liquid staking

Liquid staking is the practice of staking a proof-of-stake token (most commonly ETH) and receiving a derivative token that represents the staked position. The derivative — stETH from Lido, rETH from Rocket Pool, cbETH from Coinbase — can be traded, used as DeFi collateral, or held normally while the underlying ETH stays staked and earning rewards. The category had $30+ billion in TVL as of mid-2026.

What liquid staking actually does

Three components combine:

The user deposits ETH into a protocol (Lido, Rocket Pool, Coinbase Staking). The protocol delegates the ETH to validators (sometimes its own, sometimes a permissionless set). The validator runs an Ethereum validator node, attesting and proposing blocks, earning approximately 3-4% APY in 2026 (down from 5-6% in earlier years as validator count grew).

In exchange for the deposit, the user receives stETH (or equivalent). stETH is a rebasing token: every day, the protocol increases the holder's stETH balance to reflect accrued staking rewards. The relationship "1 stETH = 1 ETH worth of staked position" is maintained through this rebase.

The stETH can be used freely. Use it as collateral on Aave, swap it on Curve, hold it in a hardware wallet, transfer to another user. The underlying ETH stays staked.

Why this is convenient

Two reasons most US-resident ETH holders use liquid staking instead of running validators:

The validator requires 32 ETH and continuous operational uptime. Running it well requires server administration, monitoring, and the ability to respond to slashing events. For most holders this overhead exceeds the marginal yield.

Direct staking locks the ETH. Until withdrawal (which Ethereum's Shanghai upgrade in April 2023 made possible, but with delays during high-demand periods), staked ETH cannot be moved. Liquid staking lets you exit by simply selling stETH on the open market.

The risks worth knowing

Three categories:

Smart-contract risk. The liquid-staking protocol's contracts can have bugs. Lido has run since 2020 with no permanent losses; Rocket Pool similarly. Newer protocols (Frax, Stader) carry more risk per dollar staked.

Depeg risk. stETH trades on Curve. During market stress, the stETH:ETH peg can dislocate. In June 2022, stETH traded down to roughly 0.94 ETH. The peg restored over the following months, but holders who needed to exit during the dislocation took losses. The risk is mostly a temporary-illiquidity risk for major LSTs; for smaller LSTs it can be permanent.

Slashing risk. The protocol's validators can be slashed for bad behavior (double-signing, downtime in some severe cases). Modern LSTs distribute slashing risk across many validators, so the impact on a single user is usually a few basis points of yield rather than catastrophic. Coinbase Staking offers explicit slashing insurance; Lido shares slashing loss across its node operator set.

The US tax angle

Staking rewards are taxable income at receipt (Rev. Rul. 2023-14). For liquid staking, "receipt" is interpreted as the daily rebase event — meaning a holder of stETH accrues taxable income every day, denominated in ETH at the day's fair market value. Tools like Koinly handle this if configured correctly; manual recordkeeping is impractical.

The 2025-2026 IRS proposed regulations clarify some edge cases but the general principle stands: staking rewards are income, the cost basis of the received rewards becomes a new property holding, and any future sale is a capital gains event.

Which LST to pick

For a US holder in 2026: Coinbase Staking (cbETH) for the regulated-US-entity option; Lido (stETH) for the highest liquidity and longest track record; Rocket Pool (rETH) for the more decentralized validator set. The yields are within 50bps of each other; the difference is operational and regulatory.