Intermediate level
A liquid staking token is a claim on staked coins plus their rewards. Rebasing tokens such as stETH add rewards to your balance; value accruing tokens such as wstETH, rETH and JitoSOL keep your balance fixed and raise the exchange rate instead. The token can trade below its redemption value when sellers outpace the withdrawal queue, so know both prices, both exit routes, and what a loop or a bridge adds on top.
Two designs: rebasing and value accruing
Every liquid staking token (LST) is a receipt for staked coins plus the rewards they earn. The liquid staking overview covers why they exist. What it does not cover is the design choice that decides how a given token behaves in your wallet, in DeFi and in your records: where the rewards show up.
| Token | Design | How rewards show up | What to watch |
|---|---|---|---|
| stETH (Lido) | Rebasing | Your balance grows once a day when Lido’s oracle reports, around midday UTC | Contracts that assume a fixed balance mishandle it, and a full transfer can leave 1 or 2 wei behind |
| wstETH (Lido) | Value accruing | Balance fixed. Each wstETH is redeemable for more stETH over time: about 1.245 stETH as of September 2026 | The form most lending markets, bridges and layer 2s actually use |
| rETH (Rocket Pool) | Value accruing | Balance fixed. The rETH to ETH rate rises: about 1.17 ETH as of September 2026 | Burning rETH for ETH needs spare ETH inside the protocol |
| JitoSOL (Jito) | Value accruing | Balance fixed. JitoSOL appreciates against SOL every epoch, from staking rewards plus MEV tips | Direct unstaking waits for the Solana epoch boundary |
Rebasing is easy to read, since the number in your wallet simply grows. It is awkward everywhere else. Most token bridges have no way to handle a balance that changes on its own, and many pools and vaults snapshot balances. Lido’s own integration guide recommends wstETH wherever rebasing is not supported, and notes that on most other networks wstETH is a bridged token that cannot be unwrapped locally. Remember that last point; it comes back below.
Fees are taken from the rewards, not from your deposit. Lido keeps 10% of staking rewards, split between node operators and its treasury. Jito charges 4% of rewards, plus 0.1% if you unstake directly through the protocol. A rate worked out from the token’s own rebase or exchange rate, like the stETH rate Lido publishes, is already net of these fees.
Why the design shows up in your records
With stETH, a new balance lands in your wallet every day, and each one looks like a small reward. With wstETH, rETH or JitoSOL, nothing happens until you sell or redeem, because the reward is embedded in the exchange rate.
That difference matters for US taxes, and the rules have not caught up with it. Rev. Rul. 2023-14 says staking rewards are ordinary income at fair market value when you gain dominion and control over them, whether you stake directly or through an exchange. It does not mention liquid staking tokens. A daily rebase looks a lot like the rewards the ruling describes. A rising exchange rate looks more like an asset gaining value, which is normally taxed only when you dispose of it. Practitioners take both views, and whether swapping ETH into an LST is itself a taxable disposal is unsettled as well. Keep the records that let you support either position:
- Deposit and exit rates. The exchange rate on the day you entered and the day you left (stETH per wstETH, ETH per rETH, SOL per JitoSOL).
- Daily balances if you hold stETH. Your tracker may miss rebases, because a rebase is not a transfer and emits no ordinary transfer event.
- Every wrap and unwrap. stETH to wstETH and back is a contract interaction worth logging even if you treat it as non taxable.
The guides to crypto income and records to keep cover the general rules. Talk to a professional before filing on a large position.
Two prices: market value and redemption value
An LST always has two prices. The redemption value is what the protocol would pay out if you went through its own exit. The market price is what a buyer on a DEX or exchange will pay you right now. They are usually within a fraction of a percent of each other. When they are not, the gap is the price of impatience.
