Paper: SoK: Liquid Staking Tokens (LSTs) and Emerging Trends in Restaking
Authors: Krzysztof Gogol, Yaron Velner, Benjamin Kraner, Claudio Tessone
Institution: University of Zurich, Risk DAO
Date: December 26, 2024
Estimated Reading Time: ~40 minutes

Liquid Staking Tokens (LSTs) have become the leading method for staking in Proof-of-Stake (PoS) blockchains, particularly in Ethereum. LSTs allow users to earn staking rewards while maintaining liquidity, enabling participation in Decentralized Finance (DeFi) protocols. Restaking extends this concept, allowing staked tokens to secure additional protocols for supplementary rewards. The study presents a taxonomy of liquid staking protocols, comparing their design, node operator selection, staking reward mechanisms, and security risks. The research also empirically examines token performance, highlighting price deviations, arbitrage opportunities, and the impact of major market events on LST stability. Furthermore, the paper explores recent developments in restaking, including cross-chain staking and Bitcoin staking, discussing the associated risks and security implications.

Core Insights

  1. LSTs dominate Ethereum staking - LSTs account for 37% of total staked ETH, surpassing centralized exchanges and staking pools. Lido, with a 31% market share, is the largest liquid staking provider (LSP). While LSTs improve flexibility, their concentration raises concerns about Ethereum’s network security and centralization risks.
  2. Restaking and Liquid Restaking Tokens (LRTs) extend staking yields - Restaking protocols like EigenLayer allow users to use staked ETH to secure additional services, such as data availability layers and oracles. LRTs further enhance liquidity in restaking, enabling additional DeFi integrations. However, restaking introduces compounded slashing risks.
  3. Market price deviations and arbitrage opportunities - LSTs and LRTs are pegged tokens but experience price fluctuations due to staking limitations, validator availability, and extreme market events (e.g., FTX insolvency, Terra crash). Arbitrage mechanisms can stabilize prices, but technical constraints and liquidity issues sometimes prevent full alignment.
  4. Node operator selection impacts security and decentralization - LSPs differ in governance models: Lido uses a DAO-governed whitelist, while RocketPool allows permissionless participation with collateral. Distributed Validator Technology (DVT) enhances security by splitting validator keys across multiple operators, reducing risks of single-point failures.
  5. Cross-chain staking and Bitcoin staking are emerging trends - Babylon Protocol introduces Bitcoin staking, enabling BTC to secure PoS chains without bridging. Cross-chain security in Cosmos, known as mesh security, allows one PoS chain’s stake to secure another. These innovations expand staking utility but introduce additional systemic risks.

Ethereum’s shift from Proof-of-Work (PoW) to Proof-of-Stake (PoS) in 2022-2023 dramatically changed staking dynamics, with liquid staking emerging as the dominant method. LSTs tokenize staked assets, allowing them to remain tradable while earning rewards. This approach has fueled their integration into DeFi, where they serve as collateral in lending protocols, liquidity provision in automated market makers (AMMs), and backing for decentralized stablecoins. However, LSTs are not without risks-market price deviations, staking queue inefficiencies, and governance centralization can impact their effectiveness.

Supply & Demand Effects:

LSTs enhance liquidity but create a trade-off between staking security and market accessibility. By reducing staking friction, they increase participation in PoS consensus, potentially strengthening security. However, Lido’s dominance (31% of staked ETH) raises concerns of centralization, where a failure in its protocol could impact Ethereum’s network finality. Conversely, RocketPool’s permissionless approach increases decentralization but historically struggled to attract node operators, leading to upward de-pegs in its LST price.

Restaking further amplifies yield opportunities by allowing staked ETH (or LSTs) to secure additional protocols, generating extra rewards. EigenLayer pioneered this model, attracting over $15 billion in total value locked (TVL). However, restaking introduces systemic risks-compounded slashing penalties across multiple protocols could lead to cascading failures if a major attack occurs. LRTs, which tokenize restaked assets, face similar market price risks as LSTs, particularly during liquidity crises.

Validator Selection & Security Considerations:

LSPs use different models for selecting node operators, impacting security and governance. Lido employs a DAO-voted whitelist, ensuring a curated set of 30 operators. RocketPool and Stader allow permissionless participation but require collateral (8 ETH and 4 ETH, respectively). These collateral-based models lower the economic security threshold of Ethereum, making attacks theoretically more affordable. DVT, used by DIVA and other emerging protocols, distributes validator keys across multiple operators, reducing single-entity risks but increasing infrastructure complexity.

Restaking protocols have their own operator models-EigenLayer initially vetted node operators but plans to transition to a permissionless model. Symbiotic allows fully customizable restaking setups, letting developers define security criteria, collateral, and governance models. The Babylon Protocol’s Bitcoin staking innovation enables BTC to secure PoS chains, avoiding reliance on bridges, but its economic model is still under development.

Market Performance & Arbitrage Mechanics:

Empirical analysis reveals that LSTs track ETH staking rewards well but experience temporary de-pegs, particularly during extreme market events. Rebase LSTs (e.g., Lido’s stETH) maintain a 1:1 peg through periodic supply adjustments but struggle with DeFi integrations. Reward-bearing LSTs (e.g., RocketPool’s rETH) accrue staking rewards in their price, making them more DeFi-compatible but subject to liquidity-driven price fluctuations.

Arbitrage plays a crucial role in stabilizing LST prices. When the market price of an LST drops below its protocol value, arbitrageurs can buy the undervalued token on decentralized exchanges (DEXs) and redeem it at the higher protocol price. Conversely, when an LST trades above its protocol value, users can mint new LSTs at the protocol price and sell them at a premium. However, practical arbitrage execution depends on liquidity conditions and validator availability-if node operators are scarce, LST prices can remain de-pegged for extended periods, as seen with RocketPool’s rETH before its Atlas upgrade.

Emerging Trends & Future Considerations:

Cross-chain staking expands the economic security model beyond Ethereum. Mesh security in Cosmos allows tokens staked on one chain to secure another, reducing inflationary pressure on native staking incentives. Bitcoin staking, pioneered by Babylon, introduces BTC as a stakable asset for PoS chains. These innovations diversify staking use cases but add complexity and slashing risks across networks.

The growth of restaking prompts questions about sustainability. EigenLayer’s model allows Ethereum validators to secure multiple Actively Validated Services (AVSs), increasing potential yield but also exposing stakers to compounding slashing risks. If an AVS fails, restaked ETH could be slashed, impacting multiple protocols simultaneously. This raises concerns about whether current risk models sufficiently account for multi-layered exposure.

Key Questions for Further Exploration:

Liquid staking and restaking are reshaping the PoS ecosystem, unlocking liquidity and yield opportunities while introducing new security and market risks. While LSTs have become the preferred staking method for Ethereum users, their integration with DeFi and reliance on validator selection models create vulnerabilities. Restaking amplifies these dynamics, offering increased rewards but introducing compounding slashing risks. As the space matures, the challenge will be balancing liquidity, security, and decentralization to ensure sustainable staking models across multiple blockchain ecosystems.