Tezos Proposes sTEZ: Protocol-Level Liquid Staking Token

Tezos is exploring a native liquid staking mechanism with the introduction of sTEZ, a protocol-level liquid staking token. Designed to address the limitations of traditional delegation and staking, sTEZ aims to preserve liquidity for users while maintaining network security. This proposal could position Tezos as a key player in decentralized finance (DeFi), combining usability with integrated security measures.

Currently, Tezos offers two staking options: delegation, which provides liquidity but lower rewards, and direct staking, which involves locking tez for higher returns. However, neither approach allows users to earn staking rewards while participating in external DeFi ecosystems. This gap has fueled interest in liquid staking solutions, such as Ethereum’s stETH, which represent staked assets while remaining tradable. Yet, third-party liquid staking introduces risks, including centralization and reliance on external systems.

The proposed sTEZ token takes a different approach by embedding liquid staking functionality directly into the protocol. Users would deposit tez and receive sTEZ, a token representing their share of the underlying staked assets. Unlike third-party systems, sTEZ eliminates reliance on external operators, smart contracts, or admin keys. Instead, the protocol itself governs staking logic and ensures distribution across participating bakers.

The sTEZ system uses an accrual model, where the token’s value increases over time as staking rewards accumulate. Conversely, slashing penalties would decrease its value. Users can redeem their sTEZ to reclaim their tez after an unbonding period, similar to traditional unstaking processes. Crucially, sTEZ does not carry governance rights, a deliberate design choice to prevent the concentration of voting power.

The proposal’s protocol-based design aims to mitigate risks associated with third-party solutions, such as centralization of stake and operational vulnerabilities. By automating stake distribution and capping allocations per baker, sTEZ seeks to maintain a decentralized and balanced network. This could also benefit smaller bakers by improving their access to external stake.

sTEZ is expected to feature in the upcoming Ushuaia proposal. If approved by the Tezos community, its activation would require a separate signaling step involving baker participation. While the concept is still under discussion, proponents believe sTEZ could increase Tezos’ staking ratio over time, potentially reducing token issuance and enhancing network security.

For more details, interested parties can explore the canonical LST whitepaper, review the TezDev presentation, or join the ongoing Agora discussions. Community feedback will play a critical role in shaping this innovative staking model.

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