Staking Basics Review
Before discussing liquid staking and restaking, it is necessary to first review the basic concepts of traditional staking:
1. Definition of Staking
Staking refers to users locking their crypto assets in a blockchain network or protocol to support network security, consensus, or certain smart contract functions. In return, users typically receive staking rewards such as interest or protocol tokens.
2. Characteristics of Traditional Staking
- •Lock-up limitations: Assets cannot be freely traded during a certain period, reducing liquidity.
- •Security assurance: Staking helps blockchain networks maintain consensus mechanisms, such as PoS (Proof-of-Stake) systems.
- •Forms of returns: Staking rewards usually come from network block rewards or transaction fees.
Limitations of Traditional Staking
- •Liquidity constraints: After staking, users cannot directly use or trade the assets, resulting in opportunity costs.
- •Lock-up risk: If the staking platform or validator encounters issues, assets may be impaired or fail to unlock on time.
It is precisely these limitations that gave rise to liquid staking and restaking.
The Concept of Liquid Staking
1. Definition
Liquid staking refers to users staking crypto assets while receiving a tradable representative token (a liquid token) that represents their staked entitlement. Users can both enjoy staking rewards and use the representative token for trading or other DeFi operations.
2. Principle
- •Users stake native tokens (such as ETH, SOL, etc.) into a liquid staking protocol.
- •The protocol issues a corresponding amount of liquid staking tokens (such as stETH, stSOL) based on the staked amount.
- •Holders of the liquid token can freely trade it on secondary markets, use it for lending, or deploy it in DeFi strategies, while the underlying staked asset continues to generate rewards.
3. History and Development
- •Early staking development: The emergence of PoS networks allowed users to stake tokens for interest, but with lock-up periods.
- •Lido protocol (2020): One of the earliest liquid staking protocols, offering stETH for ETH staking.
- •Solana and Terra ecosystems: Corresponding liquid staking tokens also emerged in their respective networks, enabling a win–win of liquidity and returns.
4. Advantages
- •Improved liquidity: Users need not wait for the unlock period to utilize the value of staked assets.
- •DeFi interoperability: Liquid tokens can be used for lending, trading, liquidity mining, and more.
- •Lower opportunity cost: Users simultaneously enjoy staking rewards and market operation opportunities.
5. Risks
- •Smart contract risk: If a protocol has vulnerabilities, the liquid token may fail to redeem the original asset.
- •Market risk: The secondary market price of the liquid token may deviate from the value of the native asset, causing potential losses.
- •Validator risk: If the staked validator is penalized or goes offline, rewards may decrease or assets may be affected.
The Concept of Restaking
1. Definition
Restaking refers to users taking already staked assets or liquid staking tokens and staking them again in other protocols to obtain additional returns. It is an overlay strategy for staking.
2. Principle
- •Users obtain a tradable representative token through liquid staking.
- •Users then stake that representative token again in a DeFi protocol or participate in yield farming.
- •Users earn the original staking rewards plus the restaking yield, achieving stacked returns.
3. Development History
- •2021 DeFi boom: Liquid staking tokens began to be used in lending and yield farming, enabling multi-layer yields.
- •Multichain restaking strategies: With the development of cross-chain bridges and cross-chain DeFi, users can restake tokens across different chains.
4. Advantages
- •Maximized returns: Through layered strategies, users can significantly increase the total yield of staked assets.
- •Efficient capital utilization: Assets that would otherwise be locked can simultaneously generate multiple value streams.
- •Flexible strategies: Users can adjust restaking directions and protocols at any time based on market conditions.
5. Risks
- •Stacked risks: Each additional restaking step increases smart contract and market risks.
- •Liquidity risk: If a restaking protocol runs into issues, users may be unable to redeem in time.
- •Price volatility: The market value of restaked assets may fall below that of the original staked asset, leading to losses.
Market Applications of Liquid Staking and Restaking
Lending Markets
The application of liquid staking tokens in DeFi lending markets is one of their most direct value-add scenarios. Traditional staked assets are typically locked and cannot be used elsewhere, whereas representative tokens produced by liquid staking (such as stETH, stSOL) allow users to post them as collateral for lending, achieving secondary use of capital.Workflow:
- •Users stake native tokens to a liquid staking protocol and receive an equivalent amount of liquid tokens.
- •Users deposit the liquid token into a lending protocol (such as Aave, Compound) to borrow assets or stablecoins.
- •Users can deploy borrowed assets for trading, investments, or cross-chain operations, compounding returns.
Advantages:
- •Capital efficiency boost: The same asset earns staking rewards while also serving as loan collateral, maximizing returns.
- •Flexible cash flow: Users can obtain liquid funds without selling the original asset, reducing trading costs and market risk.
- •DeFi interconnection: Lending protocols often interoperate with liquidity pools, derivatives, and other DeFi products, expanding use cases.
