As Ethereum and other proof-of-stake (PoS) networks mature, staking has become a core part of institutional crypto strategy—enabling passive yield, network participation, and capital efficiency.
You now have:
- Traditional staking: Lock tokens, secure the network, earn rewards—but lose liquidity.
- Liquid staking: Stake while keeping a tokenized receipt you can use in DeFi or trade freely.
With over $30 billion in assets currently staked across Ethereum, Cosmos, Solana, and emerging L1s, the choice between traditional and liquid staking has major implications for capital deployment, risk, and platform design.
What Is Traditional Staking?
Traditional staking is a fundamental process in Proof-of-Stake (PoS) blockchains where users lock up their cryptocurrency holdings, such as ETH, SOL, or ATOM, to contribute to the network’s security and operations. By delegating their tokens to a validator or a staking pool, participants essentially commit their assets to support transaction validation and block creation. During this staking period, the tokens are locked and cannot be accessed or traded. In return for their contribution, stakers periodically earn rewards, typically a combination of newly minted tokens (inflation) and transaction fees, with the amount depending on the staked sum and the validator’s performance. It’s important to note that unstaking these tokens usually requires a predetermined cooldown period, which can range from a few days to several weeks, during which the assets remain inaccessible.
Pros:
- Simple & secure: Ideal for long-term holders
- Direct network participation: Helps decentralize the chain
- Minimal protocol risk: Especially when staking natively
Cons:
- Capital inefficiency: Funds are illiquid
- Slashing risk: Poor validator performance can cause partial loss
- Limited composability: Can’t use staked assets in DeFi or trading
For institutions with passive exposure goals and low risk tolerance, traditional staking offers a stable yield but locks capital flexibility.
What Is Liquid Staking?
Liquid staking offers an innovative approach to earning staking rewards while maintaining the liquidity of your crypto assets. Users deposit their tokens into a liquid staking protocol and, in return, receive a tokenized derivative, often referred to as a Liquid Staking Token (LST), such as stETH, mSOL, or rETH. These LSTs represent the user’s staked position and continue to accrue staking rewards from the underlying network. The key advantage is that these LSTs remain liquid and can be freely used across various decentralized finance (DeFi) ecosystems. This means users can leverage their LSTs for additional yield opportunities, including lending them out, trading them on decentralized exchanges, participating in yield farming strategies, or utilizing them as collateral for other DeFi protocols, effectively maximizing capital efficiency without sacrificing their staking rewards.
Pros:
- Liquidity + yield: Stay staked while using your assets
- DeFi composability: LSTs can be used across lending, trading, and LP protocols
- Better capital efficiency: Popular with hedge funds, treasuries, and DAOs
Cons:
- Smart contract risk: LSTs rely on complex protocol logic
- Price depegging: LST may trade below its native token’s value
- Protocol dependency: Slashing or bugs in the staking provider may affect LSTs
Liquid staking is ideal for DeFi-native strategies, liquidity providers, and active treasury managers looking to optimize yield while maintaining flexibility.
Comparative Table: Traditional vs. Liquid Staking
| Feature | Traditional Staking | Liquid Staking |
| Asset Liquidity | Locked | Fully liquid (LST) |
| DeFi Compatibility | Low | High |
| Unstaking Period | Yes (e.g. 7–21 days) | No (LSTs can be sold anytime) |
| Yield | Network rewards only | Network + DeFi yield |
| Risk | Validator & slashing | Validator + smart contract |
| Use Case Fit | Long-term HODLing | Active DeFi participation |
Institutional Considerations
For institutional players such as funds, banks, custodians, and DAOs, the decision between traditional and liquid staking necessitates a careful evaluation of regulatory fit, custody and risk management, and capital optimization policies.
From a regulatory perspective, traditional staking models, particularly those involving “staking-as-a-service,” may more readily align with existing regulatory frameworks. In contrast, liquid staking, by issuing tokenized derivatives representing staked positions, could potentially trigger classifications as custodial services or even financial derivatives under certain jurisdictions, such as those overseen by the SEC or MiCA. This necessitates a thorough legal and compliance review to ensure adherence to evolving digital asset regulations.
Regarding custody and risk, the management of validator keys is paramount, with Multi-Party Computation (MPC) custody emerging as a critical solution to enhance security and prevent single points of failure. However, liquid staking introduces additional layers of risk. These include liquidity provider (LP) risk, where the value of the liquid staking token might de-peg from the underlying asset, and smart contract risk, given the reliance on complex code that could contain vulnerabilities. Consequently, robust infrastructure audits of liquid staking protocols are essential to mitigate these inherent risks.
Finally, in terms of capital optimization, liquid staking offers a significant advantage by enabling the reuse of otherwise idle capital. The ability to deploy Liquid Staking Tokens (LSTs) across various DeFi protocols for lending, trading, or yield farming can be highly attractive for institutions pursuing active capital management strategies. Conversely, traditional staking, with its asset lock-up, is generally better suited for more conservative portfolios focused on long-term base layer trust-building and network security without the need for immediate liquidity.
Final Thoughts: Choose the Right Staking Model for Your Strategy
There’s no one-size-fits-all answer to staking.
Traditional staking provides simplicity, stability, and secure alignment with network health.
Liquid staking unlocks liquidity and composability—turning yield into strategy.
For enterprises navigating this choice, the best solution may be a hybrid approach—staking a portion for security, while using LSTs to deploy capital across trusted DeFi integrations.
ChainUp offers enterprise-ready infrastructure to support your staking operations. Book a consultation or request a demo today.
Let’s build your staking strategy—secure, scalable, and DeFi-compatible.
