Staking is the most popular method to earn rewards with your crypto, but there is a bit of a nuance in how it works. There are multiple staking methods, but two are the most common: liquid staking and native staking. With native staking, investors lock their cryptocurrency directly onto the blockchain while in liquid staking, they use a platform to do so.
Whether you’re a long-term investor or an active DeFi explorer, understanding the difference between these methods is essential to maximizing your yields and minimizing your risks. Let’s help you understand how both native and liquid staking work by breaking down their mechanisms, including their pros and cons.
What Is Native Staking?
Native staking is the process of locking your cryptocurrency tokens directly on a blockchain, such as Ethereum or other Proof-of-Stake (PoS) networks, to help secure the network and earn rewards in return.
You can commit your tokens to the network by either running your own validator node or delegating your tokens to an existing validator, which is a more user-friendly and accessible option.
Most users stake via wallet interfaces like Phantom (Solana) or MetaMask (Ethereum)
You can also choose a validator to delegate your tokens. This allows you to retain control over your locked tokens, but they remain locked for a specified period.
The natively staked tokens contribute to validating transactions and maintaining consensus. This helps make the network more secure and decentralized.
Key Benefits
Native staking has a lot of benefits for the long-term holders. Below is a comprehensive breakdown of the key benefits of native staking.
- With native staking, you don’t need complex smart contracts or DeFi protocols, as it can be easily done through wallet interfaces like MetaMask.
- You actively contribute to network security and consensus as your tokens are staked directly on the blockchain.
- With native staking, there is no reliance on external platforms or custodians, and this minimizes exposure to hacks or rug pulls.
- With native staking, rewards are issued by the network itself, often with predictable APYs. These returns are based on validator performance and network inflation, making them predictable.
- Native staking is perfect for users who want to “set and forget” their assets. There is no need to actively manage positions or chase yield across DeFi platforms with native staking.
- With native staking, you help strengthen the blockchain’s validator ecosystem. This also encourages healthy distribution of stake across the network.
Downsides
While native staking offers numerous benefits, it is not without its drawbacks. Below is a list of all the drawbacks associated with native staking.
- In native staking, the tokens are locked and cannot be accessed freely. This is not ideal if you need quick access to your funds during market volatility.
- If you want to unstake your tokens, it often requires a wait of several days or even weeks, like 21 days on Cosmos. If the price fluctuates during that time, you will be exposed to it and can suffer a loss.
- Tokens locked in native staking can’t be used in DeFi protocols for lending or yield farming, resulting in missing out on higher returns or compounding strategies.
- Native staking offers fixed or predictable yields, which are often lower than liquid staking.
- You need proper research before selecting a reliable validator because if your chosen validator performs poorly, your rewards may decrease.
What Is Liquid Staking?
With liquid staking, you can stake your crypto tokens using platforms like Lido or Rocket Pool. These platforms, in return, issue Liquid Staking Tokens (LSTs) that represent your staked position in the pool.
These LSTs are fully tradable, which means you can sell or swap them for rewards while your original assets remain staked in the pool. While holding LSTs, you can accrue staking rewards from the staked network and participate in DeFi by lending, borrowing, farming, or providing liquidity using your LSTs.
Key Benefits
Liquid staking offers a plethora of benefits that are fundamentally different from native staking. Below is a detailed breakdown of all the benefits.
- With liquid staking, you receive Liquid Staking Tokens (LSTs), such as stETH or rETH, which are tradable and usable, unlike the tokens locked in native stakes.
- The acquired LSTs can be used in DeFi protocols for lending, borrowing, farming, and liquidity provision. This allows you to earn staking rewards and DeFi yields simultaneously, thus doubling the earning opportunity.
- In liquid staking, you can unstake your tokens at any time by selling your LSTs on secondary markets. There is no need to wait through long, unbounding periods.
- More protocols, such as Ethereum, Solana, Cosmos, and Polkadot, are integrating LSTs, thereby expanding their utility and accessibility.
- Liquid staking is Ideal for active users who want to optimize returns without sacrificing network participation.
- LSTs enable creative portfolio management and risk-adjusted yield farming.
Downsides
While liquid staking offers more rewards than native staking, it also has a greater share of downsides.
- As LSTs rely heavily on smart contracts to manage staking and token issuance, bugs or exploits in these contracts can lead to loss of funds.
