LlamaRisk supports onboarding LsETH to the Aave V3 Core market as a collateral-only asset. LsETH is Liquid Collective’s non-rebasing ERC-20 receipt for staked ETH, and value accrues via an ETH/LsETH exchange rate. The token uses cToken-style mechanics (similar to Compound’s interest-accruing tokens), meaning balances stay constant in a wallet while the exchange rate to the underlying ETH changes, reducing integration complexity compared with rebasing tokens. The validator set is diversified across multiple operators.
The core challenges are market structure and access. Circulating float appears limited, and ownership is concentrated, which can constrain organic liquidity growth and slow price discovery during stress. Primary redemptions are asynchronous and ultimately gated by Ethereum’s validator exit and withdrawal process, so intraday liquidity depends on secondary venues. If depth clusters in a few pools or books, exits can increase the price gap between LsETH and ETH and degrade liquidation quality. Operational dependencies remain material, including Oracle quorum liveness and centralized control surfaces for upgrades and policy changes at the platform layer.
A balanced approach would recognize the fit for institutions wanting KYC’d staking exposure with clear legal wrappers while conservatively managing the current liquidity profile. If listed, a collateral-only configuration with tight supply caps, higher LB, and lower LTV/LT, continuous secondary depth monitoring, basis stability, oracle update cadence, and validator performance can contain downside while the market matures. Reassessment makes sense if holder distribution broadens, float grows meaningfully, and depth becomes deeper and more diversified across independent venues with stable volumes through volatile periods.
Full asset review
1. Asset Fundamental Characteristics
1.1 Asset
LsETH is a liquid staking token (LST) issued by Liquid Collective, designed as a non-rebasing ERC-20 receipt token deployed in Oct 2022 and representing staked ETH with a total supply of ±366,100 ETH. As of August 8, 2025, it offers an annual yield of approximately 3% APY. Unlike rebasing models that increase token balances to reflect accrued staking rewards, LsETH maintains a constant token quantity, with value growth expressed via an internal protocol conversion rate (1 LsETH = 1.08620 ETH at the time of writing).
1.2 Architecture
Source: Liquid Collective docs
River is the core smart contract in the protocol. River manages:
- LsETH Token
- User Deposits: River allows users to perform ETH deposits and receive receipt tokens (mint LsETH) in return.
- Consensus Layer Deposits: River orchestrates the delegation of ETH to validators and deposits to the official Ethereum deposit contract
Oracle
The Oracle contract is responsible for feeding the River contract with the balance position of the validator nodes on the consensus layer. It relies on a set of Oracle Operators that periodically report data from the consensus layer to the execution layer, which reports every 24 hours. And after the Oracle contract, perform Sanity Checks on reported data by setting up upper and lower bounds for APY.
The Oracle contract helps synchronize a quorum of Oracle Operators to report the same consensus layer data. In particular, the Oracle contract makes sure that the core River contract receives data only after the Oracle contract has received identical reports from a quorum of Oracle Operators.
Process of onboarding
Allowlisters (approved Platforms) onboard users, run KYC/AML, and submit the approved user wallets to the protocol Allowlist. Once an address is on the Allowlist, that user can deposit ETH through the Platform into Liquid Collective and receive LsETH back. The protocol then programmatically stakes deposits to Ethereum by sending them to the deposit contract and assigning pre-approved validator keys. Validators perform duties and accrue consensus- and execution-layer rewards, with any penalties or slashing losses also reflected on-chain.
Changes in Protocol Service Fee
Protocol Service Fee changes follow a defined governance and execution flow embedded in the system architecture. The process starts with approval by The Liquid Foundation head team and continues with at least 45 days of prior written notice to Platforms under their Platform Agreements. The protocol fee parameter is then changed on chain by a transaction approved by the 4/7 Governor Safe multisig.
The new rate takes effect at the next accounting interval through Oracle reports and reward accounting that apply the updated parameter to gross rewards. LsETH holders experience the impact as a change in net yield, Platforms update disclosures and operational settings, and service provider distributions follow the revised waterfall.
