Liquid staking in cryptocurrency: what it is, how it works, and what risks it involves

Liquid staking emerged during the boom in decentralized finance (DeFi). It offers an alternative to native staking*, helping investors overcome some of the limitations associated with blockchains that use the Proof-of-Stake (PoS) consensus mechanism.

* Native staking is the traditional method of staking in which cryptocurrency is used directly to secure a blockchain without issuing additional liquid tokens. Users can either operate their own validator or delegate their coins to another network participant. Unlike liquid staking, native staking does not provide users with derivative tokens that can be used in other financial transactions.

Note: The terms "staking" and "native staking" are often used interchangeably. However, staking is a broader concept that also includes other ways to earn rewards on cryptocurrency holdings, including through liquid staking protocols.

Liquid staking offers cryptocurrency holders not only the opportunity to earn rewards but also greater flexibility in managing their capital, contributing to the growing popularity of this approach.

According to DeFi Llama, as of October 2026, liquid staking was one of the largest segments of the DeFi market, with a total value of nearly $53 billion.

What is liquid staking in cryptocurrency?

Liquid staking is a way to earn rewards from staking* cryptocurrency while retaining the ability to use the value of the deposited assets. Users deposit cryptocurrency into a specialized protocol and receive liquid tokens in return. These tokens can be held, traded, or used in other financial transactions while the underlying assets remain staked.

* Staking is a mechanism for earning rewards by participating in the operation and security of blockchains that use the Proof-of-Stake (PoS) consensus algorithm. Users stake cryptocurrency independently or through specialized services, while validators use the staked assets to validate transactions and produce new blocks.

The concept of liquid staking was first implemented by Lido Finance, a protocol launched on the Ethereum blockchain in 2020.

How does liquid staking work?

Liquid staking operates through smart contracts deployed by specialized platforms known as liquid staking protocols.

Users deposit cryptocurrency into a liquid staking protocol's smart contract and receive a special asset in return, linked to the deposited cryptocurrency at a one-to-one ratio. These assets are called Liquid Staking Tokens (LSTs).

LSTs are also known as Liquid Staking Derivatives (LSDs) or LSD tokens. This terminology reflects the fact that liquid staking tokens are essentially derivative assets, similar in concept to financial derivatives* such as futures and perpetual contracts.

* Derivatives are financial instruments whose value depends on the price of an underlying asset, such as a cryptocurrency, stock, or commodity. Traditional derivatives include futures, options, and perpetual contracts.

The protocol stakes users' deposited assets, allowing the cryptocurrency to generate rewards. The platform distributes these rewards to the owners of the staked assets while retaining a portion as a service fee. As a result, liquid staking in cryptocurrency generally offers lower net yields than native staking.

Holders can use their liquid staking tokens as they wish while their underlying assets remain staked. There are several ways to use these tokens:

• Long-term holding to earn rewards: The value of liquid staking tokens may increase along with the price of the underlying cryptocurrency.
• Trading on centralized and decentralized exchanges: Holders can sell or exchange their liquid staking tokens.
• Liquidity mining and yield farming*: Holders can deposit liquid staking tokens into decentralized exchange liquidity pools or lending protocols to earn additional rewards.
• Restaking*: Liquid staking tokens can be reused to generate additional rewards while maintaining exposure to the underlying assets.

* Yield farming is a method of earning additional returns on cryptocurrency by depositing it into decentralized finance (DeFi) protocols. For example, users can provide tokens to a decentralized exchange's liquidity pool or a lending platform and receive rewards in the form of trading fees, lending interest, or additional tokens.

* Restaking is a mechanism that allows cryptocurrency already committed to staking, or the liquid tokens received in exchange for it, to be reused to help secure additional blockchain services and protocols. This enables users to earn additional rewards without withdrawing their original assets from staking. Unlike traditional staking, restaking allows the same assets to contribute to the security of multiple systems simultaneously.

If desired, holders can recover their original cryptocurrency by redeeming their liquid staking tokens through the relevant protocol or exchanging them on a cryptocurrency exchange. In the first case, withdrawing assets from staking may take some time, while in the second case, the exchange can usually be completed almost immediately.

Why is liquid staking needed?

Blockchains that use the Proof-of-Stake (PoS) consensus mechanism offer an alternative to traditional mining, allowing users to earn rewards for helping secure the network. To participate, users voluntarily lock their coins through a specialized smart contract while retaining ownership of the underlying assets. This mechanism is known as staking.

If users want to sell their cryptocurrency, exchange it for another asset, or use it for other purposes, they must first withdraw their coins from staking. However, withdrawals are not always immediate. On some blockchains, coins remain locked for a specified period after an unstaking request is submitted, ranging from several hours to two weeks or longer. During this time, users cannot freely access or use their assets.

On the one hand, this approach encourages long-term investors to hold their coins. On the other hand, it limits their ability to manage their assets freely. For example, investors may be unable to sell their coins quickly during periods of high cryptocurrency market volatility.

The primary purpose of staking is to secure the network: the more coins are committed to staking, the greater the financial incentive for participants to maintain the blockchain's stability. An attack on the network could result in substantial losses for stakers themselves, making such attacks economically unattractive.

However, locking large amounts of cryptocurrency can also reduce liquidity. Staked coins are temporarily removed from circulation, which may increase the cryptocurrency's price volatility during periods of intense trading activity and create additional risks for investors and traders.

Liquid staking lets users earn rewards on staked cryptocurrency while still using those assets in other financial transactions. As a result, although the underlying assets remain locked, their value can continue circulating within the DeFi ecosystem, supporting market liquidity and encouraging further development.

This approach attracts additional investors who previously avoided staking because of asset lockups, as reflected in the growth of the liquid staking market. Over the past three years, the total value of cryptocurrency deposited in liquid staking protocols has more than doubled, reaching a peak of nearly $100 billion in September 2025.

Risks of liquid staking in cryptocurrency

Although staked assets are subject to certain restrictions, holders generally retain ownership of their capital. Nevertheless, staked cryptocurrency can be lost due to compromised wallets and attacks on the underlying blockchain network.

With liquid staking, asset security also depends on the protocol itself. If attackers discover and exploit a vulnerability in a liquid staking protocol's smart contract, users may lose their funds.

Attackers may gain access to both the underlying staked assets and the liquid staking tokens. Even if the liquid staking tokens themselves are not directly affected, holders may suffer losses if the tokens' market value collapses following an attack on the liquid staking protocol.

For example, in November 2025, an attacker exploited a vulnerability in the yETH pool smart contract of the Yearn Finance protocol. The exploit allowed the attacker to mint a massive number of unbacked yETH tokens and withdraw other liquid staking tokens and cryptocurrencies from the pools.

The initial damage from the attack was estimated at approximately $9 million. However, the developers later recovered about $2.4 million in stolen assets. The incident was also accompanied by a decline in the market value of Yearn Finance's governance token (YFI).

What liquid staking protocols are available?

As of October 2026, more than 200 liquid staking protocols existed. More than 80% of all assets deposited in liquid staking protocols were concentrated in the ten largest platforms, including:

• Lido (Ethereum and Solana);
• Binance Staked ETH (Ethereum and BNB Smart Chain (BSC));
• ether.fi (Ethereum, Base, OP Mainnet, Arbitrum, Berachain, and Scroll);
• JustLend (TRON);
• Sanctum Validator LSTs (Solana);
• Rocket Pool (Ethereum);
• Binance Staked SOL (Solana);
• Jito (Solana).