- In volatile markets or liquidity crunches, LSTs like stETH may lose their 1:1 peg to your asset. This may result in reducing your exit value.
- Some protocols concentrate liquid stake among a few validators. This undermines the decentralized ethos of blockchain.
- For beginners, understanding how LSTs interact with DeFi and yield stacking in liquid staking can be overwhelming.
- If you make a mistake in using or transferring LSTs, this may result in unexpected losses or missed rewards.
- You must trust external platforms to manage staking and smart contract execution. If a protocol gets compromised, you will bear all the loss.
- Poor validator behavior can lead to slashing penalties. This will affect both staking rewards and the value of your LSTs.
Native Staking vs Liquid Staking: How are They Different?
Liquid staking and native staking are two distinct approaches to locking down your crypto assets to secure a network and earn rewards in return. Below is a details breakdown of all the differences between the two staking approaches.
Liquidity and Access to Funds
Liquidity is one of the biggest differentiators between native and liquid staking. Here’s a direct comparison to see how each approach handles access to your funds.
| Feature | Native Staking | Liquid Staking |
| Token Lockup | Tokens are locked on-chain and can’t be moved | Tokens are locked, but you receive LSTs that you can use freely |
| Unstaking Delay | Requires waiting from 7–21 days | No delay. You can sell your LSTs to exit instantly |
| Access to Capital | Limited until unstaking completes | Full access via LSTs |
| Market Flexibility | Poor. Makes it hard to react to price swings | High. You can pivot strategies or exit positions on demand |
| Use in Other Protocols | Can’t use the locked tokens | You can use LSTs across DeFi for yield stacking and utility |
Rewards and Yield Potential
In native staking, you lock your tokens directly into the blockchain’s staking mechanism. In return, you earn staking rewards, which are typically a fixed or variable annual percentage yield (APY), depending on network conditions. These staking rewards are paid out in the same token you staked.
In liquid staking, you stake your tokens through a liquid staking protocol, such as Lido or Rocket Pool. You receive a Liquid Staking Token (LST), which represents your staked position. These LSTs automatically accrue staking rewards, just like native staking.
But this is where the main difference arises. You can also use LSTs in DeFi to earn additional yield on top of staking rewards. You can supply LSTs to platforms like Aave or Compound to earn interest. You can also add your LSTs to DEX pools to earn trading fees + rewards.
Security and Risks
As native staking is built directly into the blockchain’s consensus mechanism, the risks are mostly systemic and protocol-based. These involve.
- Slashing: Validators can be penalized for downtime or malicious behavior.
- Protocol Bugs: Any flaw in the blockchain’s staking logic could significantly impact all stakers.
- Unbounding Delay Risk: During the unstaking period, your tokens are exposed to price volatility.
- Custodial Risk: In the case of a validator, you must trust them to act responsibly.
For liquidity staking, these risks differ due to the differences in ideology and execution method. Liquid staking introduces additional layers of complexity, which adds more risk to the fold. These include.
- Smart Contract Risk: Liquid staking protocols rely on smart contracts, which can be vulnerable to hacking or other forms of exploitation.
- Platform Risk: Semi-centralized platforms such as Lido or Rocket Pool may face governance or operational failures.
- Depeg Risk: Due to market panic or liquidity crunch, LSTs, like stETH, may trade below their pegged value, leading to sufficient loss of assets.
- Liquidity Risk: If exit demand from the staking protocol is high, selling LSTs may result in poor pricing.
- Custodial Risk: Some protocols delegate to validators. If they get compromised, your stake will be at risk.
Ease of Use and Control
Ease of use and control are two key factors when deciding whether to opt for native staking or liquid staking. As native staking is built into the blockchain’s core protocol, it makes setup straightforward via wallet or node. It has transparent mechanics as every activity is on-chain and visible.
With native staking, you get direct ownership of your tokens, and it has no dependency on smart contracts or external protocols.
However, in liquid staking, you must stake through platforms like Lido or Rocket Pool. Tokens are managed by smart contracts that mint Liquid Staking Tokens (LSTs), and rewards are embedded in the LST’s value or distributed via protocol rules.