Deposit and Redemption Buffers
The Liquid Collective protocol maintains ETH Deposit and Redemption Buffers. These buffers are designed to ensure that flows in and out of the protocol are managed efficiently between Ethereum’s execution and consensus layers, enabling seamless LsETH redemptions for ETH via the rebalancing process.
The protocol’s Deposit Buffer includes ETH pending to be deposited to Ethereum’s consensus layer, while the Redemption Buffer includes ETH pending to be supplied for redemptions.
- ETH deposits enter the Deposit Buffer to be programmatically staked in Ethereum’s consensus layer
- Ethereum execution layer fees received by Liquid Collective validators enter the Deposit Buffer to be programmatically staked
- Ethereum consensus layer network rewards received by Liquid Collective validators enter the Deposit Buffer to be programmatically staked
- Withdrawn validator consensus layer ETH from validator full exits, or slashed validator exits, enter the Redemption Buffer to fund LsETH redemptions
- Funds from Liquid Collective’s Slashing Coverage Program enter the Deposit Buffer according to the Slashing Coverage Program to be programmatically staked
1) Deposit ETH
When users deposit ETH, they receive the LsETH receipt token at the current Conversion Rate, which confirms ownership of the staked asset, plus network rewards received and minus any fees or penalties.
Deposited ETH enters the Liquid Collective protocol’s Deposit Buffer. As ETH in the Deposit Buffer reaches a fungible bulk of 32 ETH, it is programmatically staked, funding new validator keys and being pushed to Ethereum’s activation queue.
2) Redeem LsETH
When a LsETH holder requests a redemption, the request is added to the protocol’s Redemption Queue. On each Oracle report, completed approximately every 24 hours, the protocol assesses the unsupplied ETH demand for redemptions.
When there is unsupplied ETH demand:
- The Liquid Collective protocol programmatically rebalances ETH between the Deposit and Redemption Buffers at each oracle report, to preserve capital efficiency by minimizing consensus layer operations. The protocol prioritizes moving ETH from the Deposit Buffer to the Redemption Buffer to satisfy the unsupplied redemption requests.
- If there is still unsupplied redemption demand, the protocol requests validator exits by signaling Node Operators. Upon receiving this request, the appropriate number of validators are entered to Ethereum’s exit queue, where they are subject to Ethereum’s exit queue timeline.
- All Liquid Collective validator keys have their withdrawal credentials set to the address of Liquid Collective’s Withdraw contract, which is pulled to the Redemption Buffer upon Oracle report. The protocol then uses the withdrawn ETH to satisfy the unsupplied redemptions.
1.3 Tokenomics
Staking rewards from validators are continuously added to the protocol’s tracked underlying balance, net of a 10% protocol service fee deducted from rewards before they are reflected in the conversion rate. The fee is split amongst Node Operators, Platforms, Wallet & Custody Providers, Service Providers, the protocol’s Slashing Coverage Treasury, and the Liquid Collective DAO, which comprises a broad and dispersed community of protocol participants.
LsETH supply only changes when users mint or redeem. Negative events, such as validator penalties or slashing, are passed through to holders by lowering the conversion rate. The token has no embedded rebasing or compounding mechanics.
Every day, the Liquid Collective protocol accounts for Ethereum network rewards, including consensus layer network rewards and execution layer fees, minus possible penalties, which results in updating the data reflecting the total supply of ETH.
1.3.1 Token Holder Concentration
Source: LsETH Top 100 Holders, Etherscan, August 19, 2025
Top five holders of LsETH:
- SharpLink Gaming: 70.28% of the total supply. (divided into two addresses each holding 49.02% and 21.26%)
- Anchorage Digital: 3.11% of the total supply.
- EOA: 3.05% of the total supply.
- EigenLayer LsETH Strategies: 2.46% of the total supply.
- Zircuit Restaking Pool: 2.3% of the total supply.
SharpLink Gaming is a Nasdaq-listed company with a corporate treasury strategy centered on ETH. From the team’s response, they participate only as an end user of the Liquid Collective product by staking their treasury ETH and holding LsETH as the receipt.