Take 10 wstETH, which unwrapped to 12.451 stETH in late September 2026. Sold into the market at a 0.2% discount you receive about 12.426 ETH and give up 0.025 ETH. At a 1% discount you give up about 0.125 ETH. At the 6.5% seen in June 2022 you would give up about 0.81 ETH.
| Exit route | Speed | Price you get | The catch |
|---|---|---|---|
| Sell on a DEX or aggregator | Seconds | Market price, minus price impact and fees | The discount is widest exactly when everyone wants out |
| Lido withdrawal queue | 1 to 5 days normally, longer when Ethereum’s exit queue is long | Redemption value, 1 ETH per stETH in most cases | No rewards while you wait; the payout can be lower after slashing; each request is an NFT of up to 1,000 stETH |
| Burn rETH with Rocket Pool | Instant, if spare ETH exists | The protocol exchange rate | Reverts when spare ETH is short; it was close to empty when we checked in September 2026 |
| Unstake JitoSOL directly | Up to about 2 days | The pool rate, less a 0.1% fee | You receive a stake account, deactivate it and withdraw after the epoch ends |
The queue has a cost too: you stop earning the moment you request. At 2.25%, roughly Lido’s seven day average reward rate in late September 2026, five days in the queue forgoes about 0.03% of your position. So if you can wait, any market discount much larger than that, plus gas, favors the queue.
How long you wait depends on Ethereum itself. Since the Pectra upgrade, validator exits are limited by balance (EIP-7251): about 256 ETH per epoch, which is roughly 57,600 ETH a day. In September 2025, after a large staking provider began exiting all of its validators as a precaution, the exit queue passed 2.5 million ETH and the wait exceeded 46 days. By July 2026 the same queue had cleared to zero. Check the current queue before you assume five days.
June 2022: a discount is not a default
Before the Shapella upgrade on April 12, 2023, staked ETH could not be withdrawn at all, and Lido switched on withdrawals with its v2 upgrade on May 15, 2023. Until then, the only exit from stETH was to sell it, mostly through one large stETH and ETH pool on Curve.
In May 2022, after the Terra collapse, big holders headed for that exit. On May 12 alone, Three Arrows Capital pulled about $400 million of liquidity from the pool and Celsius about $380 million, according to Nansen. By June 17 the pool held roughly 492,000 stETH against 111,000 ETH, about 82% stETH, which meant there was little ETH left for anyone else to sell into. At the June lows stETH traded around 0.93 to 0.94 ETH, a discount of 6 to 7%.
Every stETH was still backed by staked ETH the whole time. This was a liquidity problem, not a solvency problem, and holders who could wait recovered the full value. The people who locked in the loss were the ones who had to sell: leveraged positions facing liquidation, and firms under pressure such as Celsius and Three Arrows Capital. Leverage is what turns a temporary discount into a permanent loss.
Using an LST as collateral, and looping
LSTs are some of the most widely accepted collateral in DeFi. On Aave v3’s main Ethereum market, as of September 2026, wstETH has a 78.5% maximum loan to value and an 81% liquidation threshold on its own. Switch the account into the ETH correlated efficiency mode and borrowing ETH against it allows 93% loan to value with a 95% threshold. That efficiency mode is what makes looping possible:
Deposit the LST
Supply wstETH as collateral and enable the correlated efficiency mode.
Borrow ETH against it
Borrow WETH, well inside the limit.
Turn the ETH into more LST
Stake it or swap it for wstETH, then deposit that too.
Repeat, or do it in one transaction
Many interfaces build the whole loop at once with a flash loan. The result is the same: more staked ETH than you own, funded with borrowed ETH.
The return is the staking rate on everything you hold, minus the borrow rate on everything you owe:
With 10 ETH of your own looped to 4 times (40 ETH of wstETH against 30 ETH of debt) and a 2.25% staking rate, illustrative numbers close to late September 2026:
| ETH borrow rate | Net yield on your 10 ETH | Compared with not looping |
|---|---|---|
| 2.05% | 2.85% | Better by 0.6 points |
| 3.00% | 0.00% | Worse by the whole staking yield |
| 4.00% | −3.00% | Worse by 5.25 points, and your ETH shrinks |
The breakeven borrow rate is the staking rate times L ÷ (L − 1), which is 3.0% at 4 times. A loop is a bet that the borrow rate stays below that line, and borrow rates are set by utilization, not by you. See running a loan for how quickly they can move.
