Risks of Liquid Staking Protocols: What You Can't Afford to Ignore
When you stake your ETH, you lock it up to help secure the network and earn rewards. Simple. But what if you could earn those rewards without locking your ETH? That’s the promise of liquid staking protocols. They give you a token-like stETH or rETH-that represents your staked ETH, so you can trade it, lend it, or use it in DeFi while still earning staking rewards. It sounds too good to be true. And in many ways, it is.
The Illusion of Liquidity
Liquid staking tokens (LSTs) are marketed as 1:1 pegged to their underlying asset. stETH should always be worth 1 ETH. But it’s not. In practice, stETH has traded as low as 0.94 ETH during market stress. The 2022 Celsius collapse triggered a liquidity crisis on Curve Finance, where stETH pools dried up. Users couldn’t swap their stETH for ETH-even though they were told it was the same thing. The peg didn’t break because of a hack. It broke because nobody wanted to buy it when panic hit. This isn’t a glitch. It’s a design flaw. Liquid staking tokens are not cash. They’re derivative claims. And like any derivative, their value depends on trust, liquidity, and market sentiment. When confidence drops, so does the price. CoinGecko data shows stETH dropped below 0.99 ETH 15 times in just six months in 2023. That’s not stability. That’s volatility dressed up as safety.Smart Contracts Are Not Bulletproof
Every liquid staking protocol runs on smart contracts. These are pieces of code that hold your ETH, manage validators, and issue your LSTs. And code has bugs. Even if a protocol says it’s been audited by OpenZeppelin or Trail of Bits, audits don’t catch everything. They’re snapshots, not guarantees. Ankr’s 2023 risk analysis warned that the smart contracts holding the original unstaked assets are especially vulnerable. If a hacker exploits a flaw in the deposit contract, your ETH could vanish. No warning. No recovery. Just gone. And while protocols like Lido and Rocket Pool have had multiple audits, users still report gaps in coverage. Reddit threads from mid-2022 show users who trusted Lido’s audits only to see their stETH lose 6% of its value overnight during the FTX collapse. The audit didn’t prevent the de-peg. It didn’t even predict it.Slashing: When Your Validator Messes Up
When you stake ETH directly, you’re on the hook if your validator goes offline or signs conflicting blocks. That’s called slashing. You can lose up to 1 ETH per event. Liquid staking protocols promise to shield you from this. But they don’t. They just shift the risk. In protocols like Rocket Pool, users must deposit both ETH and RPL to run a minipool. If the validator gets slashed, the RPL collateral is used to cover losses. But if the RPL price crashes at the same time? You still lose. In Lido’s model, the protocol covers slashing losses from a shared pool-but that pool isn’t infinite. Galaxy Research confirmed in 2023 that slashing risk remains “fully exposed” for users who outsource node operation. You’re not avoiding risk. You’re betting the protocol can absorb it.
Centralization Is the Silent Killer
Ethereum’s security relies on decentralization. But liquid staking is making it worse. As of April 2023, Lido controlled roughly 32% of all staked ETH. That’s more than a third of the entire network’s security in the hands of one entity. If Lido’s node operators are compromised-or if its DAO votes to change rules that benefit big LDO holders-Ethereum’s entire consensus could be at risk. Centralized exchanges like Coinbase and Binance offer their own staking tokens (cbETH, BETH). These are even riskier. Your ETH is held by the exchange. They control the keys. If Coinbase freezes withdrawals or gets hacked, you’re stuck. No recourse. No audit trail. Just a corporate decision. The irony? Liquid staking was supposed to make staking more accessible. Instead, it’s concentrating power in fewer hands. ChangeHero pointed out in 2023: “If it’s so convenient, more users would stake with these pools instead of becoming validators themselves.” And that’s exactly what happened.Regulatory Time Bomb
On August 5, 2025, the SEC issued a formal statement on “Certain Liquid Staking Activities.” While it didn’t ban anything, it signaled clear intent to regulate. The agency is looking at whether LSTs qualify as securities. If they do, protocols may be forced to register, restrict access to U.S. users, or shut down entirely. Imagine holding stETH, using it in a DeFi protocol, and suddenly-poof-it’s deemed an unregistered security. Your positions get frozen. Your yields stop. Your tokens become untradeable. This isn’t speculation. It’s policy in motion. The SEC doesn’t move fast. But when it does, it moves hard.
