Don’t Get Left Behind: Liquid Staking is Exploding!
The first strong narrative of 2023 is liquid staking. As the Shanghai upgrade approaches, liquid staking platforms are thriving. Lido has become the biggest DeFi protocol.
The year 2023 has a strong start for the crypto market bringing its first strong narrative. We are talking of course about liquid staking. What stands behind the sudden pump of staking platforms' governance tokens? How is the shanghai upgrade going to affect the liquid staking market? To that and more we will have a look in today's article.
A quick Refresher on Liquid Staking
- Staking refers to the process of holding a certain asset while verifying transactions
- Stakers are given yield as compensation for participating
- Liquid staking operates with LSDs (liquid staking derivatives) - tokens issued 1:1 representing your staked amount
- LSDs can be used in DeFi to earn extra yield
Nearing Shanghai Upgrade
Roughly 2 months before the Ethereum Shanghai upgrade liquid staking platforms are rapidly increasing in popularity. According to Dune analytics around 42 % of all staked ETH are staked in the pool. Lido dominates the current market with over 65 % share, but that amount is slowly decreasing in the last month.
Rocket pool and Frax finance are the rising stars:
- Rocket pool - Most decentralized and quickly rising protocol. Offers users to operate their node with a lower amount of 16 ETH. Distribution of stake across a permissionless set of independent validators. Their version of staked Ether - rETH accrues value over time by rising the exchange rate to ETH
- Frax finance - Stablecoin issuer with the newly added functionality of liquid staking. The derivative frxETH has a very similar architecture to that of Frax stablecoin. The yield-bearing token is called sfrxETH and offers a higher yield than most of its competitors. Fully permissionless and transparent.
Right now, many users might feel limited by the non-existing option of ETH unstaking. The Shanghai upgrade scheduled for March will enable native ETH withdrawals and therefore remove a major risk.
Liquid staking also offers better yields compared to traditional staking, considering the added DeFi usability. That means we could see a significant onboarding of capital after the Shanghai upgrade is implemented.
A strategy in this situation would be buying LDS (liquid staking derivatives) from platforms and unstaking them when possible. Thanks to different exchange rates on LSDs, users could benefit from unstaking arbitrage.
Native Tokens Surging
With the already positive narrative regarding liquid staking, governance and native tokens of those platforms are performing exceptionally well in the last two weeks. The token LDO of the Lido protocol is up over 135 %, Rocket pools RPL over 55 %, and FXS (Frax share) over 98 %.
This market outperformance can be caused by anticipation of the Shanghai upgrade and with that associated possible capital inflow.
Lido Is Now the Largest DeFi Protocol
According to DefiLlama, Lido has topped Maker DAO in the TVL (total value locked). Around the start of January Lido has become the largest DeFi protocol whatsoever with a recent capitalization of over 7.6 billion USD.
The position at the top of DeFi has not been flipped in over a year and has definitely sparked a lot of interest.
MetaMask Adding Support for Liquid Staking
Users can now access liquid staking through Lido directly inside MetaMasks' new portfolio app. MetaMask is aiming to become the one-stop shop for Ethereum portfolio tracking. Until ETH withdrawal is enabled, users can swap their LSDs also conveniently inside the app.
Summary and Future Predictions
The popularity of liquid staking is expected to be rising in the upcoming months, but right now only around 14 % of all ETH are staked. Shanghai upgrade will enable unstaking and therefore redeeming LSDs for actual ETH on a 1:1 basis.
Once unstaking has been enabled, we could see some selling pressure on ETH in the short term, but in the long run, confidence in the staking protocols should be higher and is expected to accrue more value.