Understanding how institutional-grade MPC wallets enable secure liquid staking operations

What is Liquid Staking?

Liquid staking represents a fundamental innovation in cryptocurrency staking that solves the age-old problem of capital inefficiency. Traditional staking requires locking up assets for extended periods (often weeks or months) creating an opportunity cost where capital sits idle, unable to be used for other purposes.

Liquid staking changes this dynamic entirely. When assets are staked through a liquid staking protocol, liquid staking tokens (LSTs) are received in return. These derivative tokens represent the staked position while remaining freely tradeable and usable across decentralized finance (DeFi) applications. Think of it as having your cake and eating it too: you earn staking rewards while maintaining full liquidity and composability of your capital.

For example, when staking ETH through a liquid staking protocol, you might receive stETH tokens. With liquid staking ETH, you can participate in staking rewards while simultaneously using stETH tokens as collateral for lending, provide liquidity on decentralized exchanges, or participate in other yield-generating strategies, thereby compounding your liquid staking rewards far beyond what traditional staking alone could provide.

Why Liquid Staking Matters for Institutions

The liquid staking market has exploded to over $40 billion in total value locked as of 2025, and this growth is driven primarily by institutional adoption. Three key factors make liquid staking particularly attractive for institutional investors:

Capital Efficiency: Institutions managing large portfolios cannot afford to have significant portions of their assets locked and illiquid. Liquid staking enables them to maintain exposure to staking yields while preserving the optionality to deploy capital rapidly when market opportunities arise.

Risk-Adjusted Returns: In today's low-rate environment, liquid staking provides attractive yields with relatively lower risk compared to many DeFi strategies. Major protocols like Lido and Rocket Pool have proven track records of security and reliability.

Regulatory Compliance: Unlike some DeFi activities, staking is increasingly recognized by regulators as a legitimate form of yield generation. The SEC's recent clarification on liquid staking tokens provides additional confidence for institutional participants.

Liquid Staking vs Other Staking Methods

Understanding when to use liquid staking requires comparing it to alternative staking approaches:

Liquid Staking vs Traditional Staking

When to Use Liquid Staking: Portfolio optimization, active yield strategies, need for liquidity, amounts below validator minimums. Liquid staking rewards are particularly attractive for institutions looking to maximize capital efficiency.

When to Use Traditional Staking: Maximum security preference, long-term holding strategy, running your own validator

Liquid Staking vs Staking Pools

When to Use Liquid Staking: Best suited for institutions that need asset flexibility, want to improve capital efficiency, or plan to integrate staked assets into DeFi strategies. Liquid staking enables institutions to earn rewards while maintaining liquidity for trading, treasury management, or risk diversification.

When to Use Staking Pools: Ideal for institutions that prefer a simpler staking model, already work with a trusted operator, or follow a more conservative risk framework. Staking pools offer stable rewards with lower operational complexity and minimal technical requirements.

Liquid Staking vs Yield Aggregators

When to Use Liquid Staking: Suitable for institutions that require core staking exposure while maintaining liquidity. Liquid staking is also appropriate when teams prefer lower operational complexity and value predictable, protocol-native yields without managing multiple strategies.

When to Use Yield Aggregators: Best for institutions focused on maximizing yield and comfortable with higher strategy complexity. Yield aggregators provide access to diversified yield opportunities across DeFi, making them effective for teams seeking optimized returns and broader market exposure.

The Infrastructure Challenge: Why Standard Wallets Fall Short

Liquid staking can improve capital efficiency, but institutions exploring any form of staking, whether liquid or traditional, must still address foundational security and operational requirements that consumer-grade wallets cannot meet.

Standard wallet infrastructures lack the controls needed to safeguard institutional-scale digital assets. A single compromised private key can put millions of dollars at risk, which is not acceptable for organizations with fiduciary responsibilities or regulated operations.

Institutions also require features such as multi-step approval workflows, granular policy controls, real-time monitoring, and comprehensive audit logs. These capabilities are essential for compliance and operational integrity, yet they are not provided by retail-focused wallet solutions.

This is why institutions rely on dedicated infrastructure such as MPC-based custody and regulated staking platforms. Even when an institution accesses liquid staking through third-party providers, secure asset storage, transaction governance, and operational oversight remain critical requirements that cannot be fulfilled by standard consumer wallets.

MPC Wallets: The Foundation for Secure Institutional Staking

Multi-Party Computation (MPC) wallet technology provides the enterprise-grade infrastructure that institutions rely on when managing digital assets at scale. Whether an institution engages in native staking or accesses liquid staking through external providers, MPC ensures that core custody, governance, and operational controls remain secure and compliant.

