After Ethereum’s successful merge to Proof-of-Stake last year, ETH staking has been a major narrative within the crypto industry to start 2023. With the new proof-of-stake consensus mechanism that Ethereum uses, anyone with 32 ETH can stake, valdiate blocks, and earn approximately 5.5% annually in rewards in what some have dubbed the safest place to earn yield in crypto. However, 32 ETH is a significant investment (approximately $50,000 today), the 32 staked ETH currently can’t be unstaked and individual stakers require technical knowledge and hardware in order to get started. These are significant barriers to entry. That’s why of the current 16.2 million ETH staked, only 25% are staked by unidentified entities. The remaining 75% are staked through liquid staking protocols or centralized entities like exchanges.
What is Liquid Staking?
Ethereum’s move to Proof-of-Stake will be complete with the upcoming Shanghai upgrade which will enable staked ETH to be withdrawn.
Liquid staking derivatives (LSDs) are tokens from platforms that enable users to stake their ETH with them and earn yield, minus a small fee to the protocol for the service provided. LSDs are tokens that act as a receipt for depositing your ETH with their platform. The LSD’s value is loosely pegged to ETH’s price and can be redeemed for ETH.
Rather than requiring you to have 32 ETH and setting up hardware, you can simply stake any amount of ETH that gets deposited into a staking pool, and receive an LSD representing your share of the stake in return.
This greatly simplifies the process and makes ETH’s staking yield accessible to everybody, which has resulted in a record amount of funds being staked within these protocols. With the success, the protocol tokens have naturally seen massive price increases to start 2023. Here’s 4 tokens you should watch.
4 Liquid Staking Derivate Tokens to Watch
1. Lido (LDO)
The leading decentralized protocol for liquid staking, Lido is seen as a safe place to stake your ETH. Lido currently has over $8billion in assets staked and has by far the largest market share for liquid staking derivatives at 73%. Users can deposit ETH with Lido and receive their token stETH in return. Stakers earn approximately 5% per year with Lido. Users who deposit and receive stETH can choose to put their tokens to work in DeFi to earn additional yield. Lido’s token LDO has doubled in price in the past month as the Shanghai upgrade draws nearer.
Market Cap (FDV): $2.6B
2. Rocket Pool (RPL)
Rocket Pool with over $900mil in TVL are smaller than Lido, but more focused on decentralization. Along with a similar product to Lido, Rocket Pool offers mini pools where stakers only need 16 ETH to become a node operator compared to the usual 32. This lower barrier to entry means stakers have easier access to the full benefits of ETH staking. Rocket Pool is looking to decrease the 16 ETH minimum in the future to further decentralize ETH staking to smaller users. Currently Rocket Pool’s mini pool option offers a higher yield than that offered by Lido. In addition to the rewards from ETH staking, node operations receive RPL token rewards, resulting in a higher yield than Lido or solo staking.
The downside of Rocket Pool mini pool staking is you’re also required to hold 1.6 ETH of RPL, which has unlimited supply. There is a risk RPL’s price could drop resulting in stakers needing to buy more RPL to retain 1.6 ETH value, taking away their profits.
Market Cap (FDV): $767M
3. Frax Share (FXS)
Frax Finance has been accruing quite a following in anticipation of the Shanghai upgrade. The Frax ecosystem consists of two tokens, FRAX which is a stablecoin pegged to the US dollar and FXS which is their governance token.
Staking with Frax Finance offers a reward of 6-10% on staked ETH per year. Stakers can earn an additional 10% yield by providing liquidity in CRV (Curve Finance) with the frxETH they receive in exchange for staking their ETH. This is an advantage of FXS compared to RPL, the rewards are issued in a different token and aren’t reliant on high FXS incentives so the FXS total supply doesn’t inflate causing a price drop.
Market Cap (FDV): $1.1B
4. StakeWise (SWISE)
Stakers can deposit any amount of ETH into StakeWise Pool and receive sETH2 in its place. Holding sETH2 gives holders rights to StakeWise Pool’s rewards. Staking rewards from StakeWise accrue in a separate token, rETH2. This is different from other protocols and makes it easier to calculate rewards at a glance. Users can deposit any amount of ETH with StakeWise, there is no minimum amount. SWISE’s price is up over 141% in the past 30 days.
Market Cap (FDV): $188M
Risks of Liquid Staking
Derivative staking tokens are not as strictly pegged to ETH’s price as stablecoins are to the USD. staked ETH derivatives regularly depeg, sometimes by as much as 20%. These depegging events are opportunities to buy ETH at a discount for those certain of the protocol’s longevity.
Lido’s market dominance also poses a threat as if they hold too much of the total supply of ETH they open themselves to attack. There is a limit to how big Lido can sustainably grow. This is a drawback of the PoS system. Lido are aware of the issue and are looking to mitigate risks and decentralize well ahead of time.
As is the case with all protocols, there is also smart contract risk to using liquid staking pools.
What’s Next For Liquid Staking?
A successful completion of the Shanghai upgrade planned for March 2023 could have two outcomes. It could result in previously locked-up staked ETH that can finally be withdrawn being sold back into the system and a fall in ETH’s price. Or it could result in increased trust in ETH staking and more usage of LSDs. What will be interesting is with Lido’s potential growth capped to maintain decentralization is which other LSDs will excel to capture new users and market share.
Prices and Market Capitalization data was collected on January 24th, 2023