Native vs. Liquid Staking

Introduction

Native staking and liquid staking are two different approaches to participating in a proof of stake (PoS) network’s consensus process. Both enable token holders to grow their assets, but each presents different tradeoffs in terms of risk, liquidity, capital efficiency, and complexity. This article breaks down both staking methods, their key differences, and their distinct opportunities.

What is native staking?

Native staking is a process in which holders of a blockchain’s native token lock up (“stake”) their tokens in the network in order to earn rewards for participating in its consensus mechanism.

Note: Both native and liquid staking are specific to PoS protocols. They do not serve the same purpose as staking in the context of DAOs or DeFi protocols (e.g., staking a DeFi protocol’s native token for yields or governance rights).

A core feature of PoS blockchains, native staking exists to secure the network, enable decentralized consensus, and provide Sybil resistance through aligning economic incentives. Stakers participate in consensus by proposing blocks, validating transactions, and contributing to consensus decisions. In return, they earn rewards in the form of native tokens. Staking rewards are sometimes thought of as a return on one's stake, akin to savings account yields. However, while they may appear similar on the surface, staking rewards are generated and awarded very differently than savings yields. Rather than being lent out by the protocol for income-generation, staked tokens act as collateral to align stakers’ incentives with the network’s security and integrity (i.e., to deter bad actors). Rewards are direct compensation for participating (rather than interest) and are typically generated from a combination of network fees and token inflation. 

Native staking can be done either through self-staking or delegated staking. Note that while this distinction is common, it’s not universal–terminology and mechanics can vary between networks.   

Self-staking: Stakers (can be individuals or entities) run their own validator nodes and manage their staking infrastructure and operations themselves. Self-staking gives stakers full control over validation, rewards, and validator uptime, but requires significant technical knowledge, reliable infrastructure (can be costly), and often a minimum stake (depending on the network).

Delegated staking: Stakers delegate their tokens to third-party validators (e.g., those run by a staking provider) while retaining token ownership. This lets stakers earn a share of the validators’ rewards without needing to obtain and operate their own infrastructure. Delegated staking is far more common than self-staking, as it is much easier for stakers to get started with and typically has a lower capital requirement. Experienced staking operators make it easy for stakers to securely stake, often with just the click of a button. 

Once tokens are staked to a validator, they are “locked” in the network and cannot be transferred, sold, or used until they are unstaked. This lockup factor is a key characteristic of native staking. As validators successfully perform their duties, they earn token rewards. These rewards are then distributed to stakers (or in self-staking, accrue to those running the validator). Often, stakers can withdraw rewards without unstaking their original tokens (i.e., exiting their staking position), but this will depend on the network, validator configuration, and staking provider (if applicable).

What is liquid staking?

Liquid staking is a staking method that allows token holders to participate in PoS staking while retaining the liquidity and capital flexibility of their staked tokens. 

Rather than staking directly to the network, like in native staking, liquid stakers stake through third-party protocols. Liquid staking protocols (e.g., Lido, Rocket Pool, Marinade Finance) stake users’ tokens on their behalf and issue them liquid staking tokens (LSTs) in return. LSTs (e.g., cbETH, stETH) represent the user’s staked position and rewards (once they accrue). These tokens can be used in DeFi ecosystems to lend, borrow, trade, and LP while the underlying staked assets are at work earning rewards. In this way, liquid staking circumvents the lockup factor present in native staking. It also enables token holders to stack multiple sources of yield, making it a powerful tool for capital efficiency. 

Liquid staking protocols typically interact with the native blockchain’s staking mechanisms via smart contracts. Below is a high-level description of a typical liquid staking scenario, however, specifics can vary between protocols. 

Deposit: When a user deposits tokens into a liquid staking protocol, it stakes them across a set of validators (selected by the protocol) and issues the user LSTs. The LSTs issued will appropriately represent the user’s stake, but their balance will depend on the protocol’s exchange rate model (varies between protocols). 