Token Models: Rebasing vs. Reward-Bearing
Not all LSTs are created equal. There are two main models:- Rebasing tokens (like stETH) increase your token balance automatically as rewards are earned. You start with 1 stETH, and over time, you have 1.05 stETH. The price stays near 1 ETH.
- Reward-bearing tokens (like rETH) keep your token count the same, but each token becomes more valuable. You still have 1 rETH, but now it’s worth 1.05 ETH.
How to Protect Yourself
If you still want to use liquid staking, don’t go all-in. Here’s how to reduce risk:- Diversify your LSTs. Don’t put all your ETH into stETH. Use Rocket Pool’s rETH, Origin’s OETH, or even Coinbase’s cbETH-but never just one.
- Check liquidity depth. Before swapping LSTs, look at the trading volume on Uniswap or Curve. If the pool is shallow, you’ll get crushed on slippage.
- Verify audits. Don’t trust marketing. Go to the protocol’s GitHub or docs. Look for audit reports from OpenZeppelin, CertiK, or Trail of Bits. If they’re missing, walk away.
- Understand the token model. Know whether you’re holding a rebasing or reward-bearing token. It affects how you track your returns and how you report taxes.
- Monitor governance. If a protocol’s DAO votes to expand to a new chain or change its fee structure, pay attention. Large holders often dominate votes. Lido’s DAO has over 150,000 members, but 10 wallets control 60% of LDO tokens.
The Bottom Line
Liquid staking isn’t evil. It’s innovative. It unlocked DeFi liquidity that was previously locked away. But it’s also a high-risk gamble wrapped in a sleek interface. The risks aren’t theoretical. They’ve already happened-multiple times. De-pegs. Exploits. Centralization. Regulatory threats. If you’re using liquid staking, you’re not just staking ETH. You’re betting on code, on governance, on liquidity, and on regulators staying quiet. That’s a lot of bets. And in crypto, the house always wins when you stack too many of them.Know what you’re holding. Know why it might break. And never assume a 1:1 peg is guaranteed.
Is stETH still safe to use?
stETH is still widely used, but it’s not risk-free. It lost its peg multiple times in 2022 and 2023 during market stress. While it usually recovers, there’s no guarantee it will next time. Use it only if you’re comfortable with potential de-pegs and understand how it behaves in DeFi protocols.
Can I lose my ETH in a liquid staking protocol?
Yes. If the smart contract is hacked, your ETH could be stolen. If the protocol gets slashed and lacks sufficient reserves, your LSTs could lose value. If a centralized exchange like Coinbase freezes withdrawals, you can’t access your funds. Liquid staking shifts risk-it doesn’t eliminate it.
What’s the difference between stETH and rETH?
stETH is a rebasing token: your balance grows as rewards are added. rETH is a reward-bearing token: your balance stays the same, but each token becomes worth more. rETH requires you to run a validator or use a minipool, which adds decentralization but also complexity. stETH is easier to use but more centralized.
Why did stETH depeg during the FTX collapse?
When FTX collapsed, panic spread across DeFi. Users rushed to sell stETH for ETH, but liquidity dried up on key DEXs like Curve Finance. With no buyers, the price dropped to 0.95 ETH. It wasn’t a hack-it was a liquidity crisis. The peg broke because people lost confidence in being able to convert it back.
Should I avoid liquid staking entirely?
Not necessarily. But treat it like a high-risk investment. Don’t stake more than you’re willing to lose. Diversify across protocols. Monitor liquidity. Understand the token model. And never assume your LSTs are as safe as ETH itself. The convenience comes at a cost.
Are liquid staking tokens considered securities?
The SEC hasn’t officially classified them yet, but their August 2025 statement strongly implies they’re watching closely. If regulators decide LSTs are securities, protocols may be forced to restrict access, halt operations, or comply with strict reporting rules-potentially making them unusable for many users.
stETH ain't cash, it's a promissory note with a side of panic buttons. I saw it drop to 0.94 during the Curve melt-down and thought my portfolio was toast. Turned out I just needed patience - and a backup plan. Don't trust the peg, trust the liquidity pools. And never, ever go all-in on one LST. Diversify like your ETH depends on it - because it does.
The illusion of liquidity is perhaps the most dangerous myth in DeFi. We treat LSTs as if they're cash equivalents, but they're derivative instruments with embedded counterparty risk. The market doesn't care about your emotional attachment to the 1:1 peg. When confidence evaporates, so does liquidity. This isn't a bug - it's a feature of systemic fragility.