What Is Liquid Staking? The Key to Unlocking Step 2 of the Flywheel
Regular staking is simple — lock up your crypto, earn rewards, wait. But there’s a catch that most beginners don’t notice until it matters: while your crypto is staked, it’s completely frozen. You can’t use it, trade it, or deploy it anywhere else.
Liquid staking solves that problem entirely. And for the Crypto Compounding Flywheel strategy, it’s the single most important mechanic to understand. Step 2 of the flywheel doesn’t work without it.
The Problem With Regular Staking
When you stake ETH directly on Ethereum, you need 32 ETH minimum and your funds are locked for an unbonding period that can take days or weeks. When you stake SOL, there’s a 2-3 day waiting period before you can access your funds after unstaking.
During that time the market can move significantly. Opportunities appear and disappear. And critically — your staked crypto is sitting idle earning one yield when it could be earning multiple yields simultaneously.
While traditional staking provides users with the opportunity to receive rewards for verifying transactions, staked tokens cannot be transacted or used as collateral to earn yield across the DeFi ecosystem.
That’s the gap liquid staking fills.
What Is Liquid Staking?
When a user deposits their cryptocurrency into a liquid staking protocol, the system stakes the assets on the underlying blockchain on the user’s behalf. In exchange, the protocol mints a derivative receipt token that represents the value of the staked principal plus any accrued rewards.
That receipt token is called a Liquid Staking Token or LST. And here’s the key — the LST can be transferred, stored, traded, and utilized in DeFi or supported dapps.
Think of it like a cloakroom ticket. You hand in your coat (your crypto), you get a ticket (the LST). Your coat is safely stored and being kept warm (earning staking rewards). But you still have the ticket — and that ticket works as currency in the rest of the building (the DeFi ecosystem).
How It Works Step by Step
- Deposit your crypto into a liquid staking protocol (Lido, Marinade, Rocket Pool etc.)
- The protocol stakes your assets across a network of professional validators on your behalf
- You receive an LST — a token representing your staked position plus all future rewards
- Staking rewards accumulate automatically — no manual claiming required
- Deploy your LST in DeFi to earn additional yield on top
- When you want your crypto back — redeem your LST through the protocol’s withdrawal queue, or sell it instantly on a DEX
This LST represents your staked position and can be traded, used as collateral, or deployed into DeFi while your original asset keeps earning rewards.
Two Types of LSTs — Rebasing vs Reward-Bearing
Not all LSTs work the same way. There are two main mechanics:
Rebasing tokens (e.g. stETH from Lido) Your token balance increases automatically over time as rewards accumulate. If you deposit 1 ETH today, you might have 1.05 stETH in a year — the quantity grows to reflect the rewards earned.
Reward-bearing tokens (e.g. wstETH, rETH, mSOL) Your token balance stays the same but the price per token increases over time. You still hold 1 rETH, but it’s worth more ETH each day as rewards accumulate into the exchange rate.
Both work equally well for the flywheel strategy. The difference is mostly relevant for DeFi integrations — some protocols prefer one type over the other. wstETH (the wrapped, non-rebasing version of stETH) is generally more widely supported across DeFi protocols than stETH itself.
The Best Liquid Staking Protocols in 2026
For Ethereum:
Lido (stETH / wstETH) — As of early 2026, Lido’s total value locked sits at over $27.6 billion, representing a 47.41% market share of all liquid staked ETH. The most widely integrated LST across all DeFi protocols. 3-4% base APY.
Rocket Pool (rETH) — the decentralized alternative to Lido. Smaller but genuinely community-owned and operated. Slightly lower APY than Lido due to smaller scale, but stronger decentralization credentials. Good choice if you care about not concentrating too much ETH in one protocol.
For Solana:
Marinade Finance (mSOL) — the leading Solana liquid staking protocol. mSOL is the most widely supported LST across Solana DeFi. 7-8% base APY.
