Liquid staking explained: staking tokens, how they work and the risks

Staking lets you earn rewards for helping secure a proof-of-stake network like Ethereum. The catch has always been that staked coins are locked up. Liquid staking is the workaround: you stake through a pool and get a token back that you can hold, use or sell while your ETH keeps earning rewards.

It’s become one of the most popular ways to stake, and one of the most misunderstood. This guide explains how it works, the different kinds of tokens, the risks and what regulators and tax authorities have said.

For staking basics, see what is crypto staking?

Why liquid staking exists

Running your own Ethereum validator needs 32 ETH and the hardware and skills to keep it online. ethereum.org explains that staking pools let many people with smaller amounts combine their ETH, and that pooling is not built into the Ethereum protocol itself: third parties built it separately.

Some pools use smart contracts: you deposit ETH, the contract tracks your stake, and it issues you a receipt token. That’s a liquid staking token (LST). ethereum.org says liquid staking protocols account for around a third of all staked ETH.

How an LST works

According to ethereum.org:

• When you deposit ETH, the protocol stakes it with its node operators and mints an LST, an ERC-20 token, to your wallet.
• The ETH stays staked; the LST is your claim on it and its rewards.
• You can hold, transfer or sell the token at any time, or use it in DeFi, for example as collateral.

The SEC staff describe the same thing: depositors receive newly minted “staking receipt tokens” on a one-for-one basis, evidencing ownership of the deposited assets and any rewards, so they keep liquidity without withdrawing from staking.

Two kinds of tokens

ethereum.org explains that LSTs show rewards in one of two ways:

Both pay rewards after the protocol’s fee. Neither is inherently better, but they behave differently in wallets and apps, and, ethereum.org notes, can be treated differently for tax purposes in some places.

Getting your ETH back

There are two ways out:

1. Redeem through the protocol for the underlying ETH. This depends on the protocol having ETH available or validators exiting through Ethereum’s exit queue, which can take time.
2. Sell the token on the market at any time, at whatever price it trades.

ethereum.org notes that since the Pectra upgrade, validator exits can be triggered by the withdrawal address holder, so redemptions rely less on trusting node operators than before.

Why redemptions take time

Ethereum processes withdrawals in a rolling “sweep” through all validators. ethereum.org explains the pace:

• Withdrawals have been possible since the Shanghai/Capella upgrade on 12 April 2023.
• A maximum of 16 withdrawals can be processed in each block, up to 115,200 validator withdrawals a day if no slots are missed.
• At that rate, ethereum.org estimates that processing 400,000 withdrawals takes about 3.5 days.
• To leave staking entirely, a validator must make a voluntary exit first, which joins a queue.

So when a liquid staking protocol needs to pay out a lot of ETH at once, redemptions can take days or longer. Holders who need ETH sooner may have to sell the token instead, at whatever price it trades.

The risks

ethereum.org stresses that holding an LST isn’t the same as staking: the protocol pays validators and doesn’t know your token exists. You’re trusting a pool. LSTs inherit staking’s risks, such as slashing and downtime penalties, and add their own:

• Smart contract risk: the ETH is held by contracts that could contain bugs or be exploited. See what is a smart contract?
• Market and liquidity risk: the token’s price can fall below the value of its ETH (“depegging”), especially in stressed markets.
• Governance and upgrade risk: fees, operators and even how the token works can change, and token holders typically have no vote.
• Operator concentration: large amounts of stake with a few operators can create single points of failure.
• Slashing pass-through: if the pool’s validators are penalized, the loss is typically shared by all token holders.

Opaque “staking” products

ethereum.org also warns that not everything marketed as staking is protocol staking. Some exchange “earn” programs are custodial, can change terms at any time, may get their yield from lending or trading rather than validators, and leave you with nothing on-chain to redeem if the provider fails. See crypto lending and earn accounts.

What the SEC staff said

On 5 August 2025, the SEC’s Division of Corporation Finance issued a statement on certain liquid staking activities. In the staff’s view, depending on the facts, the liquid staking activities it described don’t involve the offer and sale of securities, partly because the provider’s role is administrative or ministerial and it doesn’t guarantee or set the rewards.

Important limits:

• It’s a staff statement: the SEC says it has no legal force or effect and creates no new obligations.
• It doesn’t cover restaking, which uses staked assets on additional networks or applications.
• Its conclusions depend on the specific facts it describes.

Restaking: more yield, more risk

The SEC staff statement explicitly didn’t cover restaking, and it’s worth knowing why it’s treated separately. ethereum.org describes restaking as using already-staked ETH to help secure other decentralized services, known as actively validated services, in return for extra rewards. Just as staking ETH can give you a liquid staking token, restaking can give you a liquid restaking token.

ethereum.org lists the extra risks:

• Slashing: if restaking operators go offline, censor messages or try to corrupt a network, their stake can be slashed, partly or entirely.
• Centralization: if a few operators dominate restaking, they could gain great influence over restakers and the services they secure.
• Chain reactions: if a restaker is slashed while securing several services at once, it can lower the security of the others.

In short, restaking stacks new risks on top of those of staking and liquid staking.

The SEC’s 2026 interpretation

In March 2026, the SEC itself, rather than its staff, addressed staking receipt tokens in a formal interpretation that it said supersedes earlier staff statements:

• A receipt token for a crypto asset that isn’t a security and isn’t sold as part of an investment contract is not a security either. It merely evidences the deposited asset, which the depositor still owns.
• The token doesn’t generate rewards itself: rewards come from the underlying protocol staking, which the SEC said doesn’t involve securities transactions.
• But a receipt token for an asset that is a security, or is sold under an investment contract, is a security.

See is crypto a security?

Tax

The tax treatment of LSTs isn’t settled everywhere:

• United States: the IRS ruled in Revenue Ruling 2023-14 that staking rewards are income when you gain dominion and control over them. How that applies to each type of LST isn’t addressed in the ruling. See staking taxes.
• United Kingdom: HMRC’s DeFi guidance says that giving tokens to a platform in return for a different token is an exchange of one token for another, valued at the sterling market value of the token received. See DeFi lending and staking tax in the UK.

Keep records of every deposit, the tokens received, redemptions and their values at the time.

Before you use liquid staking

1. Prefer transparent pools whose contracts are open-source and audited, and whose node operators are published, as ethereum.org suggests.
2. Hold the token in your own wallet if you can, and check you can redeem it.
3. Understand the token type, rebasing or exchange-rate.
4. Don’t stack risks by borrowing against your LST unless you understand liquidation.
5. Revoke approvals you no longer need. See token approvals.