What is a Staking Derivative?
A staking derivative is a tokenized representation of staked cryptocurrency assets that maintains liquidity while the underlying assets remain locked in a staking protocol. These derivative tokens, also known as liquid staking tokens (LSTs) or liquid staking derivatives (LSDs), allow holders to trade, transfer, or use their staked position in DeFi applications without unstaking the underlying assets.
Staking derivatives solve the fundamental liquidity problem of proof-of-stake systems. Traditional staking requires locking assets for extended periods, making them illiquid. Staking derivatives give users the best of both worlds: earning staking rewards while maintaining the ability to move and use their capital.
How it Works
When you deposit assets into a liquid staking protocol like Lido, Rocket Pool, or Marinade, you receive a staking derivative token in return. This token represents your claim on the staked assets plus any accumulated rewards.
There are two main types of staking derivatives based on how they handle rewards. Rebasing tokens (like Lido's stETH) increase their balance over time as rewards accrue. If you hold 10 stETH, you'll see your balance grow daily as staking rewards are reflected. Reward-bearing tokens (like Rocket Pool's rETH) maintain a constant balance but increase in value relative to the underlying asset. Your rETH count stays the same, but each rETH becomes redeemable for more ETH over time.
Staking derivatives trade on secondary markets, often at prices close to but not exactly equal to the underlying asset. Small premiums or discounts arise from supply and demand dynamics, withdrawal queue lengths, and market sentiment. During the period before Ethereum enabled withdrawals, stETH traded at significant discounts to ETH.
The underlying assets backing derivatives are staked by the protocol with various validators. This creates a layer of smart contract risk not present in native staking, but enables the liquidity that makes derivatives valuable.
Practical Example
Maria wants exposure to ETH staking yields but needs flexibility. She deposits 100 ETH into Lido and receives approximately 100 stETH. Over a year, her stETH balance grows to 103.5 stETH from staking rewards. Meanwhile, she can use her stETH as collateral on Aave to borrow stablecoins, or provide stETH liquidity on Curve. When she eventually wants to exit, she can either swap stETH to ETH on a DEX instantly or wait for Lido's withdrawal queue.
Why it Matters
Staking derivatives have become the dominant form of ETH staking, with Lido alone controlling over 30% of all staked ETH. They enable capital efficiency that drives DeFi innovation, allowing staked assets to be used as collateral, traded, and composed with other protocols. However, this convenience comes with additional smart contract risk and potential centralization concerns. Understanding staking derivatives is essential for modern DeFi participation. Fensory compares staking derivatives across protocols, helping you evaluate yield, risk, and liquidity characteristics to find the best fit for your strategy.