Jito (JitoSOL) — Jito targets higher SOL yield through a stake pool that shares validator rewards plus MEV revenue with JitoSOL holders. Slightly higher yield than Marinade due to MEV capture. Both are solid options.
For Monad (new and active):
aPriori (aprMON) — liquid staking on Monad mainnet. Early users are well positioned for future ecosystem airdrops. Active since mainnet launch in early 2026.
Kintsu (sMON) — alternative Monad liquid staking option.
Why Liquid Staking Is Step 2 of the Flywheel
Regular staking gives you one yield. Liquid staking gives you that same yield — plus the ability to deploy your LST in DeFi for additional returns — plus the on-chain activity that qualifies you for future airdrops.
With an LST like stETH or rETH you can engage in yield farming — lending your LST on a platform like Aave to earn interest, providing liquidity to a trading pool on Curve or Balancer to earn trading fees, or using it as collateral to borrow other assets. This ability to stack yields makes your capital incredibly efficient.
That’s exactly Step 3 of the flywheel — and it only exists because liquid staking keeps your capital mobile rather than locking it away.
Liquid Staking vs Regular Staking — A Quick Comparison
| Regular Staking | Liquid Staking | |
|---|---|---|
| Earn staking rewards | ✅ | ✅ |
| Capital stays usable | ❌ | ✅ |
| Deploy in DeFi | ❌ | ✅ |
| Instant exit via DEX | ❌ | ✅ |
| Smart contract risk | Low | Medium |
| Minimum amount | Often high | Usually none |
| Technical complexity | Medium | Low |
For long-term holders who never want to touch their position, regular staking is simpler and slightly lower risk. For anyone building the flywheel strategy, liquid staking is the clear choice.
The Risks to Understand
Liquid staking is not risk-free. Two specific risks don’t exist with regular staking:
Smart contract risk — Your funds are held in a third-party protocol’s smart contracts. If those contracts contain a vulnerability, funds could be lost. The history of DeFi includes significant exploits against protocols with substantial audits and long track records. Mitigate this by sticking to established, audited protocols like Lido, Rocket Pool, and Marinade.
LST depeg risk — The price of liquid staking tokens is not pegged to the underlying asset. While they may trade at the same price or a very slight discount most of the time, they can drop below the price of the underlying asset during liquidity crunches or unexpected events. This is usually temporary but worth understanding — especially if you plan to sell your LST on a DEX rather than redeeming through the protocol.
The gas reserve rule: Always keep some unstaked native token for gas fees. You need ETH to interact with Ethereum protocols, SOL for Solana. Never liquid stake 100% of your holdings.
How to Get Started
The process is simpler than it sounds. Here’s how to liquid stake SOL via Marinade as a beginner-friendly example:
- Set up a Phantom wallet and acquire some SOL
- Go to marinade.finance directly — never via a link in a DM
- Connect your wallet
- Enter the amount of SOL you want to stake
- Click Stake and confirm the transaction
- Receive mSOL in your wallet
- You’re now earning staking yield — mSOL grows in value over time
That’s it. Your SOL is staked, earning rewards, and your mSOL is ready to deploy in Step 3 of the flywheel.
Conclusion
Liquid staking is the bridge between free crypto earnings and the compounding DeFi strategy that makes the flywheel work. Without it, your staked crypto sits frozen earning one yield. With it, the same crypto earns staking rewards AND generates DeFi yield AND builds the on-chain history that attracts future airdrops.
It’s the single most powerful lever in the flywheel — and it takes about five minutes to set up.
Ready to put your LSTs to work? Step 3 of the flywheel — deploying in DeFi — is next.
👉 Continue to Step 3 — DeFi & Yield Farming → (coming next)
👉 Back to the Full Flywheel Strategy →
This article is for educational purposes only. DeFi protocols carry risk. Always research before depositing funds.
📖 Flywheel Steps: Step 1 — Earn · Step 2 — Bridge · Step 2 — Liquid Stake · Full Strategy
← Back to How-To Guides