2. Market Risk
2.1 Liquidity
Source: LsETH/USDC Swap Liquidity, LlamaSwap, August 19, 2025
Current depth implies an 11.42% slippage for selling 221 LsETH. Considering LsETH’s market cap, LsETH has poor DEX liquidity. If Aave liquidators need to sell LsETH to cover bad debt, this could cause sharp price fluctuations on DEXs.
2.1.1 Liquidity Venue Concentration
Source: LsETH to USDC Ethereum Mainnet, Odos Router, August 19, 2025
On-chain liquidity on Ethereum Mainnet is heavily concentrated in a single LsETH/WETH Uniswap v3 pool, which currently holds roughly $1.9M in total value locked.
Source: LsETH/ETH pool, Uniswap V3, August 19, 2025
The pool also sees a moderate activity level, with daily trading volumes averaging around $101.4K over recent periods.
2.1.2 DEX LP Concentration
On-chain DEX liquidity for LsETH in the Uniswap LsETH/WETH pool is highly concentrated, with a single address providing nearly 95% of the LP according to Revert Finance analysis, a unilateral withdrawal by this address would materially thin depth and significantly increase slippage risk.
2.2 Volatility
Source: LsETH Conversion Rate & APY, Dune, August 16, 2025
The Conversion Rate of LsETH for withdrawals is calculated by following the formula and updated every 24 hours by Oracle Operators:
The APY offered by Liquid Collective to ETH stakers has exhibited significantly higher variability, with short-term spikes exceeding 6% and drawdowns near 2%.
The most pronounced APY surge occurred in May 2023, coinciding with heightened network fee activity, while the lowest sustained period followed in mid-2023 during low-fee epochs.
There have been no registered slashing events among the Operators working with Liquid Collective. However, on January 30, 2024, an incident involving validator exits was triggered by an operator misconfiguration. The affected validators were promptly rotated out, replaced with new keys, and the issue was resolved without any loss of principal or penalties to stakers.
2.3 Exchanges
Source: LsETH Exchanges, Coingecko, August 16, 2025
LsETH is traded on several centralized exchanges, including Kraken, Coinbase, BIT, and LBank, across multiple pairs such as USD, USDT, ETH, and EUR.
2.4 Growth
Source: LsETH Growth, Liquid Collective via Dune, August 19, 2025
The chart shows a steady, organic increase in total ETH deposited into LsETH over time, followed by a sharp surge at the end of May 2025. This jump was likely driven by the LsETH/ETH pair listing on Kraken CEX in March 2025. Deposits have since climbed, with the total now exceeding 400,000 ETH.
3. Technological Risk
3.1 Smart Contract Risk
Liquid Collective has been audited multiple times by Certora, Spearbit, Quantstamp, and Halborn, with the last major code release v1.2.1 dated by Oct 2024.
- Halborn (Jul, 2022) - 1 high, 4 medium, and 5 low issues identified, with one low marked as “Risk Accepted”.
- Spearbit (Sep, 2022) - 3 critical, 4 high, 15 medium, and 5 low issues identified; with 1 high, 3 medium, and 1 low marked as “Risk Accepted”.
- Spearbit (Nov, 2022) - 1 critical, 0 high, 2 medium, and 2 low issues identified; plus 25 informational items.
- Spearbit (Mar, 2023) - 2 critical, 1 high, 3 medium, and 14 low issues identified; plus 24 informational items.
- Spearbit (May, 2023) - 0 critical, 0 high, 0 medium, and 0 low issues identified.
- Spearbit (July 2023) – no issues identified.
- Spearbit (Oct, 2023) - 0 critical, 0 high, 0 medium, and 5 low issues identified (4 fixed and 1 acknowledged).
- Quantstamp (May, 2024) – 0 high, 1 medium, and 3 low issues identified; plus 6 informational items and 4 undetermined-severity findings
- Certora (Nov, 2024) – 1 critical, 2 high, 4 medium, and 5 low issues identified; plus 3 informational items.
3.2 Bug Bounty Program
As of August 11, 2025, Liquid Collective does not currently run a public bug bounty program but is actively designing one according to their vulnerability disclosure documentation.
