Liquid Staking and Restaking

The Locking Problem

Ethereum moved to Proof of Stake in September 2022. Validators must lock 32 ETH to participate in securing the network and earn ~3-4% annual rewards. The problem: that ETH is stuck. You cannot sell it, lend it, or use it in DeFi while it is staked.

For individual users, there is an additional barrier: 32 ETH costs roughly $100,000. Most people cannot afford a full validator.

Liquid Staking: Lido's Solution

Lido solves both problems.

1. Pool: You deposit any amount of ETH (even 0.01 ETH) into Lido's smart contract.
2. Receipt: Lido gives you stETH — a token that represents your share of the staking pool.
3. Rewards: Your stETH balance automatically increases daily as the validators earn rewards.
4. Liquidity: You can trade stETH on DEXs, use it as collateral on Aave, or provide liquidity — all while earning staking yield.

As of 2025, Lido holds over $15B in staked ETH, making it the largest DeFi protocol by total value locked.

Other Liquid Staking Protocols

The difference between rebasing (stETH balance increases) and value-accruing (rETH price increases) is cosmetic. Both achieve the same economic outcome — your position grows over time.

Restaking: EigenLayer

EigenLayer introduced a concept called restaking in 2023. The idea: Ethereum validators already have ETH at stake. Why not let them use that same economic security to protect other services too?

How It Works

1. You stake ETH normally on Ethereum (or hold stETH).
2. You opt in to EigenLayer, which lets you extend your staked ETH as security for Actively Validated Services (AVSs) — protocols like oracles, bridges, and data availability layers.
3. These AVSs pay you additional rewards for the security you provide.
4. In exchange, you accept additional slashing conditions. If an AVS you're securing fails or acts maliciously, a portion of your ETH can be slashed.

The Risk Stack

Each layer adds yield and risk:

Layer 3: AVS rewards (EigenLayer) +2-5% APY ← slashing risk from each AVS
Layer 2: DeFi yield (Aave, Uniswap) +1-3% APY ← smart contract risk
Layer 1: ETH staking rewards (Lido) +3-4% APY ← Ethereum slashing risk
───────────────────────────────────────────────────
Base: ETH ← market price risk

The more layers you stack, the higher the yield — but each layer introduces a new vector where you can lose funds.

The Centralization Concern

Lido controls roughly 28% of all staked ETH. If one entity controls too much stake, it could theoretically censor transactions or reorganize blocks. The Ethereum community actively debates concentration limits. Rocket Pool's permissionless validator model was designed specifically to address this — anyone can run a Rocket Pool node with just 8 ETH.

Key takeaways

• Liquid staking lets you earn Ethereum staking rewards without locking your ETH. You get a receipt token (stETH, rETH) that stays tradeable.
• Restaking (EigenLayer) extends staked ETH to secure additional protocols for extra yield, at the cost of additional slashing risk.
• Stacking DeFi yield on top of staking yield on top of restaking yield creates compounding returns — and compounding risk.
• Concentration of stake in a single protocol (like Lido) is an active concern for Ethereum's decentralization.