Liquid staking derivatives are ready to take off thanks to Shepela. Here’s how you can gain exposure as an investor.
Lido is now the largest DeFi application on Ethereum with approximately $12 billion in capital pooled on its platform.
It is part of a wider group of platforms that provide liquid betting for Ether (ETH,
liquid expressed platform Let you stake your ETH and earn a yield, but also give you a tokenized IOU for your staked ETH.
These tokenized IOUs are known as Liquid Staking Derivatives (LSDs). They can be sold, traded or used in DeFi applications in the same way as regular ETH – essentially allowing you to have your cake and eat it too.
LSDs were already big, but Shpela, a recent network upgrade, added rocket fuel to the fire.
Here’s how it works and how you can get in on the action.
problem with staking
Every transaction on Ethereum requires ETH to pay a gas fee, which you can think of like a road toll. This road toll is then paid to the validators who manage the network (you can think of validators as construction workers who maintain the roads).
Validators perform this service by staking or locking up their own ETH coins. In return, they earn an annual yield on their ETH, which is approximately 5% until May 5, 2023.
But there’s a catch — you need 32 ETH to work as a validator. At today’s prices, that’s about $60,000. Plus, you need to operate some computer hardware, which can be a learning curve for some.
This means you are locking up capital above $60,000, and every seasoned investor knows that liquidity is important.
Enter LSD – Putting Liquidity Back in the Bet
Liquid Staking Derivatives (LSDs) allow stakers to earn a yield without losing the liquidity of their staking assets.
LSD is issued as an IOU when you stake your ETH and intend to maintain 1:1 value.
They also automatically earn yields, so you don’t need to spend money on gas fees to withdraw your staking rewards.
Better yet, they remove the 32 ETH barrier to entry, allowing anyone to stake any amount of ETH in exchange for a yield.
If you wish, you can hold your LSD and earn a yield, trade it, borrow against it, deposit it into a Liquidity Pool for additional revenue, or cash out when you want. You can sell it if you want.
Their usefulness has made them so popular that STETH – an LSD issued by Lido – is now the 8th largest cryptocurrency by market capitalisation.
And it looks like they will become even more popular thanks to Ethereum’s recent Shepela upgrade.
Why Shepela Makes LSD an Even Bigger Deal
Last month, Ethereum completed a major upgrade called shepela,
Shepela changed the way you bet on Ethereum. Previously, any staked ETH could not be staked without staking. It was effectively closed and could not be taken back. This was the situation for the last two years.
After Shepela, users can now offload their ETH as they wish.
This means that around 10 million ($1.85 billion) previously unavailable ETH can now be redirected to the LSD market.
It’s not just a theory – on-chain analysis Shows that staking through Liquid staking service is extremely popular.
4/9 of the largest depositors are from Liquid Staking platforms
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At the time of this writing, there are approximately 19.8 million ETH at stake, with approximately 50% of this done via Liquid staking.
This suggests that the remaining 50% are through staking methods that do not offer LSD.
on-chain data shows While around 1.3 million ETH were unstaked after Shepela 470,000 was at stake In liquid staking protocol.
ETH flow since Shepela
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This suggests that stakers are withdrawing their ETH to rebase it with the Liquid Staking service to obtain LSD.
And keep in mind that 440,000 of those 1.3 million withdrawals were done by cryptocurrency exchange Kraken, which was forced by US authorities to shut down its retail staking service.
It is unlikely that those retail investors will be looking for a new place to stake their ETH, with liquid staking services likely to look attractive.
How to speculate on the success of Liquid Staking platforms
Many LSD providers also have their own DAO or Treasury Token.
Buying DAO tokens is a popular way to invest in a protocol by proxy, in the hope that any success will increase demand for the corresponding token.
Here are some of the most popular LSD providers and their DAO tokens as well as the value proposition for each.
If you believe Liquid staking has a bright future ahead, you may want to do further research before adding these tokens to your portfolio.
Keep in mind, however, that DAO tokens do not represent ownership or entitle you to profit-sharing. They are only a proxy investment that could theoretically benefit from the success of the underlying platform.
Alternatively, you can participate in liquid staking by staking your ETH and receiving an LSD or directly buying an LSD like stETH or cbETH through an exchange, which saves you money on gas fees and all the same benefits provides.
Some platforms even reward you with DAO tokens as an incentive for staking.
How to stake ETH and get LSD
The largest LSD provider is Lido, an on-chain solution that in turn issues STETH.
stETH is extremely liquid and accounts for over 70% of the LSD market.
Distribution of ETH among the largest LSD providers.
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The next largest are Coinbase and Rocket Pool, which issue cbETH and rETH respectively.
Before getting started, let’s brush up on how staking on Ethereum works and consider the risks involved.
The views and opinions expressed here are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
