Staying Safe

What is Liquid Staking?

By The Fire Team
Liquid staking allows you to stake your Ethereum (ETH) while maintaining liquidity, solving the traditional staking limitations like the need for 32 ETH and locking up your assets. Platforms like Lido and Rocketpool manage the staking process and issue synthetic tokens, known as Liquid Staking Derivatives (LSDs), that represent your staked ETH. While these platforms are generally considered safe, there are still risks like potential centralization of staked ETH. Lido dominates the market, but Rocketpool offers a more decentralized option, even letting you run your own node.

What is Liquid Staking?

Staking is one of the most popular ways to earn yield in web3: You help secure the network and get returns in exchange. But traditional staking can be annoying: You need 32 of ETH to start and need to guarantee uptime. And while you’re staking you can’t use your ETH to trade tokens, use lending protocols or do anything else. 

Enter liquid staking, which lets you stake ETH and maintain liquidity. If you’re wondering what liquid staking is, how it works and if liquid staking is safe, read on!

1. How Does Liquid Staking Work?

Liquid staking lets you stake your (self-custodied) ETH while still having access to liquidity.. Liquid staking addresses this issue. Liquid staking protocols like Lido and Rocketpool handle all the staking infrastructure and give you (most of) the staking returns on your ETH.

by issuing synthetic or derivative tokens that represent the staked assets.

Here's a simplified step-by-step process:

  1. Deposit Tokens: The first step in liquid staking is depositing your tokens, usually ETH, into a staking smart contract.
  2. Receive Synthetic Tokens: After depositing, you receive an equal amount of liquid staking derivatives (LSDs) in your wallet which represent your staked amount.
  3. Earn Rewards: While your original tokens are staked and helping validate transactions, you earn staking rewards just like you would in traditional staking. The protocol usually takes a cut of the rewards for handling all the infrastructure.
  4. Liquidity: The synthetic tokens you receive can be traded, used in DeFi protocols, or otherwise utilized to maintain liquidity.

2. What Are Liquid Staking Derivatives?

Liquid staking derivatives are a token issued in exchange for your original ETH. These derivatives hold a 1:1 value ratio with the original assets, meaning one staked ETH token is always worth the same as one ETH—and when you deposit one ETH, you get one staked ETH token.

To withdraw from liquid staking, you can always redeem LSDs for ETH along with any rewards earned during the staking period. For example, if you stake ETH through liquid staking protocol Lido, you’d receive a derivative token like "stETH" that represents your staked ETH.

The most well-known liquid staking derivatives are: 

  • Lido’s stETH
  • Rocketpools rETH

3. Is Liquid Staking Safe?

Safety in liquid staking depends on the platform and smart contracts used for staking. Whenever you’re looking at liquid staking protocols, look for security audits like those on Rocketpool’s website: 

Rocketpool security audits
Rocketpool security audits

None of these mean that the protocol is perfectly safe. While no liquid staking protocol has rever been exploited, that doesn’t mean it can’t happen. 

Perhaps the bigger risk of liquid staking is that of having too much staked ETH in one entity, which centralizes the overall Ethereum blockchain. While liquid staking derivatives offer great convenience, the overall space benefits also needs independent stakers!

4. Is Lido Staking Safe?

Lido is the most popular platform for liquid staking and holds nearly 30% of staked ETH. Prominent web3 personalities criticize this because of the centralization risks mentioned above.

Lido has undergone multiple security audits and has a strong track record in the industry. While Lido is generally considered safe and reliable, nothing is ever 100% safe. 

Besides the staking product itself, Lido offers developer resources to integrate stETH in their protocols as well as governance opportunities for $LDO token holders (note that $LDO is the Lido DAO token, not the liquid staking derivative). 

In addition to Ethereum mainnet, Lido also has its liquid staking protocol on the low-fee layer 2 Polygon and the Solana blockchain. 

5. What is Rocketpool?

Rocketpool is another liquid staking platform with the rETH LSD token. It’s often considered a great alternative to Lido liquid staking because it has a lower market share. This means that staking on Rocketpool decentralizes the total amount of staked ETH away from the market leader Lido. 

While Lido only offers its staking pool, Rocketpool also lets you run your own node through its protocol. Via Rocketpool, anyone with 8 or more ETH can create a node, which is another example of Rocketpool’s interest in decentralizing Ethereum liquid staking. 

If you’re exploring Ethereum, check out Fire!

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To Summarize

Liquid staking provides the perks of traditional staking without locking up your assets. Lido and Rocketpool are the main platforms, but they come with varying risks, including centralization. While Lido and Rocketpool have been exploit-free for a long time no platform is entirely risk-free.