# Staking & Liquid Staking

## What Is Staking?

Ethereum is secured by **validators** — computers that verify transactions and propose new blocks. To become a validator, you lock up 32 ETH as collateral. This collateral is your "stake" — your skin in the game.

If you validate honestly, you earn rewards. If you try to cheat (signing contradictory blocks, for example), the protocol **slashes** your stake — destroying a portion of your 32 ETH and forcing you off the network.

This mechanism — reward honesty, punish dishonesty — is called **Proof of Stake**. It replaced Ethereum's original Proof of Work system in September 2022.

### Where Does Staking Yield Come From?

Validator rewards come from three sources:

| Source               | What It Is                                                                                         | Typical Contribution    |
| -------------------- | -------------------------------------------------------------------------------------------------- | ----------------------- |
| **Protocol rewards** | New ETH issued by Ethereum to compensate validators for attesting to blocks and proposing new ones | \~60-70% of total yield |
| **Priority fees**    | Tips that users pay to get their transactions included faster                                      | \~15-25% of total yield |
| **MEV rewards**      | Value extracted from optimal transaction ordering within blocks (via MEV-boost)                    | \~10-20% of total yield |

As of early 2026, validators earn roughly **3-5% APY** depending on the method. This yield is real — it comes from protocol issuance and transaction fees, not from token inflation games.

### The Problem with Solo Staking

Solo staking requires:

* **32 ETH** (\~$68,000 at current prices) as a minimum deposit
* A computer running 24/7 with reliable internet
* Technical knowledge to maintain validator software
* Willingness to lock your ETH for an indefinite period

Most people can't do this. And even those who can face a painful trade-off: **staked ETH is illiquid**. You can't use it as collateral, trade it, or deploy it elsewhere in DeFi while it's locked in a validator.

***

## Liquid Staking Solves This

**Liquid staking protocols** pool ETH from many depositors, run validators on their behalf, and issue a **Liquid Staking Token (LST)** that represents your share of the staked pool.

Here's the flow:

```
You deposit ETH → Protocol stakes it with validators → You receive an LST
                                                        ↓
                               The LST earns staking yield AND
                               can be used anywhere in DeFi
```

No 32 ETH minimum. No hardware. No lock-up. Your LST is a standard ERC-20 token — you can hold it, trade it, use it as collateral, or provide liquidity with it.

### The Major LSTs

| Token     | Protocol    | TVL      | How Yield Accrues                           | Fee     |
| --------- | ----------- | -------- | ------------------------------------------- | ------- |
| **stETH** | Lido        | \~$18.6B | **Rebasing** — your balance increases daily | 10%     |
| **weETH** | ether.fi    | \~$4.6B  | **Non-rebasing** — exchange rate increases  | 10%     |
| **cbETH** | Coinbase    | \~$3.9B  | **Non-rebasing** — exchange rate increases  | 10%     |
| **rETH**  | Rocket Pool | \~$1.5B  | **Non-rebasing** — exchange rate increases  | Dynamic |

Lido dominates with \~24.3% of all staked ETH. Together, LSTs represent a significant share of the approximately 35.9 million ETH currently staked on Ethereum (about 28.9% of total ETH supply). For a detailed breakdown, see [LST Comparison](https://docs.ethstrat.xyz/tokenomics/lst-comparison).

### Rebasing vs. Non-Rebasing

There are two ways an LST can pass staking yield to you:

**Rebasing (stETH model):** Your token balance increases automatically. If you hold 10 stETH today, tomorrow you might hold 10.001 stETH. Simple to understand, but creates problems: smart contracts that cache your balance will show the wrong number, and every balance change triggers accounting complexity.

**Non-rebasing (rETH, cbETH model):** Your token balance stays the same, but each token becomes worth more ETH over time. If the exchange rate is 1.05, your 10 tokens are worth 10.5 ETH. Simpler for smart contracts, simpler for accounting, but less intuitive for beginners.

> **ETH Strategy's esETH is non-rebasing and pegged 1:1 with ETH.** Unlike rETH or cbETH where the exchange rate increases over time, esETH always equals 1 ETH. Yield from underlying LSTs is harvested separately and directed to the protocol. This makes esETH easy to integrate into DeFi protocols and eliminates both rebase and exchange-rate accounting complexity. See [esETH](https://docs.ethstrat.xyz/core-mechanics/eseth) for full details.

***

## Risks of Liquid Staking

LSTs are not risk-free. You should understand these before depositing:

### Smart Contract Risk

Every LST relies on smart contracts that control pooled ETH. A bug or exploit in these contracts could result in loss of funds for all depositors. Audits reduce this risk but never eliminate it.

### Slashing Risk

If the validators backing your LST misbehave, the protocol's staked ETH gets slashed. For diversified protocols with many validators, the impact of a single slashing event is small. But **correlated slashing** — where many validators fail simultaneously because they share infrastructure or client software — could cause meaningful losses.

### Depeg Risk

LSTs trade on secondary markets (like Uniswap or Curve). During market stress, LSTs can trade *below* the value of the underlying ETH. In June 2022, stETH traded at a \~5% discount during the Terra/Luna crisis. Since the Shapella upgrade in April 2023, direct withdrawals are possible, which structurally reduces depeg risk — but withdrawal queues during high-demand periods can still cause temporary discounts.

### Centralization Risk

A single LST protocol controlling too much staked ETH threatens Ethereum's decentralization. Lido's \~24% share is already a concern in the Ethereum community. Protocol governance decisions (fee changes, operator selection, upgrade paths) affect all stakers.

***

## Why This Matters for ETH Strategy

ETH Strategy's esETH is an LST — but it's not just another competitor to stETH or rETH. It serves a specific role within the protocol's [treasury accumulation model](https://docs.ethstrat.xyz/academy/treasury-accumulation-model):

* **esETH wraps multiple underlying LSTs** (wstETH and potentially others), diversifying validator risk rather than concentrating it
* **esETH is the denomination layer** — the asset that the protocol's treasury holds and that backs all lending and borrowing activity
* **Yield harvesting is separated from the token** — esETH is always 1:1 with ETH. Underlying LST yield is harvested and redirected to STRAT stakers rather than accreting to the token's value

Understanding how staking and LSTs work is the foundation for understanding everything else in the protocol. Next, read about [leverage and liquidation](https://docs.ethstrat.xyz/academy/leverage-and-liquidation) — the other fundamental concept you need before diving into the protocol mechanics.