Liquid Staking Tokens (LSTs) Explained: wstETH, cbETH & Friends

What Are Liquid Staking Tokens?

Liquid staking tokens (LSTs) solve one of proof-of-stake's oldest trade-offs: staking your ETH earns validator rewards, but natively staked ETH is locked away. You can't trade it, lend it, or post it as collateral. An LST is the token you receive when you stake through a provider like Lido, Coinbase, or Rocket Pool. It represents your staked ETH plus the rewards it earns, and because it's a standard ERC-20, it stays liquid: you can sell it, move it, or put it to work across DeFi while the underlying stake keeps earning.

Under the hood, the provider pools deposits, runs (or delegates to) validators, and passes consensus rewards, priority fees, and MEV back to token holders, minus a provider fee. When you want out, you either redeem through the protocol's withdrawal queue or simply sell the token on a DEX.

That combination of staking exposure and liquidity has made the LST crypto category one of the largest in DeFi. Tokens like wstETH and cbETH are now core collateral across lending markets, AMMs, and yield products.

Rebasing vs. Value-Accruing: How LST Yield Shows Up

Not all LSTs deliver yield the same way. There are two designs:

• Rebasing: your token balance grows. Lido's stETH tracks staked ETH 1:1, and your wallet balance ticks up as rewards accrue.
• Value-accruing (reward-bearing): your balance stays fixed while each token's redemption rate against ETH rises. wstETH, cbETH, and rETH all work this way, so one token becomes worth progressively more ETH.

Rebasing is intuitive but breaks a lot of DeFi plumbing. AMM pools, vaults, and bridges generally assume balances don't change on their own, so rebasing tokens get stuck or leak rewards inside them. That's exactly why wstETH exists: it wraps rebasing stETH into a fixed-balance token whose exchange rate climbs instead. The same pattern shows up elsewhere. Aave's rebasing aTokens have wrapped static versions for the same reason. If a token needs to sit inside another smart contract, value-accruing is the composable choice.

The Major LSTs: wstETH, cbETH, and rETH

• wstETH (Lido): the wrapped, non-rebasing version of stETH and the largest LST by a wide margin. Deep liquidity and the broadest integration footprint, though it concentrates a significant share of all staked ETH with one protocol's node operator set.
• cbETH (Coinbase): Coinbase Wrapped Staked ETH. Staking is operated by Coinbase, so it carries a custodial trust assumption, but it accrues value via a published exchange rate and is natively issued and widely integrated on Base.
• rETH (Rocket Pool): backed by a permissionless network of independent node operators, making it the most decentralized of the big three. Also value-accruing, with thinner liquidity than wstETH.

Each sits at a different point on the triangle of liquidity, decentralization, and trust assumptions. There is no single best LST, which is itself an argument for holding more than one.

Why Liquid Staking Fits Yield Baskets

LSTs are what DeFi calls productive assets: they track ETH's price while slowly appreciating against ETH itself, because staking rewards accrue into the token. Holding an LST instead of raw ETH means your ETH exposure works in the background, with no farming, claiming, or restaking clicks required.

They also pair naturally with ERC-4626 vaults, the tokenized-vault standard used by Beefy, Yearn, Morpho, Moonwell, Euler, and others. A 4626 vault share behaves just like a value-accruing LST: fixed balance, rising share price. Combine the two and every component of a basket compounds on its own:

• LSTs like wstETH and cbETH for ETH staking exposure
• Lending or stablecoin vaults for yield sources that aren't tied to ETH staking
• No rebasing tokens, so accounting stays clean inside any contract that holds them

The catch is logistics. Buying three or four of these individually means multiple swaps, multiple approvals, and dust management, which is where index products come in.

The Real Risks: Depeg, Smart Contracts, and Centralization

LSTs trade on secondary markets, and the market price can drift below the redemption rate. The best-known example is mid-2022, when stETH traded at a visible discount to ETH during forced deleveraging, and that was before withdrawals were even enabled. Since Ethereum's Shapella upgrade in 2023, withdrawals give arbitrageurs an anchor, but exits go through a queue, so discounts can still open up under stress.

• Smart-contract risk: the staking protocol, the wrapper, and anything built on top can have bugs.
• Slashing risk: validator misbehavior can destroy part of the stake backing your token; extended downtime incurs smaller penalties.
• Counterparty and centralization risk: cbETH depends on Coinbase; Lido's sheer scale is a live systemic debate.
• Liquidity risk: thinner LSTs can gap harder in a sell-off.

None of this makes LSTs uninvestable. It makes them assets to size responsibly. This is DeFi, not a regulated securities product: do your own research and never treat any yield as guaranteed.

Holding a Basket of LSTs and Vaults With One Token

This is the problem Tessera's Earn baskets are built for. Tessera is an onchain ETF platform on Base: each index token is a single ERC-20 backed 100% in-kind by a basket of 2 to 30 assets held in a smart-contract vault. An Earn basket might hold wstETH, cbETH, and a handful of ERC-4626 vaults, and because every component is value-accruing, the whole basket compounds while you hold one token.

The mechanics stay simple on your end. You pay with USDC or ETH, and a single trade routes across up to roughly six DEXs (Uniswap v2/v3/v4, Aerodrome, and others) plus 4626 vaults to assemble the basket atomically. You never buy the legs individually. You can redeem anytime for the underlying assets. Baskets are permissionless to create and immutable once deployed: no admin key can change the weights, custody stays with you, and everything is verifiable onchain. A small fee applies on buys and sells, with a share going to the basket's creator.

Be clear-eyed about what this adds: an index layer on top of LSTs stacks one more smart contract into the chain of dependencies. The trade is convenience and diversification for another contract to trust. Verify it, size accordingly, and treat it like any other DeFi position.