Liquid Staking and Restaking, Explained

Staking on a proof-of-stake blockchain involves depositing tokens to participate in network security, earning rewards in return. The catch, as it was originally designed on Ethereum, is that staked assets are locked — they cannot be moved, traded, or used elsewhere while they are securing the network. Liquid staking protocols emerged to address this constraint. Restaking is a newer development that extends staked assets to secure additional systems simultaneously. Together, they represent two of the more consequential financial innovations in the Ethereum ecosystem.

How Liquid Staking Works

A liquid staking protocol accepts deposits of ETH (or another proof-of-stake token) from users, pools those deposits, and runs validators on their behalf. In return, the depositor receives a liquid staking token — a derivative that represents their staked position. Lido, the largest such protocol, issues stETH; Rocket Pool issues rETH; Coinbase’s institutional product issues cbETH.

These tokens accrue staking rewards over time. stETH, for instance, is designed so that the holder’s balance increases to reflect earned rewards, while rETH appreciates in value relative to ETH. The key property is that the derivative token is transferable: holders can sell it, deposit it as collateral in a lending protocol, or provide liquidity in a trading pool. The capital is no longer fully locked, even though the underlying ETH continues to earn staking rewards and secure the network.

Liquid staking tokens trade on decentralised exchanges, and their price relative to the underlying asset can diverge from parity. Under normal conditions, the discount or premium tends to be small, but in stressed market conditions — such as the period following the collapse of TerraUST in 2022 — stETH briefly traded at a meaningful discount to ETH as forced sellers exceeded buyers. This represents a form of liquidity risk that holders should understand: the derivative is not the same as the underlying.

Concentration Risk and Protocol Dominance

Liquid staking has become very large relative to Ethereum’s total staked supply. Lido alone has at various points controlled between 25 and 33 percent of all staked ETH, which has generated sustained debate within the Ethereum developer community. A single entity controlling a substantial share of the validator set creates potential risks: the ability to exert undue influence over block ordering, the concentration of smart contract risk into a single point of failure, and the concentration of governance power in Lido’s governance token holders.

The Ethereum protocol’s own security properties are partly premised on no single entity controlling more than one third of staked ETH, beyond which certain attack scenarios become theoretically possible. The ongoing debate about whether liquid staking concentration constitutes a systemic risk remains unresolved, but it is taken seriously by the Ethereum research community.

Restaking: Extending Security to New Systems

Restaking is a mechanism by which staked ETH — or a liquid staking token — is simultaneously used to secure additional systems beyond Ethereum itself. EigenLayer, launched on Ethereum mainnet in 2024, is the primary protocol enabling this. Restakers opt in to providing cryptoeconomic security to what EigenLayer calls Actively Validated Services (AVSs) — a term covering data availability layers, oracle networks, cross-chain bridges, and other infrastructure that requires economic guarantees but cannot easily issue their own token to attract a large validator set.

The mechanism works as follows: a restaker deposits ETH or a liquid staking token into EigenLayer’s contracts and selects which AVSs they want to secure. If they behave dishonestly with respect to those AVSs, their restaked ETH can be slashed. In exchange, they earn additional rewards from the AVSs they are securing, on top of their base Ethereum staking yield.

The risk profile of restaking is meaningfully different from basic staking. A restaker is now exposed to slashing conditions defined by multiple systems, each with their own logic and potential for bugs. A flaw in an AVS’s slashing contract could result in loss of restaked capital through no fault of the restaker’s behaviour on Ethereum itself. The additional yield offered by AVSs is compensation for this additional risk, and the appropriateness of that compensation is something each participant must assess independently.

What These Mechanisms Mean for Ethereum’s Economy

Liquid staking and restaking together mean that ETH can now perform multiple economic roles simultaneously: securing Ethereum’s base layer, serving as collateral in lending markets, providing liquidity in trading pools, and underwriting additional infrastructure systems. This capital efficiency is the appeal. The risk, which serious analysts consistently flag, is that leverage and interconnection increase the potential magnitude of cascading failures. A sharp price decline combined with mass liquidations in lending protocols where liquid staking tokens serve as collateral could produce dynamics that are difficult to predict in advance.

For current data on staking participation rates and Ethereum network metrics, the Ethereum overview page provides an up-to-date reference. Liquid staking and restaking are substantive financial innovations operating at scale; engaging with them seriously requires understanding their mechanics and their risks with equal care.