Risks:
- •Collateral liquidation risk: In extreme market moves, collateral may be liquidated, causing losses.
- •Protocol risk: Vulnerabilities in lending platform smart contracts may result in frozen or stolen assets.
Case study:
On Ethereum, a user stakes ETH to receive stETH, then supplies stETH to Aave as collateral to borrow USDC. The borrowed USDC is deployed into liquidity mining or other DeFi strategies. This setup earns ETH staking rewards and lending/yield returns, significantly lifting total annualized yield.
Liquidity Mining
Liquid staking tokens can be directly deployed into liquidity pools for mining — this is a classic composite DeFi yield strategy. By providing liquidity, users can earn both trading fees and protocol token rewards, achieving multiple income streams.Mechanics:
- •Users hold liquid staking tokens (e.g., stETH, stSOL).
- •They deposit tokens into a DEX or AMM pool, supplying liquidity for a trading pair.
- •Liquidity providers earn a proportional share of trading fees and may also receive platform rewards or governance tokens.
Advantages:
- •Stacked yields: On top of staking rewards, users earn trading fees and platform incentives.
- •Liquidity support: Supplying liquidity to DEXs or other protocols improves overall market activity.
- •Strategy diversity: Users can choose different pools by risk preference and flexibly adjust portfolios.
Risks:
- •Impermanent loss: Price volatility can make LP returns underperform simple holding.
- •Smart contract risk: Liquidity pools may have vulnerabilities or be attacked, causing losses.
Cross-Chain Investment
The development of cross-chain technology allows liquid tokens to move between chains and participate in multichain yield strategies. This not only enhances asset utilization but also broadens investor choices.Operating model:
- •Users stake on the main chain and receive a liquid token.
- •They bridge the token to another chain via a cross-chain bridge.
- •On the destination chain, they participate in staking, lending, or liquidity mining to stack returns.
Advantages:
- •Diversified yields: Participate in the earnings of multiple chain ecosystems simultaneously.
- •Risk dispersion: Different chains may not be highly correlated, helping to mitigate market volatility risk.
- •Strategic flexibility: Rebalance cross-chain allocations at any time to capture optimal opportunities.
Risks:
- •Bridge risk: Bridge contracts may be attacked, leading to asset loss.
- •Operational complexity: On-chain operations can be complex; missteps can cause fund mismatches or missed windows.
Case study:
A user stakes ETH for stETH, bridges it to Avalanche, then restakes or joins liquidity mining in Avalanche DeFi protocols to realize cross-chain, stacked yields. This approach is increasingly popular in multichain DeFi as a key method for advanced users to optimize returns.
RWA Linkage
As digital assets connect with real-world assets (RWA), liquid staking tokens and restaked assets can also be used as collateral for RWA financing, linking on-chain assets with traditional assets.Operating method:
- •Users hold liquid staking tokens.
- •They collateralize them to an RWA protocol/platform for financing or to obtain yield instruments linked to traditional assets.
- •Assets remain transparent and traceable on-chain while generating traditional finance–style income.
Advantages:
- •Asset diversification: Link digital assets to RWAs such as real estate, cultural/tourism assets, and invoices to reduce single-market risk.
- •Capital efficiency: Locked digital assets can realize extra yields through RWA linkage.
- •Financial innovation: Promotes the fusion of DeFi and TradFi, expanding digital asset use cases.
Risks:
- •Valuation risk: RWA values may fluctuate, affecting collateralized returns.
- •Legal and compliance risk: Jurisdictional differences may impact RWA operations.
- •Credit risk: RWA project defaults can cause losses.
Future Trends in Liquid Staking and Restaking
- Multichain Liquid Staking Ecosystems With the growth of multichain PoS networks, users can stake and restake across chains, forming larger cross-chain capital pools.
- Smart Strategies and Automated Restaking Smart contracts and DeFi strategy bots will automatically optimize restaking routes to maximize returns.
- RWA Integration In the future, liquid staking tokens may directly link to real-world assets (e.g., cultural/tourism projects, real estate), forming new yield instruments.
- Innovations in Risk Control Mechanisms Insurance protocols and dynamic risk adjustments will offer stronger safeguards for liquid staking and restaking.
Conclusion
Liquid staking and restaking provide unprecedented liquidity and yield optimization for blockchain assets. Liquid staking solves the liquidity dilemma of traditional staking and lets assets “come alive.” Restaking further amplifies capital efficiency, delivering compound returns for users.
However, any high-yield strategy comes with risk. Smart contract vulnerabilities, market volatility, and protocol failures can all lead to losses. Investors should fully understand the mechanisms and allocate risk prudently before participating.
With advances in blockchain technology, the DeFi ecosystem, and cross-chain protocols, liquid staking and restaking will become core tools of digital asset investing and usage — driving efficient asset flow, capital appreciation, and ecosystem innovation.