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Ethereum’s transition to a proof of stake (PoS) consensus mechanism has made the network far more inclusive. Under this design, anyone can stake ETH to help secure the blockchain while earning staking rewards for their efforts.
However, staking ETH directly to the smart contract carries a high barrier to entry. Users need to lock up 32 ETH to run a validator node. In addition, users need to maintain their nodes to avoid penalties. These technical and capital requirements make it difficult for most investors to participate in staking ETH.
Fortunately, liquid staking has emerged as a far more accessible alternative. In contrast to traditional staking, liquid staking allows users to earn rewards by depositing as little as 0.01 ETH.
Liquid staking was pioneered by Lido Finance, who launched the first liquid staking platform for ETH in December 2020.
With liquid staking, users can participate in ETH staking without needing to lock up funds or maintain their own nodes.
Here’s how the process of liquid staking works:
In practice, it’s even more simple than this. Most users will swap ETH for stETH or other LSTs on Uniswap, and they’ll start earning staking rewards right away. This approach makes ETH staking far more appealing for ordinary investors. Token holders are empowered to retain full control of their funds, while the low deposit threshold allows far more users to participate.
Lido’s dominance of ETH staking highlights the popularity of liquid staking mechanics. The protocol is now DeFi’s largest platform by total value locked (TVL), with more than $18B in TVL at the time of writing. Impressively, more than 30% of all ETH staked has been staked via Lido.
Also known as liquid staking derivatives, liquid staking tokens fall into three high-level categories.
Rebasing tokens have been adopted widely throughout the space. These tokens, like Lido’s stETH and Origin Ether’s OETH, have an elastic supply. This approach distributes token rewards to users in the form of additional tokens, while the value of each token remains static. This is especially important considering that LSTs generally strive to maintain a peg to Ethereum.
Rebasing tokens are by far the most popular design among liquid staking platforms.
In contrast to rebasing, non-rebasing tokens maintain a constant supply while the value of each token increases daily in proportion to staking rewards. This model is utilized by a number of platforms. Leading LST project Rocket Pool boasts a non-rebasing token in the form of rETH.
LST protocol Frax Finance is currently the only major liquid staking platform that uses a dual-token model. This design isolates users’ initial capital and accrued yield in the form of two LSTs.
For example, Frax stakers receive frxETH representing their deposited funds. Users can choose to stake frxETH to Frax’s sfrxETH vault, which allows stakers to earn yield in the form of sfrxETH.
This approach can offer more flexibility in DeFi by separating the capital token from the volatile, yield-bearing token. For example, Frax is able to incentivize its frxETH pools, which in turn boosts sfrxETH yield for holders.
However, dual-token models remain fairly niche due to their complexity.
Liquid staking’s growth has seen many protocols compete for users to stake ETH. As a result, there are many platforms that potential stakers can choose from. It’s important to consider factors like security and usability when deciding where to stake ETH. Additionally, staking rewards vary significantly depending on the platform used.
The DeFi platforms outlined below comprise some of DeFi’s most prominent liquid staking protocols.
Lido remains the most dominant platform for ETH staking, having popularized the benefits of liquid staking. The protocol uses a rebasing LST in the form of stETH, which maintains a peg to ETH. Lido users currently receive around 3% APYs on their staked ETH.
Founded in 2016, Rocket Pool has been building its liquid staking product for seven years. Rocket Pool stakers hold rETH, a non-rebasing LST. The platform is the second largest liquid staking protocol behind Lido, with more than 1 million ETH staked.
Rocket Pool’s mechanics have further broken down barriers to entry. In addition to regular LST staking, Rocket Pool allows users to run their own validator nodes by locking up 8 ETH to mini-pools. This threshold is far lower than the 32 ETH needed to run a node independently. Rocket Pool’s base APY currently sits at >2.8%, but is higher for mini-pool operators.
Origin Ether (OETH) is an enhanced liquid staking token from the team at Origin Protocol. The liquid staking protocol addresses a key issue in ETH staking: yield compression. As staking adoption increases, yields decrease. This is because the same pool of rewards is being split between a growing number of stakers.
OETH is fully collateralized by reserves of ETH, which is staked to Ethereum's beacon chain to receive staking rewards. ETH reserves can also be used in audited liquidity provision strategies, utilizing Origin's AMO. In doing so, OETH is able to deliver higher yield than traditional ETH staking, while maintaining a tight peg to ether's price.
Like other LSTs, OETH maintains an ETH peg and can be traded seamlessly – no lockups required.
For most investors, liquid staking is far more suitable than solo staking. The amount of technical knowledge and capital required for solo staking makes it far more appealing for institutions and individuals with a deep commitment to Ethereum’s long-term growth.
The key benefits of solo staking comprise autonomy and heightened rewards. By staking directly to the smart contract, solo stakers have full control over their nodes. In addition to staking rewards from transaction fees, validators also earn block rewards for proposing or verifying new blocks of transactions.
However, solo staking APYs vary between 3-5%, which LST protocols like OETH offer users without any of the hassle involved.
Additionally, failing to maintain a node or breaking network rules can result in your node being slashed from the network. These penalties have been implemented to protect network security. Thus, it’s vital to be confident in your technical abilities when deciding to solo stake.
While there are no guarantees when it comes to investing, liquid staking carries lower risk for users than many other options in DeFi. Given that users retain control of their capital with LSTs, stakers face little risk of losing funds.
That being said, it’s important to research platforms thoroughly before depositing any assets. Exploits are still commonplace in DeFi, and there’s no room for complacency.
OETH, for example, boasts a robust, battle-tested codebase. The protocol is open source, affording users maximum transparency. Additionally, OETH has been rigorously audited by the space’s most prominent security firms, including OpenZeppelin.
Dive into Origin's liquid staking ecosystem to see how OETH can help you stack ETH faster: originprotocol.eth.limo
What are liquid staking tokens?
Liquid staking tokens (LSTs) are tokens given to ETH stakers representing their staked capital and accrued yield.
Which liquid staking tokens are most popular?
Lido’s stETH is the largest LST in the space, with more than 30% of ETH staked via the platform. Origin Ether’s has also seen significant traction with over $150M in total value locked.
