Risks of Liquid Staking Protocols Explained

When you stake your ETH, you lock it up to help secure the Ethereum network and earn rewards. But what if you could earn those rewards and still use your ETH to trade, lend, or buy things? That’s the promise of liquid staking protocols. They let you stake your crypto while getting a token - like stETH or rETH - that represents your stake and can be used elsewhere. Sounds great, right? But behind the convenience lies a web of hidden dangers that have already cost users millions.

What Happens When the Peg Breaks?

The biggest fear in liquid staking isn’t a hack. It’s a de-peg. Most liquid staking tokens are supposed to trade at a 1:1 ratio with the underlying asset - so 1 stETH should always equal 1 ETH. But that’s not how it works in practice.

During the 2022 Celsius collapse, stETH on Curve Finance plunged to 0.94 ETH. Users couldn’t swap their stETH back to ETH because the liquidity pools ran dry. Reddit threads from that time show people panicking: “My stETH is worth 6% less than ETH. I can’t sell.” CoinGecko data later showed stETH traded below 0.99 ETH on 15 separate occasions in just six months. That’s not a glitch - it’s a structural flaw.

Why does this happen? Because liquid staking tokens aren’t cash. They’re claims on future ETH, and when markets panic, those claims get discounted. If you need to cash out fast, you might be stuck with a token worth less than what you put in. And unlike a bank account, there’s no FDIC insurance.

Smart Contracts Aren’t Safe - Even If They’re Audited

You’ve probably seen headlines like “Lido Protocol Completes Third Audit!” That sounds reassuring. But audits don’t make code bulletproof. They just find the obvious bugs.

The smart contracts that hold your ETH are the weakest link. Ankr’s 2023 analysis points out that “smart contracts that hold the original unstaked assets will have bugs which makes them susceptible to hacking.” In 2023, a minor vulnerability in a lesser-known liquid staking protocol led to a $2.3 million exploit. The code looked fine on paper. The audit firms missed it. The fix took three days. In that time, users couldn’t withdraw.

Even Lido, the biggest player with over $12 billion locked, isn’t immune. Its contracts have been audited by OpenZeppelin and Trail of Bits - but audits don’t stop future exploits. New attack vectors emerge as protocols evolve. One wrong line of code, one misconfigured oracle, and your staked ETH could vanish overnight.

Slashing Risk Is Real - And You Can’t Avoid It

When you stake directly, you know the rules: if your validator goes offline or signs conflicting blocks, you lose part of your stake - up to 1 ETH per slashing event. Liquid staking makes this worse.

You’re not running the validator. Someone else is. And if they get slashed, you lose too. Lido, Rocket Pool, and others pool your ETH with hundreds of other users to run validators. If one of those validators gets penalized, the loss is shared across everyone. There’s no way to know which validator is risky. And unlike direct staking, you can’t choose your own node.

Galaxy Research confirmed in 2023 that liquid staking adds “liquidity risks as market volatility and prolonged delays to validator entries or exits may cause a de-pegging event.” But slashing? That’s a direct, real loss. And since most liquid staking protocols don’t fully cover slashing losses, you’re on the hook.

Centralization Is the Silent Killer

Ethereum’s whole point is decentralization. But liquid staking is making it worse.

As of April 2023, Lido controlled 32% of all staked ETH. That’s more than 12 million ETH under one organization’s control. If Lido’s validators were compromised - or if its DAO voted to change the rules - it could shake Ethereum’s entire security model. The network’s safety relies on distributed validators. But now, one company holds nearly a third of the power.

Centralized exchanges like Coinbase and Binance offer their own versions - cbETH and BETH. These are even riskier. Your ETH is held by the exchange. They decide when to stake, how to stake, and if they’ll ever let you withdraw. If Coinbase gets hacked or shuts down, your cbETH could be frozen forever.

Rocket Pool tries to fix this by requiring users to deposit 8 ETH + 2.4 ETH worth of RPL to run a minipool. It’s harder, but it’s more decentralized. Most users don’t bother. They pick the easiest option. And that’s how centralization creeps in.

Regulators Are Watching - And They’re Not Happy

In August 2025, the U.S. Securities and Exchange Commission (SEC) issued a formal statement on “Certain Liquid Staking Activities.” It didn’t ban them. But it signaled that LSTs might be classified as securities.

Why does that matter? Because if stETH is a security, it can’t be traded freely. Exchanges might delist it. Liquidity could vanish. Your “liquid” token becomes locked again - but this time by law, not code.

This isn’t speculation. The SEC has already gone after similar DeFi products. Liquid staking is next. And if regulators decide these tokens are unregistered securities, millions of users could suddenly lose access to their assets.

What You Can Do - And What You Should Avoid

Don’t panic. But don’t assume it’s safe either.

• Diversify your staking. Don’t put all your ETH into stETH. Try Rocket Pool’s rETH or Origin Ether (OETH). Each has different risk profiles. OETH, for example, includes built-in slashing protection.
• Check liquidity depth. If you’re holding stETH, monitor how much is available on Uniswap, Curve, or SushiSwap. If the pool has less than $500 million in liquidity, you’re at risk during a market crash.
• Know your token model. Some LSTs (like stETH) increase in value over time. Others (like rETH) increase in quantity. This affects taxes and how you track gains.
• Audit history matters. Look for protocols audited by OpenZeppelin, Trail of Bits, or Quantstamp. But don’t stop there - check if they’ve had past exploits. A clean audit today doesn’t mean clean code tomorrow.

The Bottom Line

Liquid staking isn’t evil. It’s useful. It lets people earn rewards without running a node. But it’s also a high-risk gamble wrapped in a simple interface. The risks aren’t theoretical. They’ve happened. They’ve cost real money. And they’re getting worse as more capital flows in.

If you’re using liquid staking, you’re not just trusting a smart contract. You’re trusting a DAO, a validator operator, a liquidity pool, a regulatory environment, and a market that can turn on a dime. There’s no safety net. No insurance. No backup plan.

The convenience is real. But the cost? You might not realize it until it’s too late.