The project operates a vulnerability disclosure policy with a dedicated security contact (security@liquidcollective.io). It states that any eligible bugs or vulnerabilities reported now will be included with retroactive effect once their bug bounty program launches. Their security docs emphasize multiple external audits but do not yet advertise specific bounty tiers, scopes, or payout mechanisms as the program is still in development.
3.3 Price Feed Risk
We recommend using Chainlink’s dedicated LsETH/ETH exchange-rate feed as the primary oracle for LsETH valuation, coupled with Chainlink ETH/USD for USD quoting - while avoiding protocol-internal rate getters as the sole price source. This approach is more transparent and resilient.
3.4 Dependency Risk
The primary dependency lies in Liquid Collective’s multi-operator validation network, where enterprise-grade staking providers like Coinbase Cloud, Figment, Staked, Blockdaemon, and Galaxy handle the actual ETH staking operations. Any technical failures, slashing events, or operational issues affecting these validators directly impact LsETH holders through reduced staking rewards or principal losses.
Source: Liquid Collective RAVER performance, Rated Network, August 14, 2025
Liquid Collective uses Rated Network as an external data and scoring source for its validator set.
RAVER (Rated Validator Effectiveness Rating) is the Rated Network’s composite 0–100 score that summarizes operator-controllable duties. It’s calculated from attestation participation, inclusion delay, head-vote correctness, and proposal performance/misses over a chosen window.
Liquid Collective shows RAVER score in 96.9% which is considered as moderated.
Validators Breakdown
- Consensus Layer: Prysm (41%), Lighthouse (39%), Teku (20%)
- Execution Layer: Geth (55%), Nethermind (9%), Erigon (36%)
- Geographic Distribution: Canada: 30%, EU (Ireland): 30%, Seoul: 20%, Singapore: 20%
- Infrastrcture Providers: Bare Metal: 20%, AWS: 60%, GCP: 20%
Oracle dependency represents another critical infrastructure layer for LsETH operations. The Oracle contract maintains a member list of Oracle Operators. It requires a configurable quorum of identical reports on validator count and total validator balance at target epochs before publishing data to the River contract. Configured to report approximately every 24 hours, the Oracle triggers River to update balances and process deposit/withdrawal logic tied to redemptions. Changes to quorum or membership during an epoch clear in-flight reports and require resubmission, creating liveness sensitivity to operator coordination.
Operators must run Oracle daemons against their execution and consensus layer clients, maintain local withdrawal state data, and fund gas costs estimated at roughly 1.09 ETH annually per operator. Missed or delayed quorum rounds directly stall conversion rate updates and delay redemption satisfaction until the next successful Oracle report.
Liquid Collective uses a dedicated Nexus Mutual policy as one layer of its slashing-coverage program for LsETH. Premiums come from protocol fees, coverage scales with staked assets, and approved payouts are routed on-chain to a coverage fund that restores losses by nudging the ETH-per-LsETH conversion rate upward after an event.
If Nexus Mutual experiences failure, LsETH holders could face uncovered slashing losses despite paying for protection through protocol fees. The coverage also has limits and exclusions that may not fully compensate for severe slashing events, particularly during correlated slashing scenarios affecting multiple validators simultaneously, with payouts capped at a maximum of $5 million per incident.
4. Counterparty Risk
4.1 Governance and Regulatory Risk
Legal Structure
We obtained detailed insight into its architecture during our legal due diligence on the protocol.
The Liquid Collective protocol is stewarded by The Liquid Foundation, a memberless foundation company incorporated in the Cayman Islands. The Foundation holds two wholly-owned subsidiaries: NORS Inc., a Cayman Islands exempt company responsible for administering the Node Operations Risk Standard; and Liquid Collective Ltd., a company organized in the British Virgin Islands.
Neither the Foundation nor its subsidiaries is subject to regulatory registration or licensing requirements in its respective jurisdiction.
Platforms that integrate the protocol enter into Platform Agreements directly with the Foundation. Similarly, Node Operators participating in the protocol’s validator set enter into Validator Agreements with the Foundation. These Platforms and Node Operators may be subject to regulatory requirements in the jurisdictions in which they conduct business and, as a condition of participation, represent to the Foundation that they comply with such applicable requirements.
