The whole point of a liquid staking token is that it does two things at once: it earns staking rewards, and it stays free to move. That second half is where DeFi gets interesting. You can lend it, deposit it into a pool, or use it as collateral. Each move layers a new yield on top of the base rate, and each move layers a new way to lose the whole thing.
None of what follows is advice. It's a plain map of the routes people use, plus the honest reasons some of them blow up.
Start with the base layer
Before adding anything, remember what a liquid staking token is doing on its own. It represents your staked ETH, SOL, or MATIC, and it accrues staking rewards while you hold it. On Ethereum that's typically 3-4% APY (approximate). If you're new to the concept, our plain-language intro is worth five minutes.
Every DeFi strategy below sits on top of that base. The base yield doesn't stop when you use the token elsewhere. That's what makes stacking possible in the first place.
Lending: the quiet add-on
Deposit stETH into a lending protocol like Aave, and borrowers pay you interest on top of the staking reward. It's usually the least dramatic route.
- Extra yield: often 0.3-1.5% APY, illustrative and highly variable.
- Main risk: smart-contract bug in the lending protocol. Rare but final.
- Secondary risk: the liquid staking token depegs, which can trigger liquidations for borrowers using it as collateral.
Lending is the closest thing to a boring add-on. You don't take on price exposure to a second asset. You just accept protocol risk in exchange for a small extra bump.
Liquidity pools and the price you pay
Pair stETH with ETH in a Curve or Balancer pool and you'll earn trading fees plus, sometimes, extra token rewards from the protocol. On a stable pair the price divergence risk is small — the two assets usually track each other closely. Usually.
When stETH depegged in 2022, the pool got very lopsided. Anyone withdrawing then received far more of the cheaper asset than they put in. That's impermanent loss made permanent by a sale. It happens rarely but it does happen. See the risk rundown for how these events unfold in practice.
Looping: the loud strategy
Looping means depositing your liquid staking token as collateral, borrowing ETH against it, staking that ETH into more liquid staking tokens, and repeating. Each turn adds borrowed exposure, and borrowed exposure adds yield.
| Loops | Rough effective yield | Rough liquidation buffer |
|---|---|---|
| 1x (no loops) | Base staking rate | Wide |
| 2x | Base plus borrow-rate spread, roughly 1.5x | Narrower |
| 4x | Much higher, but only if the spread stays positive | Thin |
The catch has two parts. First, borrow rates can spike, turning the spread negative overnight. Second, a depeg can trigger cascading liquidations. Looping is the strategy most likely to go from "nice extra yield" to "account emptied" in a single afternoon.
Picking a strategy that fits
Match the strategy to what you can afford to lose. Lending fits people who want a small, quiet bump. Stable pools fit people who accept occasional divergence. Looping really only fits people who watch positions daily and have a plan for the day a peg breaks.
Two rules of thumb from painful history. Don't stake more than you'd accept losing outright, and don't add layers you can't explain to a friend. If a strategy needs a spreadsheet to justify, the risk it hides needs a spreadsheet too. For broader ideas beyond DeFi loops, see this passive income overview.
The real appeal of using liquid staking tokens in DeFi
The clean version of the pitch is this: liquid staking tokens let you earn twice on the same collateral without asking permission from anyone. That's a genuine upgrade over locked staking. The messy version is that every extra layer moves more of your outcome away from Ethereum's own security and into the hands of a smart contract someone wrote in a hurry. Use liquid staking tokens in DeFi if you've thought that trade through. Skip it if the phrase "cascading liquidation" makes you shrug — that's the phrase that ends most of these stories.