The Rise of Liquid Staking | Lido & Rocket Pool’s Role in Ethereum DeFi
By CapitalKeeper |DeFi & Web3 Trends | Crypto Capital | Market Moves That Matter
The Rise of Liquid Staking: How Lido & Rocket Pool are Changing Ethereum
Discover how liquid staking tokens (LSTs) like Lido and Rocket Pool are transforming Ethereum in 2025. Learn why liquid staking is crucial for DeFi, investors, and the future of ETH staking.
Introduction
Ever since Ethereum transitioned from Proof-of-Work to Proof-of-Stake (PoS) through The Merge in 2022, staking has become the backbone of its security. Validators lock up ETH to secure the network, earning rewards in return.
But a problem quickly surfaced: locked ETH is illiquid. Investors staking ETH couldn’t use their funds elsewhere in DeFi until withdrawal options opened. This gave rise to a groundbreaking solution: liquid staking tokens (LSTs).
Protocols like Lido and Rocket Pool pioneered liquid staking, issuing tokens that represent staked ETH — like stETH or rETH. These tokens can be freely traded, used as collateral, or reinvested in DeFi, making staking more flexible and attractive.
Today in 2025, liquid staking is one of the hottest trends in DeFi, with billions of dollars locked into LST protocols. This blog explains how liquid staking works, why LSTs matter, and whether they’re shaping Ethereum’s financial future.
What is Liquid Staking?
In traditional staking, you deposit ETH to secure the network, but your coins remain locked. With liquid staking, you receive a derivative token representing your staked ETH:
- Lido (stETH) → Receive stETH when staking ETH through Lido.
- Rocket Pool (rETH) → Receive rETH when staking ETH through Rocket Pool.
These derivative tokens:
- Earn staking rewards in the background.
- Can be traded or used across DeFi protocols.
- Provide liquidity and flexibility compared to locked staking.
Simply put, liquid staking turns an illiquid investment into a versatile financial tool.
Why is Liquid Staking Important for Ethereum?
Ethereum staking yields around 3–5% annually, depending on validator participation. Without liquidity, ETH holders face an opportunity cost — they can’t use their staked ETH in DeFi lending, trading, or yield farming.
Liquid staking changes this dynamic by:
- Unlocking liquidity: stETH and rETH can be swapped or used while still earning rewards.
- Boosting DeFi activity: LSTs are now accepted as collateral on major protocols like Aave, Curve, and MakerDAO.
- Lowering entry barriers: Instead of running your own validator (requires 32 ETH), liquid staking allows even small holders to stake fractions of ETH.
This flexibility explains why liquid staking protocols have seen explosive growth since 2023.
Lido Finance: The Market Leader
Lido remains the largest liquid staking protocol, controlling more than 70% of staked ETH derivatives.
- Token: stETH (staked ETH).
- Key Strengths:
- Deep integration across DeFi protocols.
- Instant liquidity with high trading volume.
- Institutional adoption.
However, Lido’s dominance has raised centralization concerns. With such a large share of staked ETH, critics argue it threatens Ethereum’s decentralization principle.
Rocket Pool: The Decentralized Challenger
Rocket Pool takes a more decentralized approach to liquid staking.
- Token: rETH.
- Key Strengths:
- Permissionless validator network anyone can run a mini-pool with just 16 ETH (instead of 32).
- Strong community governance.
- Designed for long-term decentralization.
Rocket Pool’s slower growth compared to Lido is offset by its decentralized ethos, appealing to purists who prioritize Ethereum’s original vision.
The Rise of LSTs in DeFi
Liquid staking tokens are no longer passive assets. They are at the center of DeFi innovation:
- Collateral in Lending Protocols
- Users deposit stETH or rETH into Aave or MakerDAO to borrow stablecoins while still earning staking rewards.
- Liquidity Pools & Yield Farming
- On Curve Finance, stETH/ETH pools generate trading fees + liquidity incentives.
- Composability in DeFi
- LSTs can be stacked across multiple protocols (e.g., stake ETH → receive stETH → use as collateral → borrow stablecoins → reinvest).
This “money Lego” effect makes LSTs powerful tools for maximizing yield.
Risks of Liquid Staking
Despite its benefits, liquid staking carries risks:
- Centralization Risk (Lido): Too much ETH concentrated in one protocol may create systemic risk.
- Smart Contract Risk: Bugs in staking protocols could lead to losses.
- Liquidity Risk: During high volatility, stETH may depeg slightly from ETH.
- Regulatory Risk: Authorities could target staking providers as “investment contracts.”
Investors should weigh these factors before allocating large capital.
Liquid Staking in Numbers (2025 Snapshot)
- Over $40 billion worth of ETH is staked via liquid staking protocols.
- Lido’s stETH accounts for nearly 70% of this market.
- Rocket Pool has grown steadily with rETH adoption rising among decentralization advocates.
- LSTs are now a top collateral type in major lending protocols.
These numbers highlight how crucial LSTs have become to Ethereum’s economy.
Future Outlook: LSTs as the Backbone of Ethereum DeFi
Looking ahead, liquid staking may become Ethereum’s most dominant DeFi primitive. Possible developments include:
- More competitors: New players like Coinbase’s cbETH and decentralized projects could balance Lido’s dominance.
- Interoperability: LSTs might extend beyond Ethereum, usable on other blockchains via bridges.
- Institutional Adoption: Hedge funds and traditional finance may adopt LSTs for safe, liquid ETH exposure.
- Yield Layering: Advanced strategies may combine staking rewards, lending yields, and liquidity incentives for optimized returns.
Conclusion
The rise of liquid staking has transformed Ethereum from a staking network into a financially vibrant ecosystem.
- Lido offers convenience, scale, and liquidity but risks centralization.
- Rocket Pool champions decentralization and community trust.
For DeFi investors, liquid staking tokens (LSTs) are no longer optional they are becoming a core building block of Web3 finance.
As Ethereum scales and adoption deepens, liquid staking will remain at the forefront, bridging the gap between staking rewards and DeFi liquidity.
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