Ethereum Liquid Staking Hits 35% of Total Supply, Raising Centralization Concerns

Liquid Staking Reaches 35% of Supply

Liquid staking protocols collectively hold 35% of all staked Ethereum, representing approximately 14 million ETH valued at over $28 billion. The milestone reflects the strong product-market fit of liquid staking, which allows ETH holders to earn staking rewards while maintaining liquidity through derivative tokens that can be used across DeFi protocols. Total ETH staked from all sources (including solo stakers, exchanges, and liquid staking protocols) stands at approximately 40 million ETH, or 33% of total supply.

The growth of liquid staking has been driven by the DeFi composability of liquid staking tokens (LSTs). Unlike directly staked ETH, which is locked in the Beacon Chain, LSTs like Lido's stETH and Rocket Pool's rETH can be used as collateral in lending protocols, provided as liquidity in DEX pools, or deployed in other yield-generating strategies, enabling holders to earn staking rewards alongside additional DeFi yields.

Market Share Distribution

Lido Finance maintains a dominant position in the liquid staking market with approximately 72% market share, holding over 10 million stETH. Rocket Pool holds the second position at 8% with approximately 1.1 million rETH, followed by Coinbase's cbETH at 7%, Frax's sfrxETH at 4%, and Mantle's mETH at 3%. The remaining 6% is distributed among smaller liquid staking providers including StakeWise, Ankr, and SharedStake.

Lido's dominance has persisted despite efforts by the Ethereum community to promote decentralized alternatives. The protocol's first-mover advantage, deep DeFi integrations, and strong liquidity for its stETH token create network effects that have been difficult for competitors to overcome. Rocket Pool, which offers a more decentralized staking model through permissionless node operation, has grown steadily but remains significantly smaller than Lido.

LSTs as DeFi Collateral

Liquid staking tokens have become one of the most important collateral types in DeFi lending, with approximately $18 billion in LSTs deposited across Aave, MakerDAO, Compound, and other lending protocols. stETH is the single largest collateral asset on Aave, exceeding even native ETH deposits. The use of LSTs as collateral creates a capital-efficient system where users can simultaneously earn staking yield and borrow against their staked positions.

The prevalence of LST collateral in DeFi lending creates systemic dependencies. A significant depeg of stETH from its expected value (as occurred briefly during the 2022 market turmoil) could trigger cascading liquidations across multiple lending protocols. Risk teams at Aave and MakerDAO maintain separate risk parameters for LST collateral, including lower loan-to-value ratios and higher liquidation thresholds compared to native ETH.

Restaking and Liquid Restaking Tokens

The emergence of restaking protocols, primarily EigenLayer, has added another layer to the liquid staking ecosystem. Restaking allows staked ETH (or LSTs) to simultaneously secure additional protocols beyond Ethereum, earning additional yield in exchange for additional slashing risk. Liquid restaking tokens (LRTs), which represent restaked positions, have grown to over $12 billion in TVL.

LRTs including Ether.fi's eETH, Renzo's ezETH, and Puffer's pufETH provide liquidity for restaked positions, enabling DeFi composability similar to first-generation LSTs. The multi-layered staking structure (ETH to stETH to eETH) creates complex risk profiles that are still being studied by the research community, with concerns about cascading slashing events and compounding smart contract risk.

Decentralization Concerns

Lido's 72% share of the liquid staking market has renewed concerns about validator centralization on Ethereum. Lido distributes its staked ETH across approximately 35 professional node operators, which collectively control a significant portion of Ethereum's validator set. While Lido has implemented governance mechanisms to manage node operator selection, the concentration of staking decisions within a single protocol raises questions about Ethereum's validator diversity.

The Ethereum community has proposed several approaches to address the concentration concern. A self-imposed cap on Lido's share of total staking has been debated but not implemented. Protocol-level changes to the staking mechanism, including penalties for excessive validator concentration, have been discussed by Ethereum researchers. Meanwhile, Lido has expanded its node operator set and introduced a module system that allows additional operator categories, including community-run validators.

Outlook for Liquid Staking

Liquid staking adoption is expected to continue growing as DeFi integration deepens and new staking products emerge. The approval of staking within Ethereum ETFs would represent a significant catalyst, potentially bringing institutional staking demand to liquid staking protocols. Ethereum protocol improvements, including reduced staking minimums and better validator economics, could also influence the liquid staking market.

The competitive dynamics within liquid staking may shift as institutional products and permissioned staking services enter the market. Traditional financial institutions seeking regulated staking exposure may prefer providers with compliance frameworks, creating opportunities for regulated liquid staking services. Research from Rated Network shows that validator performance metrics across liquid staking providers have converged, suggesting that competition will increasingly focus on DeFi integration quality and fee structures.