Liquid Staking: How to Achieve Continuous Growth Through Cryptocurrency Assets

Liquid staking is currently one of the most flexible yield strategies in the crypto investment space. Unlike traditional staking, liquid staking allows users to earn network rewards while maintaining asset liquidity, enabling the creation of multiple income streams within the DeFi ecosystem. This innovative mechanism has rapidly gained popularity since 2022 and has become a standard tool for seasoned investors.

From PoW to PoS: Ethereum’s Milestone Transition

Understanding liquid staking requires knowing how Ethereum completed its consensus mechanism upgrade.

Launched in 2015 by Vitalik Buterin and the development team, Ethereum initially used the same proof-of-work (PoW) mechanism as Bitcoin. While PoW ensured network security and decentralization, its drawbacks are obvious: slow transaction speeds, high network fees, and massive energy consumption.

To address these issues, Ethereum began transitioning to proof-of-stake (PoS). In December 2020, the Beacon Chain (Ethereum 2.0) launched; by September 2022, the “Merge” was completed, and Ethereum officially switched to PoS. According to Vitalik Buterin, this upgrade reduced the network’s energy consumption by 99.9%, which is significant for sustainability and ecological friendliness.

Limitations of Traditional Staking and Improvements

Basic Staking Concept

The core logic of staking is derived from traditional bank savings: users deposit assets into a specific account to earn returns. In crypto networks, users lock tokens into smart contracts to secure the network and, in return, receive newly minted token rewards.

Comparison of Three Traditional Staking Methods

1. Self-Staking

   • Users become validators directly, requiring a minimum of 32 ETH
   • Advantages: fully decentralized, rewards belong entirely to the user
   • Disadvantages: high capital barrier, smart contract risks, penalty risks, long lock-up periods with no flexibility

2. Exchange Staking

   • Users entrust assets to centralized exchanges for staking
   • Advantages: no minimum threshold, easy to operate
   • Disadvantages: centralized risk, low transparency, withdrawal fees, platform bankruptcy risk

3. Locked Staking

   • Assets are fully locked until the cycle ends before withdrawal
   • Suitable for: long-term holders and risk-averse users
   • Limitation: very low liquidity, cannot respond quickly to market changes

Liquid Staking: An Innovation Breaking Asset Freeze

Core Mechanism

Liquid staking uses smart contracts within the DeFi ecosystem to allow users to retain liquidity while their assets are staked. When users deposit assets (e.g., ETH) into a liquid staking platform, they receive a corresponding tokenized receipt (e.g., stETH). These tokens have the following features:

• Parity: 1 ETH staked = 1 stETH, issued at a 1:1 ratio
• Liquidity: stETH can be freely traded, transferred, or used as collateral in DeFi markets
• Independence: stETH operates independently of the underlying assets, without affecting the original staking

Dual Income Design

Users can earn two types of income simultaneously:

1. Staking Rewards: derived from Ethereum’s native rewards (historical range 4.8%–15.5%)
2. DeFi Earnings: by using the liquid receipt tokens in lending, liquidity mining, and other activities

The Ecosystem of Liquid Staking Platforms

Current market participants and their features:

Lido: Leading the Market with a Full-Chain Approach

As the largest liquid staking protocol, Lido offers staking services for ETH, Solana, Polygon, Polkadot, and Kusama. As of the latest data, ETH is priced at $2,010 (down 1.15% in 24 hours), and its liquid receipt token stETH has been integrated into 27 DeFi applications. After staking ETH for stETH, users can also use it as collateral on platforms like Aave.

Lido manages its DAO via the LDO governance token (currently $0.34), allowing users to participate in major decisions. The platform charges a 10% service fee.

Rocket Pool: Dual-Return Model

Focusing on the Ethereum ecosystem, Rocket Pool lowers the node operation threshold, allowing users to become validators with 16 ETH instead of 32. The average annual yield for users holding rETH (the liquid receipt) is about 4.16%, while node operators can earn a base yield of 6.96% plus RPL token incentives.

Tempus Finance: Fixed Income Tools

Targeted at advanced users, Tempus offers tools to lock in future yields across multiple chains (Ethereum, Fantom, etc.). The platform supports yield tokens like stETH, yvDAI, xSUSHI, and integrates AMM functions for liquidity provision. It charges zero service fees, only taking a fee on exchanges.

Hubble Protocol: Lending and Leverage

Hubble’s innovation lies in allowing users to borrow against staked assets, issuing USDH stablecoins that can be reused on other platforms to achieve up to 11x leverage. The platform charges a 0.5% fee.

Meta Pool and NEAR Ecosystem

Focusing on the NEAR protocol, Meta Pool distributes user assets across 65 validators, offering approximately 9.76% annual yield. The liquid receipt token stNEAR can be used within Aurora applications, with a 0.3% withdrawal fee.

OKTC Liquid Staking: Native Ecosystem Solution

OKTC offers liquid staking for the OKT token. Users staking OKT receive stOKT, maintaining full liquidity and trading activity within the OKTC ecosystem.

Applications of Liquid Staking in DeFi

Yield farming is a key application for maximizing liquid staking yields. After obtaining the liquid receipt tokens, users can:

• Provide liquidity: earn trading fees on DEXs
• Collateralize loans: use receipt tokens as collateral to borrow stablecoins
• Participate in incentives: earn additional tokens in specific DeFi protocols

This “one asset staked, multiple uses” model is the greatest value proposition of liquid staking.

Risks and Limitations

Although liquid staking offers elegant solutions, investors should be aware of:

1. Pegging risk: liquid receipt tokens may lose their 1:1 parity with the original asset (historical case: stETH once traded at a discount)
2. Smart contract risk: bugs or vulnerabilities could lead to total asset loss
3. Liquidity risk: if the receipt tokens become illiquid, users may need to pay an equivalent amount of assets to retrieve their original stake
4. Platform risk: centralized staking platforms may collapse due to bankruptcy or hacking

Summary: Who Should Choose Liquid Staking

Liquid staking is suitable for:

• Investors experienced in DeFi
• Medium- to long-term holders seeking multi-chain yields
• Active traders requiring liquidity flexibility

For beginner investors, traditional staking remains a safer choice. Liquid staking is a sophisticated strategy that requires thorough understanding of its mechanisms and risks before participation.