What are Liquid Staking Derivatives?

What are Liquid Staking Derivatives?

A guide to Liquid Staking Derivatives (LSDs) on Ethereum and other blockchains. Find out which ETH LSD is the safest and highest yielding.

Summary: Liquid Staking Derivatives or Tokens (LSDs or LSTs) are tokenized representations of staked assets in a blockchain network, offering flexibility and liquidity while earning staking rewards. LSTs can be traded or used in DeFi protocols. While Ethereum is a popular network for such tokens, other chains like Solana and Avalanche also offer their own LSTs.

However, potential risks include smart contract vulnerabilities. Key players offering these tokens in Ethereum include Lido (stETH), Rocket Pool (rETH), and StakeWise (SETH2), each with unique features and potential drawbacks. The choice of LST depends on an individual's needs and risk tolerance.

Best Liquid Staking Protocol - Lido
5.0 out of 5.0 by Datawallet
Lido is the largest and most trusted liquid staking protocol for Ethereum (stETH) and Solana (stSOL). Their protocol is the highest in Total Value Locked (TVL) with over $14 billion in crypto assets on the platform.
Total Value Locked (TVL)
$14 Billion on Ethereum and $60 Million on Solana
Liquid Staking Yields
Ethereum (stETH) 4.0% APR and Solana (stSOL) 5.8% APR
Consensys, Statemind, Certora, SigmaPrime and more

Lido is a decentralized liquid staking protocol, and users should exercise caution and conduct independent research before engaging.

Content Guide

What is a Liquid Staking Token?

A Liquid Staking Token (or Liquid Staking Derivative) represents a staked asset in a blockchain network (e.g Ethereum or Solana), providing more flexibility and liquidity. In proof-of-stake blockchains, staking means locking tokens as collateral to secure the network and earn rewards. However, these staked tokens become illiquid.

Liquid staking solves this by issuing a tokenized representation of the staked asset, which can be traded or used in DeFi protocols, making staked assets productive while still locked. However, this introduces extra risks like smart contract vulnerabilities.

Why use Liquid Staking Derivatives?

The benefit of using liquid staking derivatives like Lido or Rocket Pool is to earn yield on your ETH without having to worry about lock up time. This is because you receive a token that represents the underlying ETH and any staking rewards it has earned.

With this token (e.g Lido Staked Ether (STETH) you can earn extra yield by depositing it into a money-market like AAVE, or borrowing collateral against it.

Liquid Staking Derivatives AAVE

What Ethereum Liquid Staking Derivatives are there?

The main three liquid staking derivatives (LSDs) available on the Ethereum mainnet are stETH by Lido, rETH by RocketPool, and SETH2 by Stakewise. stETH has the largest market share and the most liquidity, but there are concerns about centralization and censorship with the Lido DAO.

rETH is considered the most decentralized LSD and lets stakers source outside capital to run validator nodes with as little as 16 ETH instead of the usual 32. SETH2 is a smaller competitor that pays out rewards in a separate token to keep its peg close to 1:1.

While these three are the main options, Coinbase’s cbETH and FRAX’s sfrxETH are also available on the market. You can find the complete list of liquid staking derivatives on Defillama.

Defillama Liquid Staking Rankings

Are there Liquid Staking Derivatives on other Chains?

Yes, there are Liquid Staking Derivatives (LSDs) on other chains besides Ethereum. For example, Solana has a Liquid Staking Derivative called "stSOL," and Avalanche has an LSD called (sAVAX). Most proof-of-stake Layer 1, Layer 2 and even app-chain tokens will eventually have their own liquid staking derivative as liquidity continues to grow on-chain.

What is the Best Liquid Staking Derivative?

There is no single "best" liquid staking derivative on Ethereum, as each has its own unique features and drawbacks.

stETH has the largest market share and the most liquidity, while rETH is considered the most decentralized and lets stakers source outside capital to run validator nodes. cbETH is a newer entrant to the market but brings a centralized counterparty option while still retaining the key benefits of LSDs in DeFi.

If you are looking for the highest and safest yields (9% APY), we recommend checking out frxETH but be mindful that Frax Finance is a relatively new protocol. Ultimately, the best LSD for a particular user will depend on their individual needs, risk tolerance and preferences.


Bottom Line

In conclusion, Liquid Staking Tokens (LSTs) or Derivatives (LSDs) offer a promising solution for those seeking liquidity and flexibility with their staked assets on blockchain networks. These tokens, found on Ethereum as well as other chains like Solana and Avalanche, enable users to trade, earn staking rewards, and participate in DeFi activities.

However, they're not without risks, including smart contract vulnerabilities. Players like Lido's stETH, Rocket Pool's rETH, and StakeWise's SETH2 each offer distinct advantages and potential challenges. The ideal choice varies based on individual goals, risk appetite, and desired returns. As always, thorough research and a clear understanding of each offering is essential when navigating the world of liquid staking derivatives.

Frequently Asked Questions

Got More Questions? We've Got Answers.
A Guide to Commonly Asked FAQs.

No items found.