Liquid staking has become one of the most important building blocks in modern DeFi yield strategies. For beginners, it can seem confusing: staking, liquid staking tokens, yield vaults, auto-compounding, restaking, leverage — all layered together.
This article explains how liquid staking fits into yield vault strategies, why protocols use it, how yields are generated, and what risks investors should understand before depositing funds.
By the end, you will understand how liquid staking transforms passive staking into composable yield, and why it is central to many of today’s top-performing yield vaults.
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What Is Liquid Staking? (Quick Refresher)
Traditional staking locks your assets in a validator contract. While you earn staking rewards, your capital is illiquid — you cannot use it elsewhere.
Liquid staking solves this problem.
How Liquid Staking Works
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You stake a token (e.g., ETH)
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You receive a liquid staking token (LST) in return
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The LST represents:
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Your staked principal
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Accrued staking rewards
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The LST can be:
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Traded
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Used as collateral
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Deposited into yield vaults
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Examples:
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ETH → stETH (Lido)
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ETH → rETH (Rocket Pool)
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ETH → cbETH (Coinbase)
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SOL → mSOL (Marinade)
Liquid staking turns locked capital into productive capital.
What Is a Yield Vault?
A yield vault is a smart contract strategy that:
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Accepts deposits
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Deploys capital across one or more protocols
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Auto-compounds rewards
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Rebalances positions
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Manages strategy logic
Instead of manually farming, vaults automate yield generation.
Vaults often use:
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Lending protocols
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DEX liquidity pools
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Staking derivatives
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Leverage and hedging strategies
Liquid staking tokens are ideal vault inputs because they already earn yield.
Why Liquid Staking Is Perfect for Yield Vaults
Liquid staking tokens offer baseline yield + composability.
Core Advantages
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Built-in staking rewards
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No lockups
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Widely accepted across DeFi
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Deep liquidity
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Lower opportunity cost
This makes LSTs a yield foundation layer.
Vaults can stack additional yield on top of staking rewards, rather than starting from zero.
The Base Yield Layer: Staking Rewards
Every liquid staking token earns:
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Validator rewards
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Network issuance
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Priority fees (where applicable)
For example:
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stETH earns ETH staking yield
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rETH increases in value over time
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mSOL accrues SOL staking rewards
This is the risk-minimized base layer of yield.
Vault strategies then aim to enhance this base yield.
How Yield Vaults Use Liquid Staking Tokens
1. Auto-Compounding Staking Rewards
Some vaults simply:
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Hold LSTs
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Auto-compound rewards
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Optimize validator performance
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Reduce manual claiming
This is the lowest-risk vault category.
Best for:
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Conservative investors
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Long-term holders
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Yield stacking without leverage
2. LST Lending Strategies
Vaults may lend LSTs on money markets:
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stETH on Aave
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rETH on Compound
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LSTs on Morpho
Yield sources:
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Staking yield
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Borrow interest
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Incentive rewards
This creates dual income streams.
3. LST Liquidity Pool Vaults
Vaults deposit LSTs into DEX pools:
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stETH/ETH
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rETH/ETH
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LST stablecoin pairs
Yield comes from:
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Trading fees
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Liquidity incentives
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Staking rewards
Vaults rebalance to reduce impermanent loss and auto-compound fees.
4. Looping and Leverage Strategies
Advanced vaults may:
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Deposit LST
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Borrow ETH or stablecoins
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Stake again
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Repeat the loop
This amplifies yield but increases risk.
Common in:
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DeFi-native vaults
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Professional yield strategies
This approach is not beginner-friendly, but explains why some vaults offer very high APYs.
5. Liquid Staking + Restaking (Advanced)
Some vaults integrate:
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Liquid staking
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Restaking protocols
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Additional security rewards
This stacks:
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Base staking yield
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Restaking rewards
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Vault strategy yield
Risk increases with complexity.
Why Vaults Prefer LSTs Over Native Tokens
Vaults prefer liquid staking tokens because:
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They remain productive
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They are composable across protocols
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They reduce idle capital
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They simplify strategy execution
Native staked tokens are locked and unusable.
LSTs turn staking into yield Lego blocks.
Risk Considerations When Using LST Vaults
Yield vaults increase efficiency, but risks compound.
1. Smart Contract Risk
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Vault contract bugs
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Strategy logic failures
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Oracle errors
2. Liquid Staking Protocol Risk
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Validator slashing
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Governance risk
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Centralization risk
3. Depeg Risk
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LST price deviates from underlying asset
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Market stress events can widen spreads
4. Leverage Risk
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Liquidations during volatility
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Rapid drawdowns
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Forced deleveraging
Beginner investors should favor simple, low-leverage vaults.
How to Evaluate a Liquid Staking Yield Vault
Before depositing, ask:
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What is the base asset?
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Is the strategy leveraged?
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What protocols are involved?
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Is the LST widely adopted?
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Has the vault been audited?
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How transparent is performance data?
If you cannot explain how yield is generated, do not deposit.
Beginner-Friendly LST Vault Strategy Example
A conservative approach:
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Asset: stETH
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Strategy: Lending on Aave
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Yield sources:
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ETH staking rewards
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Borrow interest
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No leverage
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Auto-compounding enabled
This setup prioritizes:
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Capital preservation
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Predictable yield
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Lower liquidation risk
How Liquid Staking Changes Long-Term Yield Strategy
Liquid staking allows investors to:
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Stay staked long-term
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Remain flexible
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Capture multiple yield layers
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Avoid lockups
Yield vaults turn this into:
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Passive income
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Automated strategy execution
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Reduced operational burden
This is why liquid staking is now core infrastructure in DeFi.
Liquid Staking vs Traditional Yield Farming
| Feature | Liquid Staking Vaults | Traditional Farming |
|---|---|---|
| Base Yield | Yes | No |
| Lockups | No | Sometimes |
| Complexity | Medium | High |
| Risk Profile | Lower | Higher |
| Capital Efficiency | High | Variable |
Liquid staking vaults are generally more sustainable over time.
Final Takeaways
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Liquid staking provides a yield-earning base layer
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Yield vaults automate and enhance staking returns
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LSTs enable composable DeFi strategies
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Risk increases with leverage and complexity
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Beginners should favor simple LST vaults
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Understanding strategy mechanics is essential
Final Thoughts
Liquid staking is not just a staking upgrade — it is the foundation of modern yield vault design. By transforming illiquid stake into productive capital, it enables safer, more flexible, and more efficient yield strategies.
Yield vaults built on liquid staking are shaping the next phase of DeFi, where passive income meets automation, and capital works continuously across protocols.
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About the Author: Alex Assoune
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