Liquid Staking: stETH, rETH and LSTs
Understand liquid staking on Ethereum: stETH, wstETH, rETH, rebasing vs exchange rate, the withdrawal queue, and the risks of discounts and centralization.
The essentials
Reminder: staking on Ethereum
Since 2022, Ethereum has run on proof of stake. Validators lock up ETH as collateral to propose and attest to blocks. In exchange, they receive rewards; if they commit serious faults, part of their stake can be confiscated (slashing).
According to ethereum.org, activating a solo validator takes a minimum of 32 ETH, a permanently connected computer and technical skills. Many holders have neither the amount nor the desire to run a node. Hence "pooled staking" solutions.
Staking withdrawals have been possible since the Shanghai/Capella upgrade in April 2023. Before that date, staked ETH simply couldn't be withdrawn, a detail that played an important role in the June 2022 episode described below.
What is an LST?
An LST (Liquid Staking Token) is an ERC-20 token issued by a staking protocol in exchange for your ETH. It represents your share of the ETH staked by the protocol and the accumulated rewards, minus the protocol's fees.
The word "liquid" means your position isn't locked: you can sell the LST, transfer it or deposit it in a DeFi application, while the underlying ETH keeps being staked. According to ethereum.org, liquid staking protocols account for about a third of staked ETH.
Two ways to distribute rewards
Ethereum.org distinguishes two models.
Rebasing tokens: the example of stETH
With a rebasing token, it's your balance that goes up. One stETH stays roughly equal to one ETH, and the number of stETH in your wallet grows as rewards come in.
At Lido, the documentation explains that stETH balances are recalculated every day, at the report of an oracle that relays the validators' state. Behind the scenes, the contract tracks shares: you hold a fraction of the total ETH controlled by the protocol, and your displayed balance is recalculated from that fraction.
Practical consequences:
- Your balance changes without any transaction on your part, which some tools or apps handle poorly.
- A technical rounding can leave 1 to 2 wei (the smallest unit of ETH) on your address when you transfer "all" of your stETH.
- In case of major penalties, the balance could theoretically go down. Lido's documentation states that daily rebases had never been negative at the time of writing.
Exchange-rate tokens: rETH and wstETH
With an exchange-rate (value-accruing) token, your number of tokens stays fixed, but each token entitles you to a growing amount of ETH. This is the case for Rocket Pool's rETH, cited as an example by ethereum.org. One rETH is therefore worth slightly more than one ETH, and that gap grows over time.
wstETH (wrapped stETH) applies this model to stETH: it's a "wrapper" that converts your stETH into a token whose balance doesn't change. According to Lido, it's the price of wstETH expressed in stETH that rises, with a daily update. This format is often preferred in DeFi and on layer 2 networks, precisely because many contracts handle balances that change on their own poorly.
| Model | What changes | Examples |
|---|---|---|
| Rebasing | The number of tokens | stETH |
| Exchange rate | The value of each token | rETH, wstETH |
How to get your ETH back
There are two exit routes, with different consequences.
Withdrawal through the protocol
You ask the protocol to return ETH in exchange for your LST. At Lido, the request works as a "first come, first served" queue:
- You deposit your stETH and receive an NFT representing your request.
- The request is "finalized" when the protocol has enough ETH (from deposits, rewards or validator exits).
- You then claim your ETH with this NFT.
The delay depends on overall demand. Upstream, the Ethereum protocol itself limits the pace: ethereum.org states that at most 16 withdrawals are processed per block, and validator exits go through their own queue. During a wave of withdrawals, the wait can therefore get longer. Careful too: this NFT has value, so don't transfer it and don't sign anything involving it on a dubious site.
Selling on the market
You can also sell your LST for ETH on a DEX or a platform. It's immediate, but the price depends on available liquidity. If many sellers show up at the same time, you'll sell at a discount.
Discount risk: the June 2022 episode
In June 2022, well before withdrawals opened, stETH traded noticeably below ETH. According to CoinDesk, the discount, usually 2 to 3%, hit a record of about 8% in mid-June.
The context: struggling players, including the lending platform Celsius and the fund Three Arrows Capital, held large amounts of stETH and needed liquidity. Since staked ETH couldn't yet be withdrawn, the only way out was to sell on the market, which widened the gap.
What to take from it:
- An LST is not ETH: its market price can drift from its redemption value.
- These gaps are especially dangerous if you have borrowed using an LST as collateral, or if you are forced to sell at the wrong time.
- The opening of withdrawals in 2023 added an arbitrage route, but the queue and liquidity conditions still matter in times of stress.
Other risks to know
Ethereum.org sorts LST risks into several categories:
- Smart contracts: a bug or flaw in the protocol's code can lead to losses.
- Operator centralization: if a large share of staked ETH is run by a small number of node operators or by a single protocol, it creates risks of censorship or a common outage for the whole network.
- Slashing: faults by the protocol's validators reduce the value of the entire pool.
- Liquidity: the price on the secondary market can fall below the value of the underlying ETH.
- Governance: the protocol's rules can change without token holders voting.
Protocols differ on operator selection: some rely on a list of operators chosen by governance, others let anyone become an operator by posting an ETH bond. Read each protocol's documentation to understand who controls the validators and the withdrawal keys.
A concrete example
You hold 2 ETH and want to stake them without running a node.
- Compare the model (rebasing or exchange rate), the fees, the withdrawal procedure and the protocol's track record on its official documentation.
- Go to the official site by typing the address yourself or via a bookmark, never via an ad or a private message.
- Deposit 2 ETH and receive about 2 stETH, or slightly fewer than 2 rETH (since one rETH is worth more than one ETH).
- If you want to use your LST in DeFi, check whether the application expects stETH or wstETH; wrapping is a separate transaction.
- Track your position: with stETH, your balance goes up; with rETH or wstETH, it's the value per token that goes up.
- To exit, compare the market price with the withdrawal procedure. If the discount is small, selling may be simpler; otherwise, the queue returns your ETH at the protocol's rate, with a delay.
Mistakes to avoid
- Believing an LST is always worth exactly one ETH: the market can apply a discount, especially in a crisis.
- Stacking risks: depositing an LST as collateral to borrow ETH, then restaking, multiplies the points of failure. See our guides on lending and restaking.
- Sending stETH to a contract that doesn't handle rebasing: use wstETH when the application asks for it.
- Forgetting gas fees: on small amounts, entry, wrapping and exit fees can absorb a significant share of the rewards.
- Following a fake "staking bonus" or "claim rewards" link: imitations of staking sites are common.
Checklist before staking
- Have I understood whether my token is rebasing or exchange-rate?
- Have I read the withdrawal procedure and delays?
- Do I know who operates the validators and who can modify the contracts?
- Am I ready to accept a temporary discount if I have to sell quickly?
- Am I using the official site and a secure wallet?
This guide is general information and is not investment advice.
Key takeaways
- An LST represents ETH staked in a protocol and remains transferable and usable, unlike locked staking.
- stETH increases your balance every day (rebasing), while rETH and wstETH keep a fixed balance whose value rises.
- To exit, you can use the protocol's withdrawal queue (variable delay) or sell on the market (variable price).
- June 2022 showed that an LST can trade at a significant discount when large holders have to sell.
- The main risks are smart contracts, operator concentration, slashing, liquidity and governance.