Understanding crypto staking: from basics to advanced liquid staking

Staking crypto is a fundamental concept in modern blockchain ecosystems. For users who want their digital assets to work for them while securing the network, staking crypto offers a chance for passive income. But with the evolution of blockchain technology, an advanced form has emerged: liquid staking. This innovation changes how users can benefit from staking crypto by keeping their assets liquid while earning rewards.

What is staking crypto?

Staking crypto relies on the principle of traditional savings accounts but without an intermediary. Instead of depositing money in a bank, users lock up their crypto holdings to secure a network. Validators—participants who perform staking crypto—help verify transactions. In return for their services, they receive newly minted coins.

The shift of Bitcoin and Ethereum from Proof of Work (PoW) to Proof of Stake (PoS) made staking crypto mainstream. Ethereum implemented this system in December 2020 via the Beacon Chain and completed the full transition in September 2022. This resulted in a drastic reduction in energy consumption—the network now uses 99.9% less energy than before.

The advantage of staking crypto over traditional savings is clear: users receive rewards directly, without banks or intermediaries taking a fee. This makes staking crypto more attractive for those looking to grow their crypto holdings.

Traditional staking options: advantages and limitations

Before liquid staking emerged, users had three options for staking crypto: self-staking, exchange staking, and locked staking.

Self-staking: This requires becoming a validator yourself. On Ethereum, this means staking at least 32 ETH—about €64,000 at the current ETH price of €2,010. It is capital-intensive and carries risks. If you make a mistake, the network can partially confiscate your stake. Additionally, you cannot freely access your ETH whenever you want.

Exchange staking: Crypto exchanges offer pools where users can stake small amounts. This is cheaper, but you entrust your assets to a centralized platform—posing risks to security and availability.

Locked staking: Your assets are completely unavailable during the staking period (usually 1-3 months). This suits users who want to hold their crypto long-term.

The limitation of all traditional options: your money is locked up. This can be problematic in volatile markets where you may need liquidity suddenly.

Liquid staking: staking crypto with full flexibility

Liquid staking solves the core problem of traditional staking crypto. Instead of locking your assets for a long period, you immediately receive a ‘derivative token’—a versatile substitute for your original stake.

For example: you stake 1 ETH with a liquid staking protocol. You immediately receive 1 stETH (staked ETH). This stETH:

• Maintains its value equal to ETH
• Can be traded or used directly on DeFi platforms
• Generates annual rewards (4.8%–15.5%, depending on platform and timing)
• Can be converted back to ETH at any time

This means your ETH isn’t sitting idle somewhere. You can lend it via DeFi protocols, add it to liquidity pools, or use it as collateral for loans. In this way, your stake generates multiple income streams simultaneously.

How does liquid staking work in practice?

The operation of liquid staking crypto relies on three elements:

1. Depositing: You send your crypto (e.g., ETH) to the liquid staking protocol.

2. Tokenization: The protocol issues a derivative token that is 1:1 linked to your original stake. This token represents your claim on your deposit plus rewards.

3. Deployment: Your stake is sent to the network where validators use it. You earn rewards while your derivative token remains freely usable.

The clever part: you can use your derivative token while still earning rewards behind the scenes. This is fundamentally different from traditional staking crypto.

Top platforms for liquid staking crypto

Lido: The largest liquid staking protocol. Supports Ethereum (current price: €2,010), Solana (€82.74), Polygon, Polkadot (€1.28), and Kusama (€4.25). Users earn rewards of 4.8% to 15.5% annually. A 10% fee is deducted from rewards.

Rocket Pool: Specially for Ethereum, with more control for participants. Requires only 16 ETH to run a node (half of the traditional 32 ETH requirement). APY: approximately 6.96% plus variable RPL rewards (current RPL price: €1.52).

Tempus Finance: Innovative protocol for fixed income. Users can lock in their future growth or speculate on growth speed. No staking fees, but swap fees apply.

Hubble Protocol: Popular on Solana. Innovation: users can leverage up to 11x on their stake via USDH stablecoin loans. This multiplies potential gains (and losses). Loan cost: 0.5%.

Meta Pool: For Near Protocol (NEAR current price: €0.99). Offers 9.76% annual return. Unstaking costs 0.3%.

OKTC Liquid Staking: On OKT Chain. Users stake OKT and receive stOKT (a KIP-20 token). You earn rewards while using your stOKT on DeFi platforms. Additionally, you can earn swap fees by providing liquidity.

Advantages and risks of liquid staking crypto

Advantages:

• Liquidity: you don’t have to lock your crypto for months
• Multiple income streams: earn rewards and trade simultaneously
• Accessibility: no minimum of 32 ETH required
• Flexibility: can participate in other DeFi projects

Risks:

• Depegging: your derivative token may lose value relative to the original (stETH has experienced this)
• Smart contract risks: if the protocol is hacked, your funds are at risk
• Complexity: liquid staking requires DeFi knowledge
• Platform risks: centralized platforms can fail

Practical applications in DeFi

The real potential of liquid staking crypto lies in DeFi. Yield farming is the most popular use: you use your derivative token as collateral for crypto loans, enabling further trading. This way, you earn staking rewards, lending interest, and trading profits simultaneously.

For example: you stake €2,010 worth of ETH via Lido, receive stETH, borrow €1,500 USDC against it, and invest that USDC in a high-yield DeFi pool. You now earn on three fronts.

Who is liquid staking crypto suitable for?

Liquid staking crypto is an advanced strategy. It works well for:

• DeFi veterans comfortable with complex protocols
• Long-term investors aiming to grow their portfolio
• Risk-tolerant investors seeking multiple income streams

It is less suitable for beginners or cautious investors due to inherent complexity and risks.

Frequently Asked Questions

Is liquid staking crypto risky?
Yes. Besides smart contract risks, your derivative token can lose value or detach from the original.

What is the difference between liquid staking crypto and traditional staking?
Traditional staking locks your assets for months; liquid staking crypto gives you a liquid token you can use immediately.

Which liquid staking crypto tokens exist?
The most well-known are stETH (Ethereum), rETH (Rocket Pool), stOKT (OKTC), and stNEAR (Near).

Does everyone earn with liquid staking crypto?
No. While you earn rewards, DeFi risks and market volatility can wipe out gains. Start small and learn the protocol thoroughly.