Rebasing in liquid staking refers to the automatic adjustment of a user’s token balance to reflect staking rewards over time. Instead of distributing rewards as separate payouts, the protocol increases (or in rare cases decreases) the number of tokens held in a wallet. This mechanism ensures that users continuously earn staking rewards without needing to claim them manually.

A common example is stETH from Lido. When users stake ETH through Lido, they receive stETH tokens. As staking rewards are generated, the stETH balance in the user’s wallet increases daily through rebasing. The value per token remains closely aligned with the underlying asset, while the quantity of tokens grows.

Rebasing simplifies the user experience because rewards are automatically compounded. It also makes it easier to track earnings, as users can simply observe their token balance increasing over time. However, rebasing can create challenges in certain DeFi applications, as changing balances may affect accounting, lending positions, or tax calculations.

Additionally, rebasing does not eliminate risks. Factors such as validator performance, network penalties, or slashing events can influence rewards and, in rare cases, reduce balances. Despite these considerations, rebasing remains a popular mechanism in liquid staking because it provides a seamless way to distribute rewards while maintaining the liquidity and usability of staked assets.