The crypto market has endured over a year of decline, but we’re now witnessing a resurgence — particularly in tokens tied to Liquid Staking Derivatives (LSDs). Protocols like Lido (LDO), Frax (FXS), and Rocket Pool (RPL) have surged, drawing attention to the growing importance of liquid staking in the Ethereum ecosystem.
But what exactly is liquid staking? And why does it matter?
What Are Liquid Staking Derivatives (LSDs)?
Ethereum’s transition to a Proof-of-Stake (PoS) consensus mechanism allows users to stake ETH and earn passive yields — typically between 4% and 6% APY. However, staked ETH is locked; it cannot be used for trading, lending, or yield farming elsewhere.
This is where Liquid Staking Derivatives (LSDs) come in.
LSDs solve this liquidity problem by allowing users to deposit ETH into a smart contract and receive a tokenized version of their staked assets — such as stETH, rETH, or sfrxETH — which can be freely traded or used across DeFi protocols. These derivative tokens represent both the staked ETH and its accruing rewards.
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This innovation transforms staking from a static, illiquid activity into a dynamic component of decentralized finance.
Why the LSD Narrative Is Here to Stay
Despite Ethereum’s dominance, only about 13% of circulating ETH is currently staked — far below the typical 40–70% seen on other PoS blockchains, according to Staking Rewards.
Why so low?
Because until recently, stakers couldn’t withdraw their principal. That changed with the Shanghai Upgrade in March 2025, which enabled full withdrawal functionality. This dramatically reduced the risk of staking, making it more appealing to retail and institutional investors alike.
As more ETH gets staked, demand for liquid staking solutions will grow — not just for convenience, but for capital efficiency.
Since mid-2021, LSDs have outpaced traditional staking methods. By the time Ethereum completed its Merge in September 2022, LSDs had already established themselves as the preferred staking infrastructure.
Now, let’s examine the three most prominent LSD protocols with governance tokens: Lido, Frax, and Rocket Pool.
Lido (LDO): The Market Leader
Lido dominates the LSD landscape.
It controls over 70% of all liquid staked ETH and accounts for nearly 30% of total Ethereum staking. Its derivative token, stETH, has become synonymous with liquid ETH across DeFi platforms.
Governed by a Decentralized Autonomous Organization (DAO), Lido issues LDO as its governance token. Holders vote on key parameters such as fee structures, node operators, and oracle selection. Profits generated by the protocol are reinvested into development and liquidity incentives.
However, LDO does not accrue direct value from protocol revenues. There’s no profit-sharing mechanism or token buybacks. Instead, LDO functions primarily as a speculative asset — a bet on Lido’s continued dominance and the broader adoption of LSDs.
Is that a weakness?
Not necessarily. In early-stage ecosystems, narrative often drives value. Consider Uniswap’s UNI, which also lacks intrinsic cash flow but remains one of the top-performing DeFi tokens. Similarly, meme coins thrived during the last bull run — proving that market sentiment can outweigh fundamentals in the short term.
If you're seeking exposure to LSD growth with minimal risk, LDO is the safest entry point.
Frax (FXS): The Integrated Ecosystem Play
Frax entered the LSD space relatively late but achieved explosive growth — rising to become the fifth-largest LSD protocol by ETH volume in just three months, even amid a bear market.
This rapid ascent stems from Frax’s deeply interconnected DeFi ecosystem:
- Frax Ether (frxETH): Their liquid staking token
- sfrxETH: A yield-bearing, rebase token backed by staked frxETH
- Curve liquidity dominance: Frax leverages its strong position on Curve Finance to offer enhanced yields through veCRV emissions
Crucially, FXS operates under a veToken model similar to Curve’s:
- Users lock FXS to receive veFXS
- The longer the lock-up (up to 4 years), the greater the voting power, yield boosts, and share of protocol fees
- As of 2025, locking FXS yields around 1.58% APY, funded entirely by real protocol revenue
Unlike LDO, FXS offers actual value accrual — making it attractive for long-term investors who believe in sustainable economic models.
