Heads Up: Enshrined Liquid Staking On Tezos

Research and Development
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A known trade-off for Proof-of-Stake protocols is protocol security through staking vs. protocol-token liquidity.

Security considerations call for committed stake, while users are interested in flexibility, and economic systems generally benefit from widely available liquidity.

The path to bridging these conflicting goals typically goes via third-party liquid staking systems. It can be convenient for users, but concentrates stake with centralized actors, introducing custodial risks, governance risk (for stake-based voting), and, in extreme scenarios, consensus risk.

To mitigate these risks, we plan to introduce an alternative for Tezos in the protocol U proposal: enshrined liquid staking.

A new way to stake

There are currently two ways to stake on Tezos:

  1. Direct staking (the gold standard): You stake XTZ with a validator.
  • Pros: You get staking rewards, funds stay in your account, best fit for long-term holding
  • Cons: Funds are illiquid while frozen and cannot be used in DeFi.
  1. Private liquid staking (today’s workaround): You send XTZ to a third-party service or smart contract and receive a tradable token representing a claim on the stake.
  • Pros: You get staking rewards, the tradable token is liquid and can be used in DeFi
  • Cons: Counterparty risk for users and centralization risks for the network.

What we intend to propose represents a third option that reconciles the benefits of the current options:

  1. Enshrined liquid staking: You send XTZ to a protocol-recognized smart contract and receive sTEZ, a tradeable token that increases in value relative to XTZ as staking rewards accrue.
  • Pros: You get staking rewards, the tradeable token is liquid, it’s a trustless system with no privileged operator.
  • Cons: No active choice of baker, no voting power assigned from the liquid stake (more on this below).

Ensuring the right fit

The feature has been designed in line with several principles meant to ensure a good fit for Tezos:

  • Complementing, not competing: Enshrined liquid staking is not meant to replace direct staking. It is a network infrastructure built to ensure that stakers who want liquidity don’t have to rely on centralized intermediaries.
  • Governance neutral: Contrary to direct staking, the stake provided by the enshrined liquid staking contract doesn’t provide voting power in on-chain governance.
  • Trustless infrastructure: The system is managed by the Tezos protocol itself. No multisig wallet or admin key can freeze funds, and any change is up to the on-chain governance. Rewards from staking are distributed by the protocol directly.
  • Simple accounting: The sTEZ token quantity in your wallet doesn’t change daily, only its relative value does. It behaves like a standard asset, which makes it much easier to integrate into DeFi apps and tax software.
  • Fair access and distribution: The protocol automatically distributes the stake across many validators who meet certain criteria, keeping the network decentralized and stable.
  • Simple adoption: Enshrined liquid staking has a smart contract interface issuing an FA2.1 token (sTEZ). It makes it easy to adopt for tooling, simple to target by other contracts and DEXs, and directly transferable to rollups through protocol-native tickets.

How it works for users: The accrual model

Most liquid staking tokens “rebase” to account for staking rewards, meaning the number of tokens in your wallet changes daily.

sTEZ uses a simpler accrual model. Your token balance stays the same, but the value of each token grows relative to XTZ with a simple formula: the number of issued sTEZ divided by the number of staked XTZ.

  • Depositing: You send XTZ to the protocol interface. The protocol mints sTEZ to your wallet. This is your claim on the shared stake.
  • Accrual: As the system earns rewards, the exchange rate updates automatically. For example:
    • Day 1: sTEZ is worth 1.00 XTZ
    • Day 365: sTEZ is worth 1.05 XTZ (illustrative number)
  • Redeeming: Whenever you want, you can burn your sTEZ to claim the underlying XTZ, including accrued rewards. You can also sell sTEZ for XTZ on exchanges.

How it works for bakers: Opt-in, parameterized, fair distribution

Baking for enshrined liquid stake is done by the ecosystem of bakers, just like direct stake, but with some key differences:

  • Automated distribution: At each cycle, the protocol distributes enshrined liquid staking stake fairly across participating bakers.
  • No voting power: Stake from the enshrined liquid staking contract carries no voting power in on-chain governance.

Bakers participate by registering with the enshrined liquid staking contract and setting two parameters:

  • A ratio defining how much capacity they reserve for direct stakers versus enshrined liquid staking.
  • A fee applied to rewards generated by enshrined liquid stake allocated to them.

Using the ratio, the protocol ensures that enshrined liquid stake doesn’t crowd out direct stakers if capacity is tight. Bakers can unregister or update parameters at any time.

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Protocol rules and constants

New protocol constants govern the enshrined liquid staking mechanism and serve as guard rails. For example:

  • Baker allocation maximum: The maximal share of stake capacity a baker can allocate to enshrined liquid staking
  • Baker fee maximum: The maximal fee a baker can apply to rewards from the enshrined liquid stake allocated to them.
  • Global allocation maximum: The maximal amount of XTZ that can be allocated to enshrined liquid staking.
  • Eligibility criteria: In addition to registering their capacity and fee, bakers must have a clean slashing history over a specified period to receive stake allocations.

The intention with these constants is to make the system safe by default, ensuring healthy and fair distribution, but also adaptable through on-chain governance as real-world conditions change.

The types and values of protocol constants are work in progress. They are meant to be refined in cooperation with bakers and the wider community.

Timeline: U for testing, V for activation

The introduction of enshrined liquid staking would happen in two phases tied to two separate protocol proposals. The purpose is to carefully validate the mechanism and gather community feedback ahead of final activation.

  1. Protocol U: Included under a feature flag (in the code, but not active on Mainnet). An initial version of enshrined liquid staking will be available on a testnet, with the intention of refining the features and parameters with the wider community before activating on Mainnet.
  2. Protocol V: Potential activation on Mainnet. Following the testing and refinement phase launched with the U protocol, the feature is proposed for Mainnet activation in V.

