Liquid Staking Explained: stETH, LSTs, Restaking, and DeFi's Base Rate

TL;DR

• Liquid staking stakes your ETH for you and hands you a tradeable token, a liquid staking token (LST), that represents the locked stake. The stake keeps earning; the token walks free.
• It is the oldest trick in banking: lock the gold with a goldsmith, and people start trading the paper receipt instead of the gold. The receipt becomes money.
• The receipt takes a second job in DeFi, backing loans or working in pools, so the same ETH earns twice. That convenience snowballed one issuer, Lido's stETH, into the giant of the category.
• Restaking (EigenLayer is the model) pledges the same stake to secure additional networks for additional pay. Each layer is a separate promise that can fail on its own.
• Staking yield is DeFi's base rate: the floor every other yield gets judged against. Anything paying less than the floor while asking you to carry more risk has already answered the important question badly.

What is liquid staking?

Liquid staking is a service that stakes your ETH for you and gives you a tradeable token representing the locked stake, so your money keeps earning staking rewards while a liquid claim on it moves freely through DeFi.

Start with the itch that created it. When you stake ETH, you lock it up to help secure Ethereum, and the network pays you steadily for the service. Good deal, one problem: staked ETH is stuck. It cannot trade, cannot back a loan, cannot work in a liquidity pool, cannot do any of the jobs the rest of DeFi exists to offer. Capital hates being stuck, and in a system built entirely out of machines that put capital to work, a large pile of productive-but-frozen money is an unbearable situation.

Liquid staking is the fix, and it is not a new idea. It is a very old one, replayed on a blockchain.

Why does a deposit receipt turn into money?

Centuries ago, savers locked their gold with a goldsmith and walked out holding a paper receipt. Then something happened that quietly built modern banking: people stopped moving the gold. Why haul metal across town when the person you owe will accept the claim on it? The receipts changed hands instead. The paper spent like gold, settled debts like gold, became money, while the metal never left the vault.

Keep that picture on the board, because liquid staking is Ethereum replaying it station by station. You deposit ETH with a staking service, the service stakes it for you, and into your wallet lands a token that represents your locked stake. The stake works the chain. The token walks free. You can hold it, send it, or trade it.

Function first, now the names. The walking token is a liquid staking token, an LST. The giant of the category is stETH, issued by Lido. Neither name matters as much as the shape: a liquid receipt for a locked deposit, which the market gradually starts treating as the deposit itself.

How does stETH actually pay you?

Here is the question that trips up most newcomers: your stake is earning rewards inside the vault, so where do those rewards show up while you are holding the receipt?

Not as an airdrop, and not as a coupon stapled to the token. The design is simpler: the claim itself grows. The receipt represents your stake, the stake grows as rewards land, so the paper quietly becomes worth more of the gold it stands for. Hold stETH and your staking pay arrives as the token itself appreciating against ETH. No claiming, no coupons. The receipt keeps the books.

One decoy to clear away: the issuer does charge for the service, but the rewards accrue to the receipt holder. That is the entire point of the design. If the vault kept the gold's growth, nobody would hold the vault's paper.

What is the receipt's second job?

Now let the paper out the door, because this is where liquid staking stops being a convenience and starts reshaping DeFi.

stETH stands as collateral on lending markets: the pawnshop counter described in how DeFi lending works accepts the receipt just as it accepts ETH itself. stETH sits in liquidity pools, earning trading fees. The receipt is money now, and money finds work.

Notice what your original ETH is doing. It is earning staking rewards inside the vault and holding down a second job outside it, backing a loan or working a pool. Same coin, two paychecks. This is composability in the flesh: one protocol's output becoming another protocol's input, with no one's permission required. DeFi could not resist it, and did not.

Why did one receipt eat the market?

Here is the quiet part, the one worth saying without drama.

Every borrower, pool, and protocol prefers the deepest, most widely integrated receipt. Deep paper is easy to trade, easy to liquidate, easy to price, so lending markets list it first and pools hold it most. That means the biggest issuer's paper gets more useful as it gets bigger, which attracts more deposits, which makes it bigger still. The snowball rolled, and today a meaningful slice of all staked ETH flows through Lido.

Named honestly: the chain's security now has a largest shareholder. Nothing broke and nobody cheated. It is simply what happens when receipts compete. The most spendable paper wins, and winning makes it more spendable still. Whether that concentration is acceptable is a live debate in Ethereum's community; what matters for your literacy is seeing that the concentration was not an accident. It is the natural end state of the receipt game.

What is restaking?

Just when the goldsmith's trick seemed fully played out, one more layer arrived.

New networks need security too. A fresh protocol cannot cheaply raise its own army of stakers, its own economic guarantee that misbehavior gets punished. So an offer appeared, function first: pledge your already-staked ETH position to also stand behind these new networks, and collect additional pay for the additional service. The name is restaking, and EigenLayer is the model people learn it from.

