Top Liquid Staking Protocols on Ethereum

2024/03/20 07:52:03

Liquid staking protocols are expected to play a significant role in the Ethereum 2.0 upgrade, as they enable users to stake their ETH while still having the ability to use it for other purposes, such as DeFi loans or trading. Since the Beacon Chain started supporting ETH staking in December 2020, liquid staking has become a popular way for ETH holders to stake their tokens and participate in Ethereum’s PoS consensus mechanism.

As of March, liquid staking on Ethereum enjoys a total value locked (TVL) of over $44 billion of the total liquid staking market’s TVL, which exceeds $51 billion. Ethereum’s liquid staking TVL had touched an all-time high (ATH) of over $55 billion in mid-March, but has slid lower on account of the broader correction in the crypto market.

Ethereum liquid staking TVL | Source: DefiLlama

What Is Liquid Staking?

Liquid staking is a transformative approach in the DeFi and blockchain space, enabling users to stake their cryptocurrency, such as Ethereum, while maintaining liquidity via representative assets (LSTs). It's a mechanism where users receive a liquid staking token (LST) in return for staking their original tokens. This LST can then be used across various DeFi platforms, allowing participants to earn staking rewards without sacrificing the utility of their assets.

The Ethereum 2.0 upgrade, or the transition to a PoS consensus mechanism, highlights the critical role of liquid staking. It offers a more accessible and flexible way for ETH holders to participate in network security and consensus mechanisms without locking up their assets, thereby contributing to the overall health and security of the network.

Learn more about the best liquid restaking protocols.

How Does Liquid Staking Work on Ethereum?

Liquid staking is a process that lets users stake their Ethereum and receive an ERC-20 liquidity token that represents their staked ETH. This token can be easily traded or used in DeFi applications without the need to unstake the ETH first. Here’s how it works:

Liquid staking protocols serve as validators and let ETH holders deposit their tokens with them.
These protocols then deposit the users’ ETH to the Ethereum deposit contract - the smart contract on the Ethereum blockchain that holds the staked Ether.
The protocols then earn rewards as validators and distribute them among their users as liquidity tokens.
This way, such protocols pool ETH tokens from multiple users, reducing the need for each user to perform a validator function and deposit a minimum of 32 ETH to participate in staking. The minimum deposit amount on liquid staking protocols is far less than 32 ETH.
Users can trade the liquidity tokens on exchanges and DeFi platforms without unstaking or unlocking their staked ETH. The liquidity tokens earned double as governance tokens on the respective protocols, letting users enjoy voting rights.

Liquid Staking and Benefits for ETH

Liquid staking protocols have contributed significantly to the popularity and adoption of Ethereum staking. The process offers a more flexible and accessible alternative to traditional staking methods, reducing the complexity and risks associated with self-staking and exchange staking and promoting wider participation in the Ethereum network.

Enhanced Liquidity: The most significant advantage is the liquidity that liquid staking provides. Instead of locking up assets in traditional staking, which makes them inaccessible until they are unstaked, liquid staking allows users to receive a liquid staking token (LST) as a representation of their staked ETH. This token can be traded or used in DeFi applications, ensuring that users' capital remains liquid and accessible.
Accessibility and Lowered Barriers to Entry: Liquid staking lowers the barriers to entry for participating in Ethereum's staking mechanism. It allows users with less than the minimum required 32 ETH for running a full validator node to participate in staking. By pooling together smaller amounts of ETH from multiple users, liquid staking protocols enable more people to contribute to network security and earn staking rewards.
Flexibility and Convenience: Liquid staking offers a flexible and convenient way to earn rewards. Users can stake their ETH with minimal effort and without needing to manage the technicalities of running a validator node. This convenience is particularly appealing to less technical users or those who prefer a hands-off approach to staking.
Diversification of Earnings: Liquid staking tokens can be used in various DeFi applications, allowing users to diversify their earnings by participating in yield farming, lending, or other DeFi strategies. This creates multiple streams of income from the same staked assets.
Risk Mitigation: By distributing staked ETH across various validators, liquid staking protocols can mitigate the risk of penalties or slashing that might occur if a single validator fails to act in the network's best interest. This collective approach to staking reduces the risk for individual stakers.
Improved Capital Efficiency: Liquid staking improves capital efficiency by allowing staked assets to be utilized in other financial activities. This unlocks the potential for compounded returns, as users can earn staking rewards while simultaneously engaging in other investment opportunities with their liquid staking tokens.
Enhanced Network Security and Decentralization: By enabling more participants to stake their ETH, liquid staking contributes to the security and decentralization of the Ethereum network. A broader base of stakers makes the network more resilient against attacks and centralization risks.

