Liquid staking allows users to earn rewards from Ethereum Proof of Stake (PoS) consensus without the hassle of operating a node. With traditional staking, users lock up 32 ETH in a contract, becoming validators and participating in the network's consensus mechanism to help secure the network and process transactions. In return, these stakers receive rewards in the form of new ETH issuance. However, once ETH is staked in this way, it is locked and cannot be used until its fully withdrawn from the staking process.
Liquid staking, on the other hand, allows users to keep their assets “liquid” by receiving a tokenized representation of their staked ETH, in the case of Frax: frxETH and sfrxETH. This token can be traded, used in DeFi applications, or otherwise utilized while the underlying ETH continues to be staked and earn rewards
FrxETH and sfrxETH are the two tokens comprising Frax’s liquid staking system.
Frax Ether (frxETH) is an ETH-pegged stablecoin. It receives no rewards from staking and it always should remain highly correlated with ETH. As a comparison, it is most similar to Wrapped Ether (WETH).
sfrxETH is frxETH that is staked in a ERC-4626 vault. sfrxETH receives all of the staking rewards earned by validators. sfrxETH is non-rebasing and its price goes up slowly over time as rewards are earned.
The first question most people ask about Frax’s model is “Why is frxETH necessary if it earns no reward yield?”
Every frxETH that exists outside of the sfrxETH vault earns no yield and increases the yield for others.