But here's the catch: Frax isn't purely an LSD play. Its success depends on multiple interdependent products — stablecoins, lending markets, DEXs. If one leg fails, others may wobble.
Thus, investing in FXS means betting on the entire Frax ecosystem — a higher-risk, potentially higher-reward proposition than LDO.
👉 See how integrated DeFi ecosystems are reshaping yield generation in 2025.
Rocket Pool (RPL): The Decentralized Challenger
Launched in November 2021, Rocket Pool positions itself as a community-driven alternative to venture-backed protocols like Lido.
It currently holds over 5% market share in liquid staking — impressive given its smaller scale and slower growth trajectory.
Rocket Pool uses a unique dual-staking mechanism:
- Node operators stake ETH and provide collateral in RPL
- They earn rewards in both ETH (from staking yields) and newly minted RPL (inflationary rewards)
- RPL acts as insurance: if a node is penalized ("slashed"), RPL collateral is burned to cover losses
The system creates built-in demand for RPL:
- Minimum collateral requirement: 10% of node’s ETH value → floor price support
- Maximum cap: 150% of ETH value → limits whale dominance and creates soft ceiling
When RPL price rises, operators unstake excess collateral (potentially selling pressure). When it falls, they must buy more RPL to maintain eligibility — creating organic buying pressure.
This design tightly couples RPL’s value to network activity, making it one of the few LSD tokens with intrinsic economic alignment.
Yet despite its innovative mechanics, Rocket Pool lags far behind Lido in adoption and momentum. Unless growth accelerates, RPL may remain a niche player.
Which LSD Token Has the Most Potential?
Let’s break it down:
| Protocol | Strengths | Risks |
|---|---|---|
| Lido (LDO) | Market leader, strong brand recognition, dominant liquidity | No direct value accrual; regulatory scrutiny possible |
| Frax (FXS) | Real yield via veModel; diversified ecosystem; revenue-backed returns | Complex interdependencies; broader ecosystem risk |
| Rocket Pool (RPL) | Strong economic design; decentralized ethos; anti-whale mechanics | Slower growth; limited scale |
Final Assessment
- For conservative investors: Choose LDO. You’re betting on the leading protocol in a high-growth sector.
- For yield-focused optimists: Consider FXS. It offers real income and exposure to multiple DeFi verticals.
- For believers in decentralization: Watch RPL. It’s less attractive now but could surge if adoption picks up.
Frequently Asked Questions (FAQ)
Q: What are Liquid Staking Derivatives (LSDs)?
A: LSDs are tokenized representations of staked assets (like ETH) that retain liquidity and can be used across DeFi while earning staking rewards.
Q: Can I still lose money using LSDs?
A: Yes. While rare, risks include smart contract bugs, slashing events, and price volatility between the derivative token (e.g., stETH) and native ETH.
Q: Why is Lido so dominant?
A: Early mover advantage, strong liquidity on major DEXs, seamless integration with lending protocols like Aave, and robust developer support.
Q: Does FXS offer better returns than LDO?
A: Potentially. FXS provides real yield through its veModel and profit-sharing, whereas LDO relies solely on speculation and market sentiment.
Q: Is Rocket Pool safer than centralized alternatives?
A: Generally yes. Rocket Pool is non-custodial and designed for decentralization, reducing reliance on single entities compared to custodial services like Coinbase.
Q: Will LSD competition increase after Shanghai?
A: Absolutely. With withdrawal enabled, more users are entering staking — attracting new protocols and increasing innovation across the LSD landscape.
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Conclusion
The future of Ethereum staking is liquid.
Protocols like Lido, Frax, and Rocket Pool are redefining how users interact with staked assets — turning idle capital into productive, composable building blocks of DeFi.
While Lido leads today, Frax brings sustainability, and Rocket Pool champions decentralization. Each offers a distinct path forward — and distinct investment profiles.
As adoption grows post-Shanghai, expect increased competition, deeper integrations, and new financial primitives built atop LSDs.
Core Keywords: Liquid Staking Derivatives, Lido LDO, Frax FXS, Rocket Pool RPL, Ethereum staking, DeFi yield, stETH, veToken model