Top ETH Liquid Staking Protocols

There are several liquid staking protocols in the market in terms of popularity and performance. Here are some of them to watch out for if you are interested in liquid staking projects on Ethereum:

Lido Finance

Lido Finance is ETH’s largest liquid staking protocol, letting users stake their Ether without needing to lock tokens or invest in expensive infrastructure. In addition, users who stake ETH via Lido can continue to use their stETH tokens to participate in on-chain activities, such as trading and lending.

More than 71% of the total value locked in ETH liquid staking derivatives (LSDs) comes from Lido Finance, as of data on Defi Llama. At the time of writing, the platform’s TVL exceeds $11 billion, with over 9.78 million ETH staked on Lido.

Lido operates on Ethereum, Polygon, Solana, Polkadot, and Kusama networks. Its cross-chain operations make the platform a robust choice for liquid staking, not just ETH but other leading crypto tokens.

Its native token, LDO, works as the governance token, letting holders become members of the Lido DAO. The DAO governs Lido’s liquid staking processes, decides on key factors such as fees, and is responsible for executing upgrades that improve the platform’s stability and efficiency.

Rocket Pool

Rocket Pool is the second-largest liquid staking protocol for ETH and aims to solve one of the critical challenges of Lido - centralization. Unlike Lido’s centralized operations, Rocket Pool offers a decentralized, trustless, and community-owned platform for staking Ether without locking up the tokens. Users can stake their ETH tokens and receive rETH tokens in exchange, which can be traded or used in DeFi protocols on the Ethereum network.

Rocket Pool ranks second in terms of contributing to the ETH liquid staking market after Lido. With over 826,00 ETH tokens staked on the protocol, its TVL is just over $3.8 billion.

Rocket Pool is a first-of-its-kind Ethereum PoS infrastructure service compatible with Ethereum 2.0. It provides a user-friendly process for users to stake their ETH tokens and earn rewards. It is designed to be highly decentralized and distributed, supporting the security and reliability of the Ethereum network.

RPL is the native token of the Rocket Pool platform. It is used for protocol governance and can be staked on a Rocket Pool node as insurance. In the process of creating a 16 ETH minipool validator in the protocol, a minimum of 10% of that ETH's value must also be staked in $RPL as a security promise to the protocol.

Mantle LSP

Mantle Liquid Staking Protocol (LSP) is a cutting-edge, permissionless, and non-custodial ETH staking solution that operates on the Ethereum mainnet and is governed by Mantle (MNT). This protocol allows users to stake Ethereum and receive mETH, a value-accumulating receipt token that signifies ownership of the staked ETH and accrued rewards. Mantle liquid staking’s TVL is over $1.76 billion at the time of writing, with over 542,000 ETH staked on its protocol.

Mantle LSP sets itself apart by offering stakers the ability to instantly stake ETH and subsequently unstake mETH to reclaim their original staked ETH along with any earned rewards. Its unique features include a focus on maintaining high sustainable yields through strategies such as Maximal Extractible Value (MEV) and treasury yield sharing, designed to make mETH one of the most efficient ETH staking tokens in the decentralized finance (DeFi) space.

Compared to existing liquid staking solutions like Lido and Rocket Pool, Mantle LSP differentiates itself through its integration within the Mantle ecosystem, leveraging Mantle's robust governance and treasury resources to support its operations. It follows a post-Shanghai Upgrade architecture, emphasizing a modern and simple design that maintains the integrity of the ETH to mETH process.