Unlike traditional wallets that depend on a single private key, MPC distributes cryptographic key shares across multiple secure environments. No single party ever holds a complete key. Transactions are authorized through threshold signatures that require coordinated participation.

This architecture delivers several critical advantages for institutional staking operations and institutional staking custody:

Elimination of Single Points of Failure:A compromised key share does not result in a compromised wallet. MPC protects staked and unstaked assets by removing seed phrases and reducing reliance on any single signer or device.

Flexible Governance and Role-Based Controls:MPC supports institutional workflows, including multi-level approvals, transaction limits, jurisdictional rules, maker-checker structures, and role-specific permissions for treasury, operations, and compliance teams.

High Availability and Operational Continuity:Because MPC does not rely on physical devices, institutions can maintain consistent access even during hardware failures or signer rotation events. This supports 24/7 operations and rapid deployment of staking transactions.

Built-In Auditability:MPC integrates with institutional logging systems and provides transparent, verifiable approval records. This is essential for internal audits, regulatory reporting, and meeting fiduciary requirements.

Secure Collaboration Across Geographies:Key shares can be distributed across global teams without increasing risk. MPC allows institutions to coordinate staking decisions securely across multiple departments and locations.

MPC vs. Multisig for Institutional Staking

While multisig wallets also require multiple approvals, MPC offers critical advantages for liquid staking operations:

• Gas Efficiency: MPC transactions appear as single-signature transactions on-chain, dramatically reducing gas costs compared to multisig transactions

• Universal Compatibility: MPC works across all blockchains, including those without native multisig support

• Privacy: MPC doesn't reveal your security setup on-chain, while multisig addresses are publicly identifiable

• Flexibility: Approval policies can be updated without changing wallet addresses or moving funds

For institutions managing liquid staking positions across multiple protocols and chains, MPC's flexibility and efficiency make it the clear choice.

Security Best Practices for Institutional Liquid Staking

Even with robust MPC wallet infrastructure, institutions must implement comprehensive security practices:

Pre-Delegation Due Diligence: Thoroughly audit smart contracts of liquid staking protocols, assess validator reputation and track records, and understand protocol-specific risks like slashing conditions.

Operational Security: Implement real-time monitoring for validator performance, set up automated alerts for slashing events or LST price deviations, and maintain clear unstaking and emergency procedures.

Compliance Framework: Ensure your staking operations align with regulatory requirements in your jurisdiction, implement proper KYC/AML procedures, and maintain comprehensive records for tax reporting.

Disaster Recovery: Document key backup and recovery procedures, test emergency scenarios regularly, and maintain business continuity plans for all staking operations.

Managing Liquid Staking Risks

Liquid staking introduces specific risks that institutions must understand and mitigate:

Smart Contract Risk: LST protocols rely on complex smart contracts that could contain vulnerabilities. Mitigate this by diversifying across multiple audited protocols and limiting position sizes.

Slashing Risk: Validators can be penalized for protocol violations, potentially reducing your staked position. Choose validators with proven track records and use infrastructure that monitors validator performance continuously.

LST Depeg Risk: During periods of stress, LSTs can trade below their underlying asset value. Maintain sufficient liquidity buffers and avoid over-leveraging LST positions.

Liquidity Risk: Mass unstaking events can create liquidity crunches. Understand protocol withdrawal mechanisms and maintain diversified liquidity sources.

The Future of Institutional Staking

Liquid staking continues evolving rapidly with several key trends on the horizon:

Restaking Innovations: Protocols like EigenLayer enable restaking LSTs to provide economic security for additional services, creating new yield opportunities.

Cross-Chain Integration: Emerging protocols will enable seamless liquid staking across multiple chains through unified positions.

TradFi Integration: Traditional financial institutions are beginning to offer liquid staking products as crypto custody becomes mainstream.

Enhanced Governance: LST holders are gaining more influence in protocol governance, making staking not just about yield but about network participation.

Getting Started with Institutional Liquid Staking

Implementing liquid staking at institutional scale requires careful planning and the right infrastructure partner. Key steps include:

1. Infrastructure Assessment: Evaluate your current custody setup and determine integration requirements

2. Protocol Selection: Choose liquid staking protocols aligned with your risk tolerance and target returns

3. Policy Definition: Establish approval workflows, position limits, and operational procedures

4. Phased Rollout: Begin with a pilot program before scaling to full production

Frequently Asked Questions

Is liquid staking safe?

