Digital Assets

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.

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
1 · SnapshotThe one idea to remember
Key intuition: staking yield is not "free interest on your crypto" — it is payment for taking three risks: slashing, protocol bugs, and the liquidity gap between the token you hold and the stake it represents. The 3–4% is the price of those risks, set by supply and demand for security.
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?

3 · IntermediateHow it works in practice

Where the yield comes from

$$ y_{\text{stake}} \approx \frac{\text{issuance rewards}}{\text{total staked}} + \text{tx fees} + \text{MEV}, \qquad \frac{\partial y}{\partial(\text{total staked})} < 0 $$

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.

Worked example: 10 ETH staked via Lido at 3.5%. Year's accrual: ~0.35 ETH. Same position levered 3× through a lending market: ~8% net of borrow costs — until a 5% stETH discount marks your collateral down 15% against a fixed debt, and the liquidation engine does the rest. The yield tripled; the failure mode went from "wait out the queue" to "forced sale at the bottom of the discount". Same asset, different instrument.
4 · AdvancedPricing & valuation

Pricing the stETH/ETH basis

The discount is a term-liquidity spread with measurable drivers:

$$ P_{stETH} = 1 - \underbrace{f(\text{queue length})}_{\text{time to redeem}} - \underbrace{\lambda_{\text{slash/protocol}}}_{\text{tail risk}} + \underbrace{\text{convenience yield}}_{\text{DeFi collateral utility}} $$

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
Practitioner note: decompose any staking yield into its three layers — base protocol rate, liquidity/basis premium of the wrapper, and leverage — and stress each separately: queue length at 10× current, discount at 2022 levels, one added slashing condition. The base layer is among the cleanest yields in crypto; almost every blow-up lived in the layers stacked on top of it.

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