The protocol emphasizes robust risk management with non-custodial core smart contracts and off-chain services, ensuring that staked ETH remains secure within protocol-defined smart contracts. Additionally, Mantle LSP benefits from the wider Mantle ecosystem, including its rollup-based L2 solutions and Mantle Governance DAO, which controls one of the largest on-chain treasuries in DeFi, to foster a highly rewarding staking experience and broad adoption of mETH across a range of applications.

StakeStone

StakeStone is an innovative Ethereum liquid staking protocol designed to enhance the staking experience by providing native staking yields and liquidity on Layer 2s in a decentralized fashion. It distinguishes itself with an omni-chain LST protocol and a highly scalable architecture that not only supports leading staking pools but is also ready for restaking. Boasting over 100,00 stakers, StakeStone’s TVL is over $1 billion as of March 2024.

StakeStone creates a multi-chain liquidity market with its native LST, STONE, offering users additional use cases and yield opportunities. One of its key innovations is the Optimizing Portfolio and Allocation Proposal (OPAP), which optimizes STONE's underlying assets to ensure holders receive automated and optimized staking yields, marking a departure from traditional methods by providing full transparency of assets and yields.

StakeStone's approach to liquid staking is characterized by its non-rebase Omnichain Fungible Token (OFT), STONE, which is built on LayerZero for seamless cross-chain transfers. This enables developers on Layer 2s to integrate STONE effortlessly, promoting wider adoption. Unlike other liquid staking protocols, StakeStone emphasizes decentralized yield optimization, allowing for automatic yield optimization and making STONE highly compatible with a range of underlying assets, including staking pools and blue-chip protocols.

The protocol also features scalable yield-optimizing services, cross-chain compatibility, and multi-scenario adaptation, setting it apart from competitors like Lido and Rocket Pool by focusing on multi-underlying asset compatibility and automatic yield optimization across multiple blockchains.

Frax Ether

The next project we feature in our list is Frax Finance’s Frax Ether. The liquid ETH staking derivative forms part of the Frax Finance ecosystem and is designed to leverage the Frax Finance ecosystem to maximize staking yield and simplify the Ethereum staking process.

Users have deposited more than 294,000 ETH into Frax Ether’s LSD, making it the fourth largest in the market. The TVL of the protocol is more than $932 million at the time of writing.

Frax Ether (frxETH) is a liquid ETH staking protocol that acts as a stablecoin loosely pegged to ETH and leverages Frax's successful strategy in stablecoins. Users can deposit ETH into the Frax ETH Minter contract and receive an equivalent amount of frxETH.

Users can exchange frxETH for sfrxETH, making them eligible to earn staking yield redeemed when converting sfrxETH back to frxETH on the platform. The exchange rate of frxETH per sfrxETH increases over time as staking rewards are added to the vault. Frax Ether’s staking token sfrxETH has a relatively higher staking yield compared to other similar products.

StakeWise

The StakeWise liquid Ethereum 2.0 staking service lets users enjoy yields on the Beacon Chain by staking ETH. StakeWise v3 uses a Vault Scoring Model to score all Vaults based on various factors, including the node operator's validation technology, collateral situation, and operational performance. Based on the Vault score, users can choose the Vault to stake and earn staking rewards independently.

StakeWise offers Deposit Tokens and Reward Tokens for every ETH deposited and earned, respectively. Users can use these tokens to store, exchange, and transfer their deposits and rewards across any protocol or wallet that supports ERC-20 tokens. This feature enables users to exit from staking before Phase 2 and generate additional yield.

Over 87,000 ETH tokens have been staked using StakeWise, making it the fifth-largest ETH LSD in the crypto market. It boasts a TVL exceeding $313 million to date and has over 115,000 ETH staked on it.

Stakers are issued sETH2 (staking ETH) and eETH2 (reward EH) tokens in StakeWise Pool. SWISE is the native token of the StakeWise platform, letting its holders become members of the StakeWise DAO and participate in the decentralized governance mechanism of the protocol.

Ankr

Ankr ETH Liquid Staking is a staking solution offered by Ankr, a decentralized Web3 infrastructure provider where developers, dApps, and stakers can interact easily with numerous blockchains. Ankr ETH Liquid Staking offers Ethereum token holders the opportunity to stake ETH and, in return, claim Ethereum Liquid Staking tokens, also known as ankrETH (ex-aETHc).