If Protocol Proposal U is accepted through on-chain governance, detailed economics, parameters, and edge-case handling will be specified in an enshrined liquid staking whitepaper, allowing time for discussion and refinement before the V protocol proposal.

6 Likes
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If I’m over-staked from direct staking, would my bakery be ineligible for enshrined distributions?

2 Likes
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Thanks for your work. This is interesting, but it raises several questions and concerns. A few that come to mind immediately:

  • How will slashing work? Will liquid stakers be affected as well?

  • Is there a general fee applied to liquid stakers (e.g. paid to the protocol)? If not, why wouldn’t everyone switch to liquid staking? Isn’t it inherently better in terms of risk and reward?

  • If there’s a global allocation cap and liquid staking is more attractive (see previous point), won’t the ones which change late to liquid staking will be the ones being pissed off?

  • Why wouldn’t a baker set the maximum allowable fee and redistribute any extra rewards to its own stakers (“milking” liquid stakers)?

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Haha, guys, you decided to destroy Stacy :sweat_smile:
I don’t understand how the fee settings for each individual baker in liquid staking will work, considering the sTEZ contract will be shared.

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A quota for receiving sTEZ will be determined, so not everyone will be able to receive it.

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I believe that this should be clearly recorded in the protocol without the possibility of setting by an individual baker.

In the protocol can set a fixed maximum capacity for liquid staking at 20% of the total staking capacity.
If a baker’s total capacity is already occupied, say, at 90%, the remaining 10% would be filled with liquid staking.
If a baker’s total capacity is occupied at 70%, the liquid staking would only fill an additional 20%, and the baker should not have the right to change this.

In the protocol can also set a fixed fee of 10%, which would be received by bakers participating in liquid staking. This is a normal average percentage, and bakers should not have the right to change it.

Liquid staking is a good idea for private bakers who can earn extra income without spending effort on advertising their bakery to attract external stakers.

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It’s truly impressive how we’ve managed to “innovate” our way right back to 2018; calling it “Enshrined Liquid Staking” doesn’t hide the fact that we’re just re-introducing delegation with a shiny new coat of paint.

We’re running in such tight economic loops that we’re now actively cannibalizing ecosystem projects like Stacy by turning the protocol into their primary competitor.

Maybe if we stopped reinventing our basic tokenomics every six months to chase staked-supply metrics, we could actually build something people want to use.

At this rate, Protocol V stands for “Vortex” because we’re just spinning in circles.

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This is not exactly delegation, as it will not be possible to exchange sTEZ for UDSC or any other asset directly other than XTZ, just like it is now with stXTZ.

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It will. It is FA2.1.

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Then you should also be against Stacy

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It’s a matter of the lesser of two evils for me. More people working on Tezos is better,. Look at how many teams we’ve killed in the last three years—where exactly has that gotten us?

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I agree with this. Youves will be extremely unhappy with this “innovation”

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You say, you want to shorten governance cycles because important changes will be discussed and evaluated way before injection. Alright, the governance cycle for U has not started yet, but i guess you have been working on the implementation of this. Wouldn’t it be wise to check really early if big changes like this are aligned with the community? As far as i understand this will kill an already working decentralized approach.

Also I don’t the need of liquid staking at all. We already have delegation and staking should not be liquid for the sake of the security of the chain. Isn’t that the whole point why we introduced staking? People have to decide if they want their tez liquid so they can spend, trade etc. or if they commit to securing the blockchain.
Thinking liquid staking, we could also introduce liquid baking. Why would I need to freeze my funds to get baking rights?

3 Likes
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Proposal: Protocol Intent Registry

To prevent surprises and improve governance alignment, I propose requiring teams to register their intent for protocol changes on-chain at least 45 cycles before submitting a formal proposal.

Key rules:

  • Intent must include: goal, rationale, risks, and scope
  • Proposal must substantially match registered intent — if not, new intent required (clock resets)
  • 45-cycle window gives community real time to review and respond

This doesn’t slow innovation — it ensures it’s transparent, accountable, and community-informed.

Open to feedback on the cycle count, matching criteria, or exceptions (e.g., security fixes).

5 Likes
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Not enforceable without strengthening veto or gathering coalitions. It remains a game of convincing bakers whether or not these subjective criteria have been met or not. The worst aspects of bureaucracy. This only happens right now for areas bakers have some level expertise or interest. Staking, governance, LB. Every other type of change, historically speaking, tacking on “without impacting governance/decentralization/users” has been sufficient evidence to get things through.

Security isn’t relevant factor. It will always be handled with hard fork until the protocol is stable.

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competition is better for innovation, not worse. basic economy

what’s described here is stacy 2.0, just protocol based and with a more democratic participation for bakers. I also like the fact that it carries no voting power

i also don’t mind a change which will finally make delegation rewards automated by protocol, or remove them altogether

3 Likes
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I disagree with this because the XTZ will essentially be frozen to protect the network, and the fact that the token received in exchange can be managed at will in Tezos DeFi doesn’t undermine security in any way; it merely creates freedom and makes XTZ more attractive.

As for liquid baking, this would undermine security, because the baker operates the baking node and shouldn’t receive a token in exchange for the frozen XTZ. They could use these tokens to obtain another asset on a lending platform like Superlend, and then commit malicious acts, with the punishment for these acts being distributed among all the bakers participating in the liquid baking.

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not only that, but more staked xtz means lower issuance, while staying liquid. two birds, one shot

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It’s enforced with a nay vote.

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It’s enforced with a nay vote.

So not enforced. Majority can still do what it wants. Hence useless…

1 Like