How Liquid Staking Unlocks Layered Yield in DeFi
Users once had to choose between staking and DeFi—now they can do both, boosting capital efficiency and yield.
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Historically, DeFi users had to choose between earning staking rewards and participating in DeFi. Now, they can do both simultaneously, fundamentally changing capital efficiency and yield generation.
Staking became a dominant narrative after the DeFi Summer of 2020, a trend that solidified further after the closely watched Ethereum Merge. Pioneers understood that staking was crucial for securing the network and earning rewards. However, the traditional method — locking up tokens on a typical Proof-of-Stake (PoS) network — had a major drawback: capital inefficiency. Liquid staking changed this, allowing users to maintain liquidity while staking simultaneously.
While PoS networks and exchanges have embraced this trend, non-staking networks such as the XRP Ledger have long been excluded from the benefits of these kinds of innovations. However, recent advancements in liquid staking and restaking promise to change this, enabling its holders to access the same kind of yield opportunities for the first time.
How does Liquid Staking work?
When a user deposits PoS tokens into a liquid staking protocol’s smart contract, the protocol mints and issues a derivative token known as a Liquid Staking Token (LST). This LST can be viewed as a receipt for a user’s staked assets and the rewards they generate.
The core benefit of an LST is that it is a fully functional, tradable token. This allows users to remain liquid by using the LST as collateral in lending protocols, or deploying it in other DeFi applications, all while the original assets continue to earn staking rewards.
The Introduction of Liquid Restaking — Lido to Eigenlayer
While Lido pioneered liquid staking by allowing users to stake their ETH and simultaneously remain liquid through staking tokens, the introduction of restaking on EigenLayer has taken things further, adding new layers of functionality and additional yield opportunities for ETH stakers.
Retaking solutions built on top of EigenLayer’s enable users to stake and secure a primary network, while receiving higher yields, without having to unstake their base ETH. Simultaneously, users provide security for secondary solutions such as data availability layers, oracles and bridges. So their initially siloed collateral can be a productive asset, which creates a marketplace to bootstrap security for AVSs. This proved successful in attracting capital, and there is over $19 billion in total value locked across restaking protocols.
Liquid Staking on Non-Staking Networks
Meanwhile, another restaking project that rose to similar successes is Babylon, which is designed to bring Bitcoin to secure PoS chains. It allows users to utilize their Bitcoin to enhance the security of other networks without transferring or selling their BTC. The market’s immense appetite for this is clear, with close to $5 billion worth of BTC locked in, and as of last year, attracted over 135K stakers.
Despite the growing interest and significant capital inflows, the sector still faces a major hurdle: the absence of compelling, real-world use cases, which has delayed the further adoption of restaking.
While the XRP Ledger does not use a PoS consensus mechanism, synthetic staking derivatives can allow XRP holders to participate in yield-bearing opportunities on sidechains or third-party platforms while earning. Instead of securing the XRP network directly, this mechanism allows users to stake their XRP to provide capital for specific third-party services, giving holders multiple avenues to participate in DeFi.
Double Dip on Your Yield
A big draw to liquid staking is the ability to earn multiple layers of rewards. When you stake an assets through an LST, you receive a liquid token in return. this token retains the liquidity of your stake while still securing the underlying network or solution.
Here’s a simple example of how you can stack your yield:
Base rewards: Earn standard staking rewards for helping to secure a network.For instance, deposit $1,000 of a token into a liquid staking protocol and receive approximately $1,000 of an LST in return, which automatically accrues staking yield.
Tap into a layered yield ecosystem: Use your LST to unlock additional opportunities. This process, called “composability,” allows you to build multiple layers of yield on top of your original staked asset. Some common strategies include depositing it into liquidity pools to earn trading fees or using it as collateral on lending protocols to borrow other assets like stablecoins.
This layering of protocols and yields, all originating from a single staked asset, is a key component and advantage of liquid staking.
Liquid staking is more than just another yield strategy; it represents a fundamental upgrade for asset utility. For an established asset like XRP, which has historically been used primarily for payments, the introduction of liquid staking will unlock a new dimension of capital efficiency, allowing holders to finally put their assets to work within the broader DeFi ecosystem.
As institutional-grade DeFi protocols continue to build on the XRP Ledger, the availability of a liquid, yield-bearing version of XRP will be a foundational “money lego.” This will not only create new opportunities for XRP holders but also enhance the overall liquidity, utility, and value proposition of the entire XRP Ledger ecosystem, bridging the gap between its traditional financial strengths and its decentralized future.