Liquid staking is generally safe when using established protocols with strong security track records like Lido, Rocket Pool, or Frax Finance. However, it does introduce additional risks beyond traditional staking, including smart contract vulnerabilities and LST depeg scenarios. Institutions should conduct thorough due diligence, diversify across multiple protocols, and use enterprise-grade infrastructure with MPC wallets to minimize risks.

What's the typical APY and profitability for institutional liquid staking?

Liquid staking APY varies significantly depending on the protocol, network, and current market conditions. As of 2025, institutional liquid staking typically generates 2-5% APY on ETH staking through major protocols like Lido (stETH) and Rocket Pool (rETH), with potential for higher returns when LSTs are deployed in DeFi strategies for additional yield generation. For example, using stETH as collateral on lending protocols can generate additional returns, potentially bringing total yields to 4-8% annually. Bitcoin staking through newer protocols like Babylon is emerging as another opportunity with yields typically in the 1-3% range. These returns are attractive relative to traditional fixed-income investments, but institutions should understand that yields fluctuate based on network participation rates, validator performance, and protocol changes. When evaluating profitability, consider that larger institutional positions may receive better terms through negotiated node operator arrangements, and the ability to deploy LSTs across multiple DeFi protocols significantly enhances overall capital efficiency and returns.

What happens if a liquid staking protocol gets hacked?

If a liquid staking protocol experiences a security breach, LST holders could face partial or total loss of their staked assets. This is why institutions should:

• Only use protocols that have undergone multiple professional security audits

• Diversify staking positions across multiple protocols

• Maintain appropriate insurance coverage where available

• Use MPC wallet infrastructure that provides additional security layers

• Monitor protocol health and security indicators continuously

Can I lose money with liquid staking?

Yes, several scenarios can result in losses:

1. Slashing events where validators are penalized for protocol violations

2. LST depeg where your liquid token trades below the value of the underlying staked asset

3. Smart contract exploits in the liquid staking protocol

4. Validator underperformance resulting in lower-than-expected yields

However, proper risk management, protocol diversification, and institutional-grade infrastructure significantly reduce these risks.

How do liquid staking tokens maintain their peg?

LST tokens maintain their peg to underlying assets through several mechanisms:

• Redemption arbitrage: When LSTs trade below peg, arbitrageurs can buy them cheaply and redeem for the underlying asset at face value

• Automatic rebasing: Some protocols (like Lido's stETH) automatically adjust token balances to reflect staking rewards

• Withdrawal queues: Protocols provide mechanisms to exit positions and redeem underlying assets, supporting the peg

• Market liquidity: Deep liquidity pools on DEXs enable efficient price discovery and arbitrage

What's the difference between stETH, rETH, and other LSTs?

Different liquid staking protocols have different characteristics:

stETH (Lido):

• Rebasing token (balance increases with rewards)

• Largest liquidity and adoption

• Multiple validator operators

rETH (Rocket Pool):

• Non-rebasing (value appreciation model)

• More decentralized validator network

• Higher capital requirements for node operators

frxETH (Frax):

• Dual token system (frxETH + sfrxETH)

• Flexible yield strategies

• Curve integration focus

Institutions should evaluate factors like decentralization, liquidity depth, yield stability, and protocol track record when choosing LST protocols.

Start Today: Cobo's MPC Infrastructure Is Already Built for Institutional Staking

This guide has highlighted why institutions need secure and scalable infrastructure before participating in any staking environment. With Cobo, that foundation is already in place. Institutions can rely on Cobo's MPC Wallets for secure asset management and access native staking opportunities directly through the Staking App in Cobo Portal.

Through the** Staking App**, institutions can stake assets such as BTC and ETH while maintaining full control of their wallets. This approach ensures operational security, governance flexibility, and enterprise-grade reliability.

With Cobo, institutional clients gain access to:

• Institution-Controlled MPC Security: Stake directly from your own MPC Wallets with full control of private key shares and no reliance on third-party custody

• Vetted Node Providers: High uptime and performance through partners such as stakefish and Figment, reducing slashing risks and improving net yield

• Compliance-Ready Governance: Role-based access controls, clear segregation of duties, and complete activity logs for internal and external reporting

• Scalable Integration: A Staking API that supports programmatic staking workflows for enterprises that need automated, large-scale operations

• Multi-Chain Flexibility: Support for institutional staking across leading networks, including BTC via Babylon Protocol and ETH via the Beacon Chain

Institutions that establish their staking infrastructure with Cobo are equipped to deploy assets confidently, manage operational risk, and generate staking rewards without compromising security or compliance.

Discover how Cobo can be your perfect partner in your institutional staking journey. Contact us today to learn more about enterprise-grade custody and staking infrastructure.