The crypto market witnessed the DeFi summer of 2020, with decentralized finance applications like Compound and Uniswap turning Ether (ETH) and Bitcoin (BTC) into high-yield assets through yield farming and liquidity mining rewards. Ether’s price nearly doubled to $490 as total liquidity across DeFi protocols quickly surged to $10 billion.
Towards the end of 2020 and early 2021, the quantitative easing induced by COVID-19 took full effect in global markets, sparking a mega bull run that lasted almost a year. During that time, the price of Ether increased nearly 10-fold to a high of over $4,800.
After the end of the euphoric bullish phase, a painful cooling journey was exacerbated by the UST-LUNA crash that began in early 2022. This dropped the price of Ether to $800. A glimmer of hope finally came in Q3 as the market staged a positive rally led by the Ethereum merge narrative.
Moving to an eco-friendly Proof-of-Stake (PoS) consensus mechanism was a big step forward. The event also reduced post-merger ether inflation. Ahead of the merger on September 15, 2021, ETH peaked at over $2,000. However, the bullish momentum quickly faded, turning the merger into a buy-the-rumor-sell-the-news event.
A similar bullish opportunity could be brewing in Ether as the upcoming Shanghai upgrade, scheduled for March 2023, takes the market spotlight. The upgrade will finally allow withdrawals from Ethereum staking contracts that are currently locked. The upgrade will significantly reduce the risk of staking ETH.
It will provide an opportunity for growth of liquidity staking protocols. The governance tokens of some of these protocols have skyrocketed since the start of the new year as the hype builds around it.
There is a chance that the upgrade can propel these tokens towards last year’s merge highs. Additionally, Ethereum’s staking space is still in its early stages, which presents a market opportunity for the growth of these protocols.
The proportion of staked ether is low
Currently, 13.18% of the total supply of Ether is staked on the Beacon Chain, which compares to other Proof-of-Stake (PoS) chains like Cosmos Hub (ATOM) with a 62.5% staking ratio and Cardano ( ADA) is low at 71.8% and Solana (SOL) at 71.4%. The reason for Ethereum’s low staking rate is that staking ether is locked in its current state, but this will change in March.
Ethereum has the lowest staking ratio compared to other L1 blockchains. Source: Staking Rewards
The upcoming Shanghai upgrade will include a code called EIP 4895, which will enable the beacon chain staked ether withdrawals and enable a 1:1 exchange of staked ether for ether. Ethereum’s staking ratio should reach parity with other leading PoS networks after this update. A significant portion of this will likely transition to liquid staking protocols.
Risk mitigation in liquid staking derivatives
Liquid staking protocols like Lido and Rocket Pool let ether holders stake without a validator node. Because Ether is pooled, a single user does not have a minimum threshold of 32 ETH (worth about $40,000) to stake. People can stake fractions of Ether, lowering the barrier to entry for staking.
The protocols also allow for the provision of liquidity for staking assets that would otherwise be included in the staking contracts. The DeFi contracts give a derivative token (e.g. Lidos stETH) in exchange for staked Ether on the Proof-of-Stake (PoS) network. A user can trade stETH while earning income from the staking contract.
As Ethereum’s staking ratio increases following the March update, the use of liquidity staking protocols is likely to increase with it. Currently, liquid staking protocols account for 32.65% of all ether staked. Due to the above benefits, their market share after the Shanghai upgrade should remain close to or above current levels.
Liquid staking protocol governance tokens could also benefit from their increased lock value, similar to DeFi tokens, which benefited from an increase in total lock value (TVL) in the recent bull run.
How are LSD governance tokens performing ahead of Shanghai?
Lido DAO (LDO)
Lido DAO is a leader in liquid staking with a higher annual return and market share than other protocols. Lido accounts for 88.55% of the total ether staked in these protocols.
Let’s use the amount of ether deployed as a proxy for evaluating the protocol. Again, we find that Lido has the most competitive market cap to staked ether ratio.
Source: Coingecko, Dune Analytics
The weak point of the project’s token economy is that LDO is a governance token. It does not entitle you to a share of the income or fees generated. In addition, the token will have additional inflation until May of this year by unlocking the Investor token.
LDO 4 hour price chart. Source: TradingView
Technically, the LDO token broke the short-term resistance around $1.17 with significant buying volume. The bulls are likely to target $1.80 and take advantage of the Shanghai upgrade hype.
The token has been heavily shorted in the futures market since Jan. 1 following its recent price surge of 26%. The funding rate for LDO perpetual swap has turned negative by a large margin, providing an opportunity for further upside in a short squeeze. The current support levels for LDO are $1.17 and $1.
Rocket Pool (RPL)
Rocket Pool is similar to Lido, albeit smaller. The platform’s market cap to ether staked ratio is five times larger than Lido, which likely makes it overpriced.
Nonetheless, besides governance, the RPL token has an added utility as an insurance token for users. Node operators deploy RPL as insurance where users get deployed RPL in case of losses due to operator’s fault.
RPL September 2021 Ethereum Merge high was $34.30. Since the beginning of 2023, its price is up 10% and last traded at $22.40. If the buyers manage to build support above the $20 level, there are chances that RPL can reach last year’s high of $30 set around the Ethereum merger.
Anchor (ANKR)
Ankr is a blockchain infrastructure provider that offers API endpoints and operates RPC nodes in addition to staking solutions. Similar to LDO, ANKR is only used for governance purposes.
The price of the token has remained relatively unchanged over the past few days. Ankr’s market cap to staked Ether ratio is on the higher side, in line with Rocket Pool, which is a negative sign.
However, if the Shanghai upgrade hype increases, ANKR may hit highs of $0.05 in August 2021. The recent breakout level of $0.03 will serve as resistance for buyers. Currently, the token is trading around $0.015.
Operation (SWISE)
Stakewise offers the highest staking return of 4.43%. Its governance token is comparatively less inflated than RPL and ANKR in terms of market cap to staked ether, making it cheaper than RPL and ANKR.
However, the token distribution is disadvantageously biased toward private investors and the founding team, who hold 46.9% of SWISE’s total supply. According to data from Nansen, since April 2021, wallets identified as “smart money” have been slowly accumulating SWISE.
Smart wallet holdings of SWISE tokens. Source: Nansen
The Ethereum Merge high for SWISE was $0.23, which will be the likely target for buyers. Support is near the 2022 lows around $0.07.
Shared Stake is marked in red because the log was suspected of an insider exploit that led to a 95% drop in the token price in June 2021. The shared stake’s high staking return compared to others is also a notable detail of. On the other hand, Cream Finance has shut down its ether staking service.
Ethereum Shanghai’s upcoming upgrade presents an opportunity for growth in the liquid staking space. Lido DAO is the clear leader in this area with an optimal market price. The de-risking of ETH staking and the hype surrounding the event could lead to a series of rallies that could push the price of LDO and other liquid staking protocols back down to their merge highs of last year.
The views, thoughts, and opinions expressed herein are solely those of the authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This article does not contain any investment advice or recommendation. Every investment and trading move involves risk and readers should do their own research when making a decision.
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