisation ledger
Lido alone has hovered near 30% of all staked ETH — approaching thresholds where a single operator set matters for network integrity. The ecosystem's responses (operator decentralisation, competitor LSTs, protocol self-limits debated) matter for holders directly: concentration is a protocol-governance risk and a regulatory magnet.
4 · AdvancedPricing & valuation
Pricing the stETH/ETH basis
The discount is a term-liquidity spread with measurable drivers:
What the symbols mean
- Pa price, or a present value
- ta point in time
- Ean expected value
- Tmaturity, in years
- lambdaan intensity, usually of defaults per year
With withdrawals live, arbitrage bounds the discount at the queue's time-value (mint at par, redeem at par, wait) — the same primary/secondary architecture as ETFs and stablecoins, with the queue as the creation/redemption friction. The convenience term is real: stETH's usability as collateral can push it above naive fair value in leverage-hungry markets. Desks trade the basis against the queue length the way money-market desks trade bill specialness.
Restaking: the frontier and its leverage
EigenLayer-style restaking re-pledges staked ETH to secure additional services for additional yield — stacking slashing conditions from multiple protocols on one collateral base. Liquid restaking tokens (LRTs) then wrap that. The structure is explicitly rehypothecation: one asset, several liabilities, correlated failure modes — the credit-structuring lineage (collateral chains, repo-style reuse, tranche-like risk stacking) rebuilt on-chain at speed. Yield-chasing flows into LRTs price the extra slashing surface at nearly zero; the first major slashing cascade will produce the asset class's own 2008-style seniority lesson.
Institutional and regulatory surface
- ETP wrappers: European staked-ETH ETPs and the US debate over staking inside spot ETFs — custody rules meeting validator operations; approval turns staking yield into a fund share-class feature.
- Securities question: SEC actions against exchange staking-as-a-service (Kraken 2023) versus protocol-native staking — the line between "program with profit expectation from others' efforts" and "network fee for work" is the live legal frontier.
- Rate-benchmark emergence: staking yield as crypto's reference rate — the base leg against which perp funding, DeFi lending and basis trades all quote; CESR-style benchmark indices formalise it.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.
5 · Desk notesHow practitioners think about it
Now say it back
Close the page and give Staking & Liquid Staking in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — two parties wanted opposite things badly enough to write it down.
- What the contract obliges, and when — not the payoff; the obligation.
- Where the money comes from — name the source, or you have described a hope.
- What makes it lose — the ordinary way, not the dramatic one.