So who is paying? Each network is paying for security it cannot raise alone. That is the honest economic engine underneath restaking: young networks renting Ethereum's staker base instead of building their own. The staker, in turn, collects twice by carrying twice the promises. The same collateral now answers to two masters, and trouble at either layer reaches through to the base. If a network you restaked to decides you misbehaved, your original stake is what gets docked.

How many promises deep is your ETH?

The stacking did not stop there, and this is where you need the goldsmith's skepticism more than his admiration.

Restaking platforms issue their own receipts for restaked positions, liquid restaking tokens, and protocols offer yield on those. Paper on paper on paper. So count what the pitch will not. A protocol offers yield on the restaked receipt token of restaked ETH. How many promises now stand between you and your gold?

At least four: the chain must keep paying its stakers, the LST issuer must keep the receipt good, the restaking platform must hold, and the end protocol must pay. Four separate promises, made by four separate machines, each able to fail on its own, all standing on one pile of ETH.

"Underneath it is all still just my ETH" is true right up until it is not. You can only reach the ETH back through every layer of paper, in order, and if any single layer stops honoring its promise, the comforting phrase stops being true at exactly the moment you need it. The honest question about any stacked position is this: does the summed yield price the summed promises? More layers do pay more, and that is precisely the trap in the reasoning. Each layer pays more because it asks you to carry one more promise. Yield is rent paid for risk, not a prize for cleverness. Deeper is not better. Deeper is simply more.

Is liquid staking strictly better than plain staking?

The obvious conclusion, at this point, is that liquid staking dominates: same stake, same rewards, plus a receipt that walks. Surely strictly better?

No, and the reason is the theme of this whole article. The receipt adds promises that plain staking never made. A plain staker holds no one's paper: just their stake and the chain's own promise. The receipt holder has added two things. First, an issuer whose books must stay good. Second, a market price of the receipt itself, which is not guaranteed to equal the value of the stake behind it.

That second one is not theoretical. Under stress, liquid staking receipts have traded below the value of the stake they represent. It is a documented pattern, not a doomsday scenario: when many holders want out at once, the paper sags below the vault gold, precisely at the moment holders most want the two to be equal. The liquidity is real, but it is not free. Liquid staking buys freedom with promises. There is no strictly better here; there is only the trade, and knowing you are making it.

Why is staking yield DeFi's base rate?

Step back from the stack, and one number organizes everything you have read.

Staking pays for the least adventurous productive thing this ecosystem offers: securing the chain itself. No borrower to trust, no pool ledger to worry about, no stack of paper. That makes staking yield DeFi's floor, its base rate: the pay for showing up, before taking anybody else's promises.

Every yield you will ever meet gets judged against that floor. Lending should pay the floor plus something for borrower risk. Providing liquidity should pay the floor plus something for the pool's particular hazards. Restaked stacks should pay the floor plus something for every promise in the pile. And anything paying less than the floor while asking you to carry more risk has answered the most important question in DeFi badly, in advance. Where each of those extra somethings actually comes from is the subject of where DeFi yield comes from, and it is the single most protective question a beginner can learn to ask.

If you want to build this instinct interactively instead of reading about it, this article is drawn from a checkpoint of Your First 90 Days in DeFi, our free course, where you count the promise stack yourself. The first three checkpoints need no account.

Related questions

Is stETH the same as ETH? No. stETH is a claim on staked ETH, issued by Lido, with a market price of its own. It usually trades close to ETH because the claim is real and redeemable, but under stress it has traded below ETH. Treating the receipt as identical to the gold is exactly the assumption that fails when it matters.

Can you lose money with liquid staking? Yes, through several doors: the issuer's systems failing, the receipt trading below the stake's value when you need to sell, smart contract bugs, and whatever risks come with the second jobs you give the receipt in DeFi. The staking rewards are real; so are the added promises.

What is the difference between liquid staking and restaking? Liquid staking makes a locked stake liquid: you get a token representing your staked ETH. Restaking pledges an already-staked position to secure additional networks for additional pay. The first frees your capital; the second loads more promises onto it.

What is a liquid restaking token (LRT)? A receipt for a restaked position, issued by a restaking platform: paper on paper. It behaves like an LST one layer deeper, which means one more issuer to trust and one more market price that can sag. Count the promises before comparing the yields.

Do you need 32 ETH to stake? Running your own validator requires a full 32 ETH stake. Liquid staking services pool deposits of any size, which is a large part of why LSTs snowballed: they turned staking from an operator's job into a token anyone can hold.

Where to go next

Liquid staking is the goldsmith's trick replayed on Ethereum: lock the gold, trade the paper, and watch the paper become money. It is genuinely useful, it quietly concentrated the chain's security around its biggest issuer, and with restaking it grew into stacks of promises that all stand on the same pile of ETH. The skill is not avoiding the paper. The skill is counting the promises behind it, and judging every yield against the floor that staking sets.

From here, read how DeFi lending works to see the receipt's biggest second job, money legos for how these stacks form in general, and where DeFi yield comes from to place the base rate inside the full yield map. Or start Your First 90 Days in DeFi below: free, interactive, no account needed for the first three checkpoints.