Understanding Liquid Staking

What is Staking?

In the world of cryptocurrency, staking is the process of locking up a digital asset to help run a blockchain network and verify transactions. Staking combines cryptography with economic incentives to reward honest participation and keep the network secure. In Ethereum, participants put their tokens at stake by running validators — nodes that take part in consensus by proposing and attesting to new blocks.

Each validator is represented on-chain as a validator object ↗ — a record that stores its state on the Beacon Chain. One key field, the effective_balance¹, is the amount of ETH that counts toward a validator's rewards and consensus weight. This amount is capped: originally at 32 ETH, and at 2048 ETH since EIP-7251 ↗. The more effective balance a validator has, the more weight it carries when performing its duties:

• Proposing new blocks
• Attesting to blocks
• Participating in
  sync committees

Validators earn rewards for performing these duties well and face penalties when they don't. Reward amounts follow mathematical formulas that account for several variables, including participation rates, timing, and network conditions². For a full breakdown of how these rewards and penalties are calculated, see ethereum.org ↗.

The Traditional Staking Dilemma

Traditional staking follows a simple premise: lock tokens and earn rewards. This secures the network, but it comes with a major drawback. Once staked, ETH becomes illiquid and cannot be used elsewhere in decentralized finance (DeFi). Stakers are left with a fundamental dilemma, forced to choose between earning staking rewards and keeping their ETH liquid, never both.

The Liquid Staking Solution

Liquid staking solves this dilemma through tokenization. When staking through a liquid staking protocol, stakers receive liquid staking tokens (LSTs) that represent a claim on their staked assets plus accrued rewards. Unlike native staking, where tokens are locked, LSTs stay liquid and

composable

, so the original stake keeps earning while the LST can be put to work across DeFi. Stakers earn from two sources at once:

• Staking rewards from the underlying validators
• DeFi yields from opportunities like lending, yield farming, or trading on decentralized exchanges (DEXs)

All while keeping the stake transferable and easily convertible back into ETH.

With LSTs, stakers keep exposure to staking rewards without giving up liquidity, breaking the either-or premise of traditional staking.

The Gaps in Today's Options

To stake on Ethereum, a validator must be backed by 32 ETH. How stakers meet that requirement varies across the options available today, and each comes with its own trade-offs.

The default way to stake — called solo staking — can be out of reach because of the 32 ETH minimum and the technical expertise needed to run a node. This barrier gave rise to staking service providers that need no programming knowledge or hardware setup, such as staking-as-a-service (SaaS) and centralized exchanges (CEXs). Both come with trade-offs. SaaS providers still require the full 32 ETH minimum and offer no liquidity. Centralized exchanges take custody of the staker's assets and concentrate control in a single company, which runs counter to the decentralization that crypto is built on.

Decentralized liquid staking protocols emerged in response. They remove the deposit minimum by pooling capital from many depositors and issuing tokens that represent each depositor's share of the staking pool. These tokens are usually tradable on decentralized exchanges and accepted as collateral in lending protocols, which makes entry and exit easy and opens the door to DeFi.

By design, these protocols are non-custodial and permissionless. Their trade-off is a standardized, one-size-fits-all service: stakers can't control how or on what terms their assets are staked, and must stake on third-party nodes to access liquidity, commingling their assets with everyone else's. Many protocols also rely on a closed set of node operators, concentrating stake around a few dominant operators and giving participants little transparency over how it is allocated.

StakeWise addresses these gaps with a different approach to liquid staking.

1. Unlike the actual balance (which changes with every block), effective balance updates only once per epoch. It also "snaps" to the nearest 1 ETH increment due to a mechanism called hysteresis — this prevents constant fluctuations from affecting consensus calculations. ↩

2. For detailed reward calculations and formulas, see: eth2book ↗ ↩