Module 9: DeFi Deep Dive
Staking and Liquid Staking
Chapter 8 of 14 · about 5 minutes
8.1 Earning from securing the network
Node held ETH long-term and had heard that staking could earn a few percent a year. "Is that real yield, or another inflation trick like Module 5, Chapter 3?"
"Partly both, and it depends on the network," said Hash. "On Ethereum, staking rewards come from new issuance plus transaction fees and MEV. It's payment for a real job: securing the network. But how you stake changes your risks dramatically."
8.2 What staking is
On proof of stake networks (Module 1, Chapter 4), validators lock up, or stake, the network's coin as collateral to propose and confirm blocks. In return, they earn rewards. If they misbehave, part of their stake can be destroyed, which is called slashing (Module 3, Chapter 5).
On Ethereum, running a validator requires 32 ETH. Since an upgrade in April 2023, stakers can withdraw their stake, subject to a queue (Module 6, Chapter 7).
8.3 Where staking rewards come from
| Source | Explanation |
|---|---|
| New issuance | ETH created by the protocol to reward validators |
| Priority fees | Tips paid by users to have transactions included (Module 3, Chapter 2) |
| MEV | Value captured from transaction ordering, shared with validators (Module 3, Chapter 11) |
Staking yield on Ethereum has typically been a few percent a year, varying with network activity and how much ETH is staked overall. The more ETH that's staked, the lower the yield per staker, because rewards are shared among more participants.
Remember the lesson from Module 5, Chapter 3: compare staking yield with network inflation. Part of the reward offsets dilution that non-stakers experience. Part, from fees and MEV, is real income from network usage.
8.4 Ways to stake
| Method | How it works | You control keys? | Main risks |
|---|---|---|---|
| Solo staking | Run your own validator with 32 ETH | Yes | Technical mistakes, downtime penalties, slashing |
| Staking services | A provider runs the validator; you keep withdrawal control in some designs | Partly | Provider performance and honesty |
| Liquid staking | Deposit any amount into a protocol, receive a liquid staking token | Through smart contracts | Smart contract, operator, depeg, governance |
| Exchange staking | The exchange stakes on your behalf | No | Custodial risk (Module 1, Chapter 7) |
| Pooled protocols with decentralised operators | Many independent operators run validators | Through smart contracts | Smart contract and coordination risks |
8.5 Liquid staking tokens
Staked ETH used to be locked and unusable. Liquid staking solves this. You deposit ETH into a liquid staking protocol, which stakes it through a set of node operators, and you receive a liquid staking token (LST) representing your staked ETH plus rewards.
The LST can be traded, used as collateral in lending (Chapter 5), or provided as liquidity (Chapter 3), while your ETH keeps earning staking rewards. This is composability at work (Chapter 1).
There are two main LST designs:
| Design | How rewards show up | Example |
|---|---|---|
| Rebasing | Your token balance increases each day | 1.000 tokens become 1.0001, then 1.0002, and so on |
| Value-accruing | Your balance stays the same; each token becomes worth more ETH | 1 token = 1.000 ETH, later 1 token = 1.05 ETH |
A value-accruing example. Mint deposits 10 ETH when the exchange rate is 1 LST = 1.00 ETH and receives 10 LST. After about two years of rewards, the rate is 1 LST = 1.06 ETH. Mint's 10 LST are now redeemable for about 10.6 ETH.
Many DeFi protocols prefer value-accruing designs, because changing balances can complicate smart contracts.
8.6 The LST discount
An LST is meant to be worth its underlying staked ETH. But on secondary markets, like DEX pools, it can trade at a discount.
What happened in 2022. Before Ethereum allowed withdrawals, staked ETH couldn't be redeemed. When markets crashed in mid-2022, some large holders, including troubled crypto lenders, needed to sell their LSTs to raise cash. With no redemption available, the main LST traded at a discount of around 5% to 6% to ETH for a time. Investors who had borrowed ETH against LSTs (Chapter 11) faced liquidation pressure.
Since withdrawals became available in 2023, arbitrageurs can buy discounted LSTs and redeem them for ETH, which helps keep prices close. But redemption takes time because of the exit queue, so discounts can still appear during stress. The queue can grow long: in September 2025, a wave of validator exits pushed the wait above 40 days.
| Risk | Effect |
|---|---|
| Secondary market discount | You may receive less ETH if you sell rather than redeem |
| Exit queue | Redemption may take days or longer during heavy demand |
| Slashing | Operator mistakes can reduce the underlying ETH |
| Smart contract | Bugs in the LST protocol |
| Governance | Decisions about operators, fees, and upgrades |
| Concentration | One large LST controlling a big share of all staked ETH could be a risk to Ethereum itself (Module 3, Chapter 13) |
8.7 Fees
Liquid staking protocols and services take a fee, typically a percentage of staking rewards, such as 10%. If the base staking yield is 3%, a 10% fee leaves stakers about 2.7%.
8.8 Choosing a staking method
"So how should I stake?" asked Node.
"Match the method to your priorities," said Hash.
| If you prioritise | Consider |
|---|---|
| Maximum control and decentralisation | Solo staking, if you have the skills and 32 ETH |
| Simplicity and small amounts | Liquid staking or reputable staking services |
| Using staked ETH in DeFi | Liquid staking tokens |
| Avoiding smart contract risk | Solo staking or reputable custodial services, accepting custodial risk |
| Supporting network decentralisation | Smaller or more decentralised staking providers |
8.9 Try it yourself
Find the current Ethereum staking yield from a staking dashboard, and the share of staked ETH held by the largest liquid staking protocols. Then pick one LST and check: is it rebasing or value-accruing? What is its current exchange rate to ETH? What fee does the protocol charge? What's its price on a major DEX compared with its redemption value?
Key takeaways from this chapter
- Staking locks coins to secure proof of stake networks, earning rewards and risking slashing.
- Ethereum staking rewards come from issuance, priority fees, and MEV.
- Staking methods range from solo staking to services, liquid staking, and exchange staking, each with different risks.
- Liquid staking tokens represent staked assets and can be used in DeFi while earning rewards.
- LSTs can be rebasing or value-accruing.
- LSTs can trade at discounts during stress, as in 2022; withdrawals help but exit queues remain.
- Consider fees, slashing, smart contract, governance, and concentration risks when choosing.