Rewards accrue: LSTs are either rebasing or non-rebasing. Rebasing LSTs are designed to maintain a 1:1 price peg with their underlying asset (e.g., ETH, SOL) and their supply is adjusted as staking rewards accrue. This means stakers with rebasing LSTs will see their LST balance increase as rewards are earned. Conversely, non-rebasing LSTs are not pegged 1:1 to their underlying asset, but rather are designed to increase in value as rewards accrue. Stakers with non-rebasing LSTs will maintain a fixed balance (unless they add to their stake), but will see its value appreciate over time. This appreciation is driven by a growing exchange rate (against the underlying asset), reflecting accumulated rewards. This means that non-rebasing LSTs are usually worth more than their underlying asset in terms of redemption value (secondary market prices may differ, based on other factors).  

Exit: LSTs can be sold on the open market via exchanges or redeemed directly through the protocol (native redemption). Native redemption typically follows the standard unstaking process of the underlying blockchain and likely includes an unbonding period (time delay between unstaking and tokens becoming withdrawable). While selling LSTs avoids the unbonding period, native redemption can sometimes be preferable as secondary market redemption may involve slippage or fees. 

Key differences and considerations

Native staking tends to be a better fit for those employing long-term holding strategies and who favor a lower risk profile and simpler operations. On the other hand, liquid staking is a good option for token holders who need liquidity or are looking to run trading or yield farming strategies and are comfortable with a higher degree of risk and complexity.        

Lower risk profile: Due to its incorporation of third-party protocols, liquid staking introduces risks not present in native staking. Liquid staking protocols add additional layers of smart contracts, protocol logic, and market mechanisms. These additions carry inherent risks, such as smart contract risk, LST devaluation or depegging (market risk), and potential risks surrounding LST redemption and secondary market liquidity (redeeming LSTs can sometimes involve delays or dependency on protocol exit queues). 

Regulatory clarity: There can be regulatory uncertainty around LSTs in some jurisdictions. Native staking does not involve creating a new asset, so is typically seen as simple network participation using the base asset. 

Uncomplicated rewards accrual: Native staking rewards are accrued directly to the staker’s position. There’s no intermediate token, no abstraction, and no exchange model to track, like in liquid staking. This makes rewards projections, as well as accounting, reporting, and reconciliation simpler. 

Control over validator or provider selection: With native staking, token holders have control over the validators or, at the very least, the staking providers they use (some providers may allow for specific validator choice as well). Staking to trusted, well-run validators is critical for protecting your funds. With liquid staking, validator or provider selection is handled by the liquid staking protocol and selection criteria can vary among protocols. 

Liquidity: The most obvious advantage of liquid staking is that it circumvents the token lockup that occurs in native staking. Not only can illiquidity be inconvenient and not conducive to trading strategies, it can also pose risk in a market downturn when stakers may want to sell assets quickly. Liquid stakers can exit their positions instantly (assuming adequate market liquidity) by selling or swapping LSTs on the open market, rather than waiting through an unbonding period. 

Capital flexibility and efficiency: In liquid staking, staked capital remains usable, enabling token holders to layer yields by earning staking rewards and additional DeFi returns on the same assets. That’s why liquid stalking can be a great option for those looking to maximize capital efficiency.

Slashing risk: Both native and liquid staking can expose stakers to the possibility of slashing penalties. Slashing is a built-in mechanism in some PoS chains that’s meant to discourage validator misbehavior (such as double signing). It results in loss of a portion of the validator’s staked tokens. Slashing risks can be minimized by choosing trusted providers with a history of good performance and strong, layered security measures. 

Network level risk: These are risks tied to the PoS protocol itself. They include risks like consensus failures (due to bugs or vulnerabilities), governance risk, attacks, network upgrade risks etc. These risks are inherent to the network and are present for all network participants, not just stakers.

Restaking

Another flavor of staking worth mentioning is restaking. Restaking is a mechanism by which stakers reuse already staked tokens–either natively staked assets or LSTs–to extend their economic security to additional protocols beyond the base blockchain. This allows the same stake to simultaneously secure the main chain (e.g., Ethereum) and external systems such as middleware, oracles, or rollups. Protocols like EigenLayer enable this by letting validators or LST holders opt in to additional slashing conditions in exchange for extra rewards.

Conclusion

Both native and liquid staking can serve as valuable tools for institutions looking to generate yield on idle native assets, while supporting network security. Which method is best for your organization will depend on your strategies, risk tolerance, regulatory posture, and need for asset mobility or yield optimization.

For institutions interested in secure, high-performance native and liquid staking solutions, connect with our sales team here for information on staking through Coinbase Prime. 

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