The rise of liquid staking has fundamentally reshaped Ethereum’s supply dynamics, economic incentives, and decentralized finance (DeFi) ecosystem. At the heart of this transformation is stETH, the liquid staking derivative issued by Lido, the dominant player in the liquid staking market. As stETH adoption grows, it increasingly influences how ETH is distributed, used, and valued across the network.
This article explores the multifaceted impact of stETH on Ethereum—covering supply composition, demand trends, and DeFi integration—while identifying core keywords: stETH, Ethereum, liquid staking, Lido, DeFi, ETH supply, staking rewards, and wstETH.
The Rise of Liquid Staking
Since Ethereum’s transition to proof-of-stake (PoS), a new paradigm has emerged: liquid staking. This innovation allows users to stake their ETH without locking it up permanently. Instead of immobilizing assets, participants receive a tokenized representation of their staked ETH—known as a liquid staking derivative (LSD) or liquid staking token (LST)—that remains usable across DeFi protocols.
Lido dominates this space with an 86% market share, issuing stETH to users who delegate their ETH to its node operators. These operators validate transactions and earn staking rewards on behalf of users, while stETH accrues value in tandem with the underlying staked ETH plus yield.
Currently, 23% of all ETH is staked, and 32% of that staked ETH flows through Lido. This means approximately 7% of Ethereum’s total circulating supply is now represented by stETH—a figure that continues to grow.
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Unlike traditional staking, where funds are illiquid for long periods, liquid staking enables users to maintain exposure to staking rewards while deploying their LSDs in lending markets, liquidity pools, or leveraged positions. This flexibility is a key driver behind the growing preference for stETH over native ETH.
How stETH Shapes Ethereum’s Supply Dynamics
Post-Merge, all newly issued ETH comes from validator rewards—not block subsidies. With Lido controlling 32% of the staking pool, it receives 32% of all new ETH created as consensus-layer rewards.
However, Lido does not distribute all these rewards directly. Its reward structure consists of three components:
- 🟠 Consensus-layer rewards (68.8%): Paid for validating blocks.
- 🔴 MEV (Miner Extractable Value) rewards (28.4%): Gains from transaction ordering.
- 🔵 Priority fees (3.72%): Fees paid for faster inclusion.
Lido charges a 10% fee on total rewards, split between node operators and its protocol treasury. But more importantly, it employs a compounding mechanism: instead of distributing all rewards immediately, part of the yield is automatically re-staked into the pool.
This strategy has significant implications:
- Lido has received over 221,000 newly minted ETH since inception.
- Of that, about 105,000 ETH has been re-locked into the staking pool.
- Resulting in a net issuance of only 116,000 ETH.
In essence, Lido’s compounding behavior reduces the net flow of new ETH into circulation—effectively acting as a partial deflationary pressure on Ethereum’s monetary policy.
Shifting Demand: stETH vs. ETH
Historically, ETH has served as the base asset of Ethereum’s economy. However, data suggests a shift in user preference toward yield-bearing alternatives like stETH and its wrapped form, wstETH.
Analyzing on-chain adoption metrics using 30-day moving averages:
- Since the Terra/Luna collapse in May 2022, new addresses holding ETH + WETH have plateaued.
- In contrast, adoption of stETH + wstETH has surged by 142% over the same period.
Transaction volumes reinforce this trend:
- ETH + WETH transfer volume stabilized between $6B–$10B per month after 2022.
- Meanwhile, stETH transaction volume jumped from $127M to between $450M–$880M monthly in 2023 alone.
This growing demand reflects a broader market shift: users increasingly favor assets that generate yield passively. As stETH offers exposure to ETH plus ongoing rewards, it becomes a more attractive store of value than non-yielding ETH.
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stETH in DeFi: From DEXes to Lending Platforms
While both ETH and stETH are used in DeFi, their usage patterns differ significantly.
Growth of wstETH and Decline of wETH
The wrapped version of stETH—wstETH—has seen explosive growth:
- Over 3 million additional wstETH tokens have been minted since early 2022.
- Now represents 74% of total stETH supply.
Conversely, wETH supply dropped by 62% during the same period. This decline signals reduced reliance on wrapped ETH in DeFi protocols—likely because stETH and wstETH offer built-in yield advantages.
Many users prefer wstETH due to tax considerations: since stETH balances increase automatically with accrued rewards (a taxable event in some jurisdictions), wrapping it into wstETH—which appreciates in price rather than quantity—can be more tax-efficient.
Dominance in Lending Protocols
Aave has become a major hub for stETH usage:
- Holds 14.4% of total stETH supply
- And 25.3% of wstETH supply
This indicates strong demand for using stETH as collateral in leveraged positions. Why? Because borrowing against stETH to acquire more stETH (a "leverage loop") often yields higher returns than providing liquidity on decentralized exchanges (DEXes).
Declining DEX Liquidity
Despite being tradable on DEXes like Curve, liquidity for stETH remains alarmingly low:
- Only 1.4% of total stETH supply is used in DEX liquidity pools.
- Curve’s top three stETH pools have seen a 90.2% decline in stETH reserves since May 2022.
This migration from DEXes to lending platforms poses risks:
- Reduced liquidity increases the chance of stETH depegging from ETH.
- In stressed markets, insufficient liquidity could hinder timely liquidations on Aave, leading to bad debt.
Frequently Asked Questions (FAQ)
What is stETH?
stETH (liquid staked ETH) is a token issued by Lido that represents staked Ethereum. It earns yield from validation rewards and can be used across DeFi applications.
How does stETH affect Ethereum's inflation rate?
By reinvesting a portion of staking rewards back into the protocol, Lido reduces the net issuance of new ETH—partially offsetting inflationary pressures.
Can stETH lose its peg to ETH?
Yes, though rare. Market stress, low liquidity, or redemption delays can cause temporary depegging. However, mechanisms exist to restore parity over time.
Why do users prefer wstETH over stETH?
wstETH maintains a fixed balance while increasing in value, which avoids frequent taxable events caused by stETH’s auto-compounding balance updates.
Is liquid staking centralizing Ethereum?
Lido’s dominance raises concerns about centralization risk. If one entity controls too much of the validator set, it could threaten network resilience—though solutions like restaking aim to diversify trust.
Should I use stETH instead of ETH?
It depends on your goals. If you seek passive yield and DeFi utility, stETH may be preferable. For simplicity and direct exposure, native ETH remains solid.
Final Thoughts
stETH has evolved from a niche yield instrument into a core component of Ethereum’s economy. It influences how new ETH is issued, where demand is concentrated, and how capital flows through DeFi.
As liquid staking matures, platforms like Lido will continue shaping Ethereum’s economic landscape—offering efficiency and yield at the cost of increased systemic interdependence. Monitoring these dynamics is crucial for investors, developers, and protocol designers alike.
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