Ankr has over 62,000 ETH tokens staked on its platform, ranking seventh in ETH LSD TVL in the crypto market. Ankr’s TVL holds just under $72 million at the time of writing, with over 22,000 ETH tokens staked.

The trustless, secure, and scalable ETH liquid staking solution integrates decentralized nodes into Ankr’s liquid staking mechanism, which increases staking security. Ankr’s users can maximize their profits by unlocking their staked ETH liquidity and reusing the tokens on other DeFi platforms in the Ethereum ecosystem.

ANKR serves as the native utility token of the ANKR ecosystem. It is used to pay for transactions and other services on the platform. $ANKR also gives token holders the power to participate in its governance mechanism.

Key Factors to Consider Before Liquid Staking ETH

When considering liquid staking on Ethereum, it's essential to evaluate several key points to ensure you make informed decisions and optimize your staking strategy. Here are some key factors to consider before liquid staking:

Evaluate the Liquid Staking Provider and Security: Choose your liquid staking provider carefully, weighing the differences between centralized and decentralized options. Consider their security practices, such as regular smart contract audits and bug bounty programs, to mitigate smart contract risks.
Understand the Tokenomics and Rewards: Understand the tokenomics of the liquid staking tokens, including how rewards are generated and distributed. Different protocols have various reward mechanisms, which can affect the overall yield and the liquidity of the staking token.
Assess Regulatory and Market Conditions: Stay informed about the evolving regulatory landscape and market conditions that could impact liquid staking. Regulatory changes can affect the legality and operation of staking protocols, while market conditions influence token liquidity and value.
Plan Your Exit Strategy: Plan your exit strategy, considering factors like token liquidity, redemption mechanisms, and any cooldown periods or penalties for unstaking. Flexibility in exiting can significantly affect your staking experience and financial outcomes.
Perform Continuous Research and Diversification: Keep up with the latest developments in the Ethereum and DeFi ecosystems. Diversifying your staking investments across different protocols can help mitigate specific risks and enhance potential returns.

Impact of the Dencun Upgrade on ETH Liquid Staking

The Ethereum Dencun upgrade represents a significant leap forward for the blockchain, particularly in enhancing its scalability and efficiency, which are crucial for the future of liquid staking on Ethereum. This upgrade comprises several Ethereum Improvement Proposals (EIPs) that bring about foundational changes to Ethereum's architecture, specifically aimed at improving the staking ecosystem:

Security and Efficiency: EIP-4788 introduces the beacon block root into the Ethereum Virtual Machine (EVM), reducing reliance on external oracles for data verification. This enhancement allows for more secure and efficient operation of liquid staking protocols by enabling direct access to consensus layer data, thus potentially eliminating a layer of trust previously required. This could lead to a more robust and trust-minimized infrastructure for liquid staking operations.
Staking Dynamics: EIP-7514 addresses validator churn by setting a cap on the number of validators that can be activated within a specific timeframe. This measure aims to manage the growth of validators more sustainably, which indirectly benefits the liquid staking environment by ensuring a more predictable and stable staking activation process.
Data and Transaction Efficiency: The introduction of "proto-danksharding" (EIP-4844) and other related EIPs aim to significantly lower the costs associated with rollup transactions by introducing a new method for data availability. This method allows rollups to post data on Ethereum at much lower costs, directly impacting gas fees and enabling more efficient transaction processing. For liquid staking, this could translate to lower operational costs and enhanced scalability for staking-related transactions.
Enhanced Rollup Support: By facilitating a more efficient and cost-effective framework for rollups, the Dencun upgrade is expected to boost the adoption and functionality of layer-2 solutions. This is particularly relevant for liquid staking protocols that utilize rollups for their operations, as it could significantly enhance the performance and user experience of these platforms.
Scalability and User Experience: Beyond direct impacts on liquid staking, the overall improvements in Ethereum's scalability and efficiency are likely to foster a more vibrant ecosystem for decentralized finance (DeFi) applications. This broader impact benefits liquid staking indirectly by promoting a healthier, more robust environment for Ethereum-based staking and DeFi activities.