Because both sides are ETH, the price of ETH barely touches the health factor. What moves it is the exchange rate the oracle uses for the LST, and slow drift when the borrow rate exceeds the staking rate. At 4 times the health factor is 40 × 0.95 ÷ 30 ≈ 1.27, a cushion of about 21%. Loop to 12 times and it is about 1.04, a cushion of 3.5%. In March 2026 a misconfigured cap in the oracle Aave uses for wstETH priced it about 2.85% below its true exchange rate, and roughly 10,938 wstETH in efficiency mode was liquidated before it was fixed. The post mortem is worth reading, because nothing about ETH’s price caused it.
Bridged copies and restaking tokens
An LST on a layer 2 is usually not the LST itself. It is a bridged claim on tokens locked on Ethereum, so it carries the bridge’s risk on top of the staking protocol’s. That became concrete on April 18, 2026. An attacker sent a forged message through the LayerZero route Kelp used between Unichain and Ethereum, a route secured by a single verifier. It released 116,500 rsETH from the contract that backs bridged rsETH. Aave’s incident report counted about 40,373 rsETH of confirmed backing left against 152,577 rsETH of claims on other chains, and the attacker deposited 89,567 rsETH on Aave and borrowed about 82,650 WETH against it. Market prices for rsETH fell from around 1.07 ETH to around 0.83 ETH within two days. The report found rsETH on Ethereum itself not directly affected, since it is backed by staked ETH; the hole was in the bridge, and how the loss would be shared was still open.
Liquid restaking tokens
Tokens such as ether.fi’s weETH and Kelp’s rsETH restake the underlying ETH to secure extra services. More yield sources, more slashing conditions, more contracts.
Bridged copies
An LST on another chain is a claim on a bridge. Check how that bridge verifies messages before you treat the copy as equal to the original.
Collateral chains
An LST posted as collateral, borrowed against and looped stacks every layer’s risk. A failure anywhere in the stack reaches the whole position.
Restaking is covered in depth in restaking and shared security, and bridge trust models in cross chain security.
A checklist before you stake liquid
- Pick the right form. Rebasing or wrapped, native or bridged, for the place you intend to use it.
- Know both exits. The market discount today and the current queue length, before you need either.
- Log the exchange rate. Entry and exit, for your records and your tax position.
- Price the loop. Write down the borrow rate at which it stops paying and the cushion to liquidation.
- Know the oracle. Whether your lending market prices the LST by exchange rate or by market price changes what can liquidate you.
- Spread it. Using several providers is kinder to your risk and to the network, as the staking guide explains.
Common questions
What is the difference between holding stETH and wstETH?
They are the same claim in two wrappers, so the question is where you will use it. stETH shows rewards as a growing balance, which suits simply holding on Ethereum. wstETH keeps a fixed balance, which is what most lending markets, pools, bridges and layer 2s support. You can wrap and unwrap at any time on Ethereum.
Why is my liquid staking token worth less than the ETH I deposited?
Check whether you are comparing the right numbers. A value accruing token is worth more ETH over time, so one rETH or wstETH should be worth more than one ETH. If the market price is below the redemption value, sellers are outpacing redemptions. That discount closes as arbitrageurs redeem through the queue, unless something is actually wrong with the backing.
How long does it take to unstake stETH?
Lido says one to five days under normal conditions, but it depends on how much is queued and on Ethereum’s own validator exit queue, which passed 46 days in September 2025. Selling on the market is immediate at whatever discount is on offer.
Can a looped position be liquidated if the price of ETH never moves?
Yes. The health factor of an LST loop depends on the exchange rate the oracle uses for the LST and on interest accrued on the debt. An oracle error, a depeg in a market that uses market pricing, or a borrow rate above the staking rate for long enough can all push it down. The higher the leverage, the smaller the move that does it.
Are liquid staking rewards taxable in the US?
Staking rewards are generally income when you gain control of them under Rev. Rul. 2023-14, but the ruling does not address liquid staking tokens. Rebasing and value accruing designs are treated differently by different practitioners, so keep exchange rate records and get advice on anything significant.
Where to go next
Next: Running a loan: health factor, LTV and liquidation
Guide 10 of 16 in the Intermediate level. Your place is kept on this device, so you can pick up exactly here next time.