Liquid staking presents key benefits for ETH holders hoping to maximize yield while maintaining transferability. However, users should understand its unique risks – and the importance of decentralizing this rapidly emerging ecosystem.

A brief primer on Ethereum staking

ETH staking enables users to earn rewards while securing the world’s second-largest blockchain network.

• However, staking has critical barriers that require validators to run software and lock more than 32 ETH in the process.

• Stakers are then unable to transfer funds while these capital, operational, and technical requirements may deter new participants.

Liquid staking has emerged as a popular solution – surpassing $20 billion in 2023.

Layer3 as the gateway to ETH liquid staking

As thoughtful stewards in the vibrant Ethereum ecosystem – we’ve developed a Quest Collection for diving into liquid staking. We encourage users to explore different liquid staking protocols.

What is Rocket Pool liquid staking?

• Rocket Pool is a popular liquid staking that secures ETH worth more than $1.7 billion as of September 2023.

• Users can easily deposit any amount greater than 0.01 ETH to mint rETH – representing the value of staked funds + accrued rewards – in return.

• Rocket Pool operates a decentralized network of validators who safeguard funds and rewards in a non-custodial fashion.

• While other protocols distribute rewards daily via new tokens sent directly to holders, rETH’s deposits + rewards are reflected in its exchange rate.

  

What is Stakewise liquid staking?

• By prioritizing stability, security, and DeFi interoperability – Stakewise has grown to over $150 million worth of  liquid staked ETH in 2023.

• On Stakewise, users can stake ETH to receive two different tokens in return: sETH2 (staking ETH) and rETH2 (reward ETH).

• The dual token model sets Stakewise apart – and is used to redeem staked ETH and rewards at a 1:1 ratio respectively.

By holding sETH2, users receive staking rewards in the form of rETH2 tokens sent continuously and directly to their address.

What is Swell liquid staking?

• With over $75 million staked in 2023, Swell liquid staking has gained popularity with its non-custodial and easy-to-use protocol.

• Users can stake any amount of ETH for swETH – which actively reflects deposited ETH + accrued rewards in its exchange rate.

• By prioritizing DeFi accessibility, swETH yield opportunities can be found across many of Ethereum’s top apps.

  

What is Lido liquid staking?

• Lido is the liquid staking pioneer and has amassed nearly $14 billion ETH staked as of September 2023.

• Users can stake any amount of ETH for stETH – which is a so-called “rebasing token.”

• Your stETH token balance automatically increases daily (or “rebases”) according to the value of deposited ETH + staking rewards.

• Like other liquid staking tokens, stETH yield opportunities can be found across the broader DeFi ecosystem.

Benefits of liquid staking

• Unlocking the barrier to entry, users with any amount of ETH can stake and mint a freely transferable token in the process.

• Popular liquid staking pools such as Lido and Rocket Pool have made staking seamless and broadly accessible with easy-to-use applications.

• By minting liquid tokens representing staked ETH + rewards — users can freely stake while maximizing yield across the DeFi ecosystem.

Risks of liquid staking

• Exchange rate risk (liquid tokens may trade lower than fair value)

• Liquid token smart contracts may be vulnerable

• Rewards can be slashed if the protocol falls short

• Dominant protocols may pose centralization risks

Recently, Lido’s dominance has raised alarms in the crypto community. Danny Ryan, who co-developed Ethereum’s staking protocol, recently warned “Lido is a Systemic Risk." Granted, it has earned its standing by pioneering innovation and ease-of-use.

However, it’s in all Ethereum users’ best interest to explore different liquid staking providers – and promote decentralization in the process.