In liquid staking, protocols may have their own governance and upgrade paths, and your user experience may vary depending on the chosen protocol.
| Feature | Native Staking | Liquid Staking |
| Setup Complexity | Simple | Complex |
| Transparency | High | Varies by protocol |
| Token Control | Direct | Indirect via LSTs |
| Risk Awareness Needed | Basic | Advanced |
| Flexibility | Low | High via DeFi integrations |
Use Case Differences
For long-term investors, native staking is a great option as these users are focused on security and want steady rewards. Liquid staking is only useful for long-term investors if they don’t want to exit while enjoying flexibility.
Native staking is ideal for passive holders who want to “set and forget” their assets. Liquid staking is not suitable for these users, as it requires active management and a basic understanding of DeFi.
As tokens are locked and idle in native staking, it is useless for DeFi power users. These users are a perfect fit for liquid staking, where assets are managed across decentralized finance (DeFi) protocols.
Native staking is not ideal for yield maximizers as it only allows single-layer yield from staking. However, liquid staking offers multi-layer yield via staking + trading pools, which makes it perfect for yield maximizers.
Security-focused users should opt for native staking, as it offers simplicity and minimal risk exposure. Liquid staking requires knowledge of smart contracts and poses platform risks, making it unsuitable for security-focused users.
Native staking is not a good fit for active traders, as the tokens are locked in it. Liquid staking is a much better option for the traders as it offers flexibility and LSTs.
Unstaking Process and Flexibility
Unstaking is one of the most significant differences between native and liquid staking, particularly in terms of flexibility and access to funds.
| Feature | Native Staking | Liquid Staking |
| Unstaking Delay | Requires a fixed unbonding period of 7–21 days, depending on the network | No delay. You can sell your LSTs instantly |
| Token Lockup | Inaccessible | Accessible through LSTs |
| Exit Flexibility | Limited until you regain your tokens after the lockup period | Instant by selling LSTs |
| Market Responsiveness | Poor | Excellent |
| User Experience | Simple and Rigid | Complex and Flexible |
Which Staking Approach is Better?
As each has its own strengths depending on your goals, risk tolerance, and time period, neither native staking nor liquid staking is “better.”
Native staking is best for simplicity and security. It is also ideal for long-term holders who don’t need immediate access to their funds. It offers direct participation in network consensus and governance, and is typically lower risk, as it avoids the use of smart contracts. However, with native staking, you will face unbonding delays and limited liquidity.
In comparison, liquid staking is best for flexibility and yield optimization. It is great for users who want to stay staked while remaining liquid. It enables DeFi integrations, which allow you to lend, borrow, or trade your staked assets. Liquid staking also offers instant exit via LSTs transfer or swaps. However, it comes with smart contract risks and potential price volatility of LSTs.
You can cross-check your needs and end goals against the pros and cons of both options mentioned above and decide for yourself which staking process is best for you.
Some Popular Liquid Staking Protocols You Should Know About
We have compiled a list of the 6 best liquid staking protocols that you can use to maximize your yields.
| Protocol | Supported Chains | What Sets it Apart |
| Lido (stETH) | Ethereum, Polygon, Solana | Largest Ethereum staking protocol with deep DeFi integration and no minimum stake |
| Rocket Pool (rETH) | Ethereum | Highly decentralized with a community-run node network and lower centralization risk |
| Coinbase (cbETH) | Ethereum | Centralized access via Coinbase, and it is ideal for institutional or retail users |
| Ankr | Ethereum, Polygon, BNB, Fantom, Avalanche, Polkadot | Multi-chain support with flexible staking options and strong DeFi integrations |
| StaFi | Polkadot, Cosmos, Ethereum | Focused on cross-chain staking and offers rTokens for various networks |
| Marinade (mSOL) | Solana | Leading Solana staking protocol with auto-compounding rewards and strong ecosystem presence |
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FAQs (Frequently Asked Questions)
Q: Is liquid staking better than native staking?
A: In some ways, like flexibility and yield optimization, liquid staking is better than native staking. However, native staking is simpler and more secure.
Q: Can I lose money with liquid staking?
A: Yes. In the event of a smart contract hack or de-pegging. However, these are rare.
Q: Why is my staked crypto locked in native staking?
A: Your assets are typically locked in native staking for a period of time because they’re actively being used to secure the blockchain network.
Q: Can I trade or sell liquid staking tokens anytime?
A: Yes, in most cases, you can trade or sell liquid staking tokens (LSTs) anytime.
Q: Which coins support liquid staking?
A: ETH, SOL, DOT, ATOM, BNB, AVAX, APT, MATIC, and Frax ETH support liquid staking.
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