Alluvial Finance, Inc., a Delaware corporation, provides development and administrative services to the Foundation in connection with the protocol. Alluvial is not, and is not required to be, a regulated entity under current U.S. law.
User Agreement
The parties to the LsETH User Agreement are (i) the user, defined as any LsETH holder, and (ii) the Liquid Foundation, a non-profit foundation established in the Cayman Islands. The Agreement explicitly states it is between “you and the Liquid Foundation.” While the operational and technological elements of the protocol may involve third parties (integrators, validator node operators, coverage providers), none of these are parties to the User Agreement. The Agreement governs every legal, economic, and operational aspect of the LsETH token and its relationship to both the protocol and the Foundation, extending to all present and future holders of LsETH.
Section 1 defines LsETH as an ERC-20 cryptographic receipt token issued by the protocol when a user stakes ETH. The Agreement is explicit that LsETH “evidences the user’s ownership of staked ETH,” and that “the Foundation will not have, and will not at any time acquire, legal and beneficial ownership of the staked ETH corresponding to your LsETH.” In practice, the token holder is the acknowledged legal and beneficial owner of the underlying staked ETH and accrued rewards, less fees and possible penalties. The contractual language asserts the “receipt” character of LsETH—there is no transfer of title to the operator; ownership strictly tracks token control.
Unlike custodial products or pooled investment vehicles—where users relinquish control and rely on the operator’s discretion—LsETH is not an entitlement to discretionary delivery or active management. Instead, the underlying protocol programmatically allocates user deposits to third-party professional validators, with ownership reflected on-chain.
The slashing risk (Section 1.E) is disclosed and contractually placed on the LsETH holder, regardless of culpability. This aligns with the technical realities of proof-of-stake protocols and the legal treatment of staking as a non-delegable, platform-level risk. The protocol allows free transfer of LsETH, with ownership and associated economic rights/risks automatically transferring with the token—a central consideration from a practical and regulatory perspective.
Redemption of LsETH for ETH is allowed at any time, subject to protocol, network, or third-party “Integrator” constraints (including unbonding periods and withdrawal limitations). It is net of applicable fees and any penalties imposed at the protocol level.
LsETH is structurally and contractually a “staking receipt token”—a technical and legal concept considered at length by the SEC. Section 4 explicitly shifts all protocol and market risks, including total loss, to users and places extremely stringent limitations on the Foundation’s liability. The Enforcement/Dispute Resolution regime in Section 5 sets exclusive jurisdiction in New York courts, explicit waiver of jury trial, and New York choice of law—consistent with sophisticated commercial contracts involving digital assets.
Ownership of staked ETH remains with the tokenholder, while the protocol (alongside its validators and integrators) provides only administrative and routing functions. There is no pooled discretionary investment activity, and rewards/losses accrue programmatically rather than being managed or redistributed by the Foundation or its agents.
The requirement to pass AML/KYC programs of Integrators before redemption or protocol use ensures functional compliance with anti-money laundering expectations in major onshore jurisdictions, and it is consistent with regulatory pressure globally to force such controls at either the protocol or access layer.
SEC’s Statement on Certain Liquid Staking Activities
The SEC describes “Liquid Staking” as a process where holders of crypto assets (“Depositors”) stake their assets via a third-party service or a protocol-based provider and, in return, receive newly minted tokens (“Staking Receipt Tokens”). These tokens serve as receipts that evidence the Depositors’ continued ownership of the staked assets and any rewards or losses that accrue to those assets. Liquid Staking Providers may hold assets in wallets they control or within smart contracts. The providers are largely limited to administrative roles: facilitating staking, issuing receipt tokens, and, if necessary, selecting node operators. The critical features, as understood by the SEC, are that: (i) the staked assets remain the property of the original owner (or current receipt holder), (ii) rewards and slashing (penalties for validator misbehavior) accrue directly to the tokenholder, and (iii) staking and reward-related activities are performed programmatically or through ministerial (i.e., non-managerial) acts; managerial or entrepreneurial discretion is absent.
