Ethereum Liquid Staking Surges to $20 Billion, Lido Takes the Lead

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The landscape of decentralized finance (DeFi) is undergoing a transformative shift, with liquid staking emerging as a cornerstone innovation—especially on the Ethereum network. Since the pivotal Shapella upgrade in April 2025, confidence in Ethereum’s staking ecosystem has surged, propelling the total value locked (TVL) in liquid staking protocols past $20 billion. This milestone marks not just a financial uptick but a fundamental change in how users interact with staked assets.

At the heart of this movement is Lido, whose stETH token controls over 74% of the market, representing $14.6 billion in staked ETH. But what’s driving this rapid adoption? And why are DeFi users increasingly choosing liquid staking tokens (LSTs) over native ETH?

Let’s explore how Ethereum’s liquid staking revolution is reshaping yield strategies, collateral usage, and long-term network dynamics.

The Shapella Effect: Unlocking Confidence in Staking

Before April 2025, Ethereum stakers faced a critical limitation: once ETH was deposited into the beacon chain, it was effectively locked with no way to withdraw. This illiquidity created hesitation among DeFi participants, who were wary of tying up capital without an exit strategy.

The Shapella upgrade changed everything. For the first time since Ethereum’s transition to proof-of-stake in 2020, users could withdraw their staked ETH and accrued rewards. This simple yet powerful feature alleviated fears of permanent lockups and liquidity crunches.

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With withdrawals now possible, holding liquid staking tokens (LSTs) like stETH or wstETH became a “no-brainer” for many. These tokens represent staked ETH while remaining tradable, transferable, and usable across DeFi platforms—offering both yield and flexibility.

As one analyst put it: “If you can hold yield-bearing ETH, why hold plain ETH?”

Why LSTs Are Becoming DeFi’s Preferred Collateral

In the post-Shapella era, LSTs have rapidly overtaken native ETH as preferred collateral in major lending protocols. On Aave, for example, stETH has surpassed ETH itself as the top collateral asset despite Aave’s total deposits exceeding $6 billion.

This shift reflects a broader trend: protocols are integrating LSTs to offer users enhanced yields by baking in native staking rewards (currently around 4–5% APR) directly into their products.

Key Advantages of LSTs in DeFi:

Platforms like Pendle Finance have further amplified demand by enabling users to tokenize and trade future yield streams from staked ETH—turning passive income into active financial instruments.

The Rise of Yield Looping: Amplifying Returns with Leverage

One of the most powerful—and risk-aware—strategies gaining traction is "looping", where users recycle their LSTs through lending protocols to amplify returns.

Here’s how it works:

  1. A user deposits stETH into a protocol like Aave or Compound.
  2. They borrow ETH against that stETH collateral.
  3. The borrowed ETH is then restaked via Lido to mint more stETH.
  4. The new stETH is deposited again, repeating the cycle.

Each loop compounds staking rewards, potentially boosting effective yields significantly above the base 4–5%. However, this strategy carries risks:

⚠️ If the price of ETH and stETH diverges (e.g., due to depegging), leveraged positions may face liquidation.

Moreover, because Lido dominates the LST space with 74% market share, heavy reliance on stETH introduces centralization concerns. Critics warn that concentrating so much staked ETH within one protocol could undermine Ethereum’s decentralization and long-term security.

While alternatives like Rocket Pool and Frax Ether are gaining ground and offering more decentralized models, Lido’s deep integration across DeFi gives it a powerful network effect that’s hard to displace.

Market Shifts: From DEX Liquidity to Lending Protocols

Data reveals a clear migration of capital from decentralized exchange (DEX) liquidity pools to lending markets:

This capital reallocation underscores a shift in user priorities: maximizing yield trumps providing liquidity for token swaps.

Users are increasingly opting to deposit LSTs into lending platforms where they can earn interest and use them as collateral—creating compounding opportunities that DEX liquidity provision can’t match.

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Frequently Asked Questions (FAQ)

Q: What is liquid staking?

A: Liquid staking allows users to stake their Ethereum while receiving a token (like stETH) that represents their staked position. This token remains liquid—usable in DeFi—for trading, lending, or earning additional yield.

Q: How does Shapella impact liquid staking?

A: Before Shapella, users couldn’t withdraw staked ETH. After the upgrade, withdrawals became possible, reducing perceived risk and boosting confidence in LSTs as reliable assets.

Q: Why is Lido so dominant?

A: Lido offers a seamless user experience, strong developer support, and broad integration across DeFi platforms. Its early mover advantage and tokenized yield model have cemented its leadership despite growing competition.

Q: Is looping LSTs safe?

A: Looping can increase returns but introduces leverage risk. If asset prices fluctuate or LSTs depeg from ETH, positions may be liquidated. It's best suited for experienced users who monitor health factors closely.

Q: Are there risks to centralized liquid staking?

A: Yes. Overreliance on a single provider like Lido creates centralization pressure on Ethereum’s validator set, potentially impacting network resilience and censorship resistance.

Q: Can other LSTs challenge Lido?

A: Projects like Rocket Pool and Frax Ether promote greater decentralization and node diversity. As awareness grows, they may capture more market share—but Lido’s ecosystem integration remains a formidable barrier.

Looking Ahead: Sustainability and Innovation

While Lido continues to lead, the growing scrutiny around decentralization may accelerate innovation in alternative staking solutions. Expect increased focus on:

Nonetheless, Ethereum’s liquid staking ecosystem is here to stay—and likely to expand further as Layer 2 scaling and restaking trends evolve.

For now, holding yield-generating LSTs isn’t just smart; it’s becoming standard practice in modern DeFi strategy.

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Core Keywords:

By embracing liquid staking, DeFi users are no longer choosing between security and liquidity—they’re getting both. As the ecosystem matures, expect even deeper integrations, smarter risk management tools, and broader access to democratized yield generation across Ethereum’s ever-expanding financial frontier.