Liquid staking vs traditional staking

Staking in crypto lets users earn rewards by locking coins to secure a blockchain, with options like traditional staking for simplicity or liquid staking for added DeFi flexibility and yield opportunities.

Jul 22, 2025 at 03:16 am

What Is Staking in the Cryptocurrency Ecosystem?

Staking refers to the process of actively participating in transaction validation on a proof-of-stake (PoS) blockchain. Instead of miners competing to solve complex puzzles as in proof-of-work systems, PoS blockchains rely on validators who are chosen based on the number of coins they hold and are willing to "stake" as collateral. Staking allows users to earn rewards for helping secure the network, similar to how miners earn rewards for validating transactions in PoW systems.

There are two primary methods of staking: traditional staking and liquid staking. Both aim to secure the network and provide users with passive income, but they differ significantly in flexibility, liquidity, and usability.

Understanding Traditional Staking

Traditional staking involves locking up a certain amount of cryptocurrency in a wallet or on a platform to support the operations of a blockchain network. During the staking period, these funds are illiquid, meaning they cannot be freely moved or used for other purposes.

• Users must choose a validator or delegate their stake to one.
• Funds are locked until the user decides to unstake, which may involve a waiting period.
• Rewards are typically distributed at regular intervals.
• Staked assets cannot be used for trading or lending while locked.

This method is straightforward and secure but lacks flexibility, especially for users who want to maintain liquidity while still earning staking rewards.

How Liquid Staking Works

Liquid staking is a more advanced and flexible alternative to traditional staking. Instead of locking assets without any utility, users who participate in liquid staking receive tokenized representations of their staked assets, often referred to as liquid staking tokens.

For example, on Ethereum, users who stake ETH via platforms like Lido or Rocket Pool receive stETH or rETH, which represent their staked ETH plus accrued rewards. These tokens can be freely traded, transferred, or used in DeFi protocols to generate additional yield.

• Users deposit assets into a liquid staking protocol.
• They receive a derivative token representing their stake.
• These tokens can be used across DeFi platforms for lending, borrowing, or liquidity provision.
• Users still earn staking rewards while maintaining liquidity.

This dual benefit of earning rewards and retaining liquidity makes liquid staking an attractive option for many crypto investors.

Key Differences Between Liquid Staking and Traditional Staking

While both methods contribute to network security and provide staking rewards, several factors differentiate liquid staking from traditional staking:

• Liquidity: Traditional staking locks up funds, while liquid staking provides fungible tokens that can be used elsewhere.
• Flexibility: With liquid staking, users can engage in other yield-generating activities, whereas traditional staking limits asset use.
• Centralization Risks: Some liquid staking platforms may centralize validator operations, increasing counterparty risk.
• Complexity: Liquid staking involves interacting with DeFi protocols, which can be more complex than traditional staking interfaces.
• Rewards Distribution: Both systems offer similar staking yields, but liquid staking may offer additional returns through DeFi usage.

These differences make each method suitable for different types of users. Risk-averse investors may prefer traditional staking, while yield-focused participants may lean toward liquid staking.

Security and Risks Involved in Each Method

Both traditional and liquid staking come with their own sets of risks:

• In traditional staking, the main risks are slashing and validator downtime. If a validator behaves maliciously or fails to perform duties, a portion of the staked assets can be slashed.
• In liquid staking, the risks are broader and include smart contract vulnerabilities, impermanent loss when providing liquidity, and potential depegging of staking derivatives.

Smart contract exploits are a major concern in liquid staking, as many platforms rely on complex DeFi integrations. Additionally, the price volatility of staking derivatives can impact the overall value of holdings.

Users must assess their risk tolerance and technical knowledge before choosing a staking method.

Use Cases and Practical Applications

Liquid staking is particularly popular in the DeFi ecosystem due to its composability. For instance:

• Users can stake ETH and receive stETH, which can then be deposited into Aave or Compound as collateral to borrow other assets.
• stETH can be used in liquidity pools on Uniswap or SushiSwap to earn trading fees and additional incentives.
• Some protocols offer yield aggregators that optimize returns by automatically shifting staked assets between different DeFi platforms.

Traditional staking, while less flexible, remains a preferred option for long-term holders who prioritize simplicity and security over additional yield opportunities.

FAQs

Q: Can I switch from traditional staking to liquid staking?

A: Yes, but it requires unstaking your assets first, which may involve a waiting period and potential penalties depending on the network.

Q: Are liquid staking tokens insured against loss?

A: Most liquid staking tokens are not insured, and their value depends on the underlying staked assets and the platform’s smart contract security.

Q: Is liquid staking available for all cryptocurrencies?

A: No, it's primarily available on major PoS networks like Ethereum, Solana, and Cosmos, and depends on the existence of liquid staking protocols for those chains.

Q: Do I need a special wallet for liquid staking?

A: You can use wallets that support DeFi interactions, such as MetaMask, Trust Wallet, or hardware wallets compatible with the liquid staking platform you choose.