Our analysis of LsETH’s design features and related contractual documentation supports the conclusion that the issuance and redemption of LsETH are directly aligned with the “Liquid Staking Activities” outlined in the SEC’s Statement. Furthermore, LsETH conforms to the SEC’s criteria for recognition as a “Staking Receipt Token”—a token issued to reflect and certify the owner’s deposit of a specific amount of crypto assets with a staking provider. The SEC’s position is that, absent other facts, such tokens are not considered “securities” by default.
Our independent analysis is consistent with the internal assessment conducted by the Liquid Collective regarding the applicability of SEC guidance to LsETH.
Given that the protocol is non-custodial and provides staking services only, the Foundation does not engage in the business of providing custody, transfer, or exchange services concerning virtual assets from within the Cayman Islands. Therefore, obtaining a license or registration under the Cayman Islands Virtual Asset Service Providers Act is not required.
Comprehensive legal analyses of LsETH have been performed under U.S. securities law, UK law, and the EU’s Markets in Crypto-Assets (MiCA) Regulation. We have reviewed the scope and depth of the regulatory considerations applicable in each regime. On this basis, it is evident that the Foundation actively monitors and takes action to mitigate legal risk exposure across relevant markets.
4.2 Access Control Risk
4.2.1 Contract Modification Options
LsETH (River) is deployed behind a Transparent Upgradeable Pausable Proxy (“TUPProxy”) that follows the ERC-1967 pattern. The implementation address is 0x34e4617764cc94620170aa0e6652ad328d196d58. Upgrades and a system-wide pause/unpause are executed at the proxy layer, while token/accounting logic lives in the RiverV1 implementation. The mainnet LsETH proxy code shows admin-only upgradeTo/upgradeToAndCall, changeAdmin, and pause controls. An Deployer (Admin Proxy) multisig controls upgrades to the smart contracts and the pause switch. It comprises the same entities as the Governor and uses the same approval threshold.
The contract exposes critical admin surfaces: ownership rotation (proposeAdmin/acceptAdmin), fee and parameter changes (setGlobalFee, setDailyCommittableLimits, setReportBounds, setCLSpec, setKeeper), and component wiring.
Address-level restrictions are enforced at transfer/deposit/redeem via an external Allowlist contract that can grant/revoke rights and deny addresses. The River contract checks isDenied tag on send/receive function calls.
Admin calls are not sent directly to River: they are routed through a dedicated River Firewall contract deployed to 0xd745A68c705F5aa75DFf528540678288ed2aD9eE that authorizes an Admin (can call anything) and an Executor (can call only whitelisted selectors) multisig accounts.
LsETH carries standard upgrade/param-change centralization risk typical of transparent proxies, partially mitigated by the proxy pause switch, an explicit allowlist, and the firewall-gated Admin/Executor multisigs. The River (LsETH Token) contract is authored by Alluvial Finance, Inc. per official technical docs.
4.2.2 Timelock Duration and Function
The LsETH contract and the admin do not appear to have timelock functionality. Although from the team response, the timelock is being prioritized with the next release phase of the protocol.
4.2.3 Multisig Threshold / Signer identity
The Liquid Collective is operated by two multisig contracts: the 4/7 Governor Safe multisig and the Executor 2/3 Safe multisig. In addition to the Governor and the Executor multisigs, Liuqid Collective uses a 4/7 Deployer multisig. This multisig controls the upgrades of smart contracts. It comprises the same entities as the Governor, using the same threshold.
From the team response, the Governor Multisig includes seven independent and globally distributed entities, each carefully selected to provide geographic, organizational, and operational diversity. Each entity has entered into a contractual agreement with the Liquid Foundation. The list of Governor signer entities was shared with the LlamaRisk team under NDA.
The Governor signers:
The Executor multisig list contains trusted individuals from the Liquid Foundation team:
Note: This assessment follows the LLR-Aave Framework, a comprehensive methodology for asset onboarding and parameterization in Aave V3. This framework is continuously updated and available here.
This review was independently prepared by LlamaRisk, a DeFi risk service provider funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.
The information provided should not be construed as legal, financial, tax, or professional advice.
