Vladislav Sopov
Here’s what’s on the menu for the Liquid Staking Derivatives (LSD) segment, a first narrative of 2023
The crypto market is in full swing right now and it is proving to be a particularly pleasant journey for Ethereum users. Liquid staking derivatives (LSD) are seeing massive inflows from users who can’t get enough of this sweet, sweet yield. Everyone is into LSD with the Shanghai upgrade that would make staking ETH unlockable.
DeFi yields give way
2022 killed many things in crypto including DeFi yields. Yield farming that fueled DeFi’s first big summer, an abundance of food coins, and ominous warnings to stay away from Pool 2 now seems a long time ago. And so it was.
Over the past year, CeFi and DeFi yields have been pushed from double-digit percentage points to zero. Without the UST payout of 20% and the DeFi protocols printing native tokens as if FDV was just a meme, there wasn’t much sustainable yield to be had. Faced with a lack of farming opportunities, many Ethereers chose to lock their remaining ETH into the new PoS chain, hoping that one day it would be unlocked soon. Your wish will be fulfilled soon.
Lots of ETH at stake
Ethereum upgrade dates are usually fluid and are invariably pushed back as a result. Still, it has been promised that the network’s much-anticipated Shanghai update will go live no later than September 2023. And when it does, all ETH locked into the Proof-of-Stake chain will be unlocked. When that happens, stakers face a dilemma: sell their ETH at a loss to regain some capital, or roll over and wait for the market to recover?
The answer to that will depend in part on whether there are juicier returns to be found elsewhere. Assuming a new DeFi summer doesn’t reach its apotheosis in Q3 and everyone is farming dubious memecoins, it may be that LSD platforms offer the safest risk-reward trade-off.
More than 13% of ETH supply is currently staked, with Lido accounting for a third of the total. Of the 33% of staked ETH contained in LSD protocols, 29% is staked by Lido. It has dominated the LSD market so far, aided by its native LDO token, which increases base rewards earned by ETH players by 4%.
LSD governance tokens have outperformed the rest of the market this year – LDO is up 2x since the beginning of the month, while Rocket Pool’s RPL is up 70%. All of this can be taken as a sign of confidence in Ethereum staking and thus in the successful implementation of Shanghai.
From Shanghai to DeFi
Although the Shanghai upgrade will unlock 16 million ETH, it is likely that much of that will be at stake. Thanks to the development of liquid staking derivatives like STETH, stakers can have their cake and eat it. In addition to the ETH staking rewards, they can stake their ETH derivatives in other protocols, giving them a second boost in earnings.
Aura Finance, the balancer LP incentive protocol, is building a secure reserve layer for DAOs to deploy their treasuries and this will include liquid derivatives with stacks. By abstracting the complexity of staking LP tokens into Balancers, Aura makes it easier to receive Balancer Gauge deposits. The ability to collect AURA rewards, meanwhile, provides an additional layer of incentive. Expect more such initiatives leveraging liquid staking derivatives as the LSD market matures.
More than $10 billion in ETH is now locked in LSDs. Lido’s 73% dominance of the LSD sector is followed by Coinbase Wrapped Stakes ETH, Rocket Pool, StakeWise and Frax Ether. Funding the native tokens of LSD providers has proven to be a profitable move so far this year; Frax’s FXS is up 88% and most other LSD assets are also deep in the green.
When the market bled dry last year, access to locked ETH couldn’t come fast enough. Now the LSD market is thriving and DeFi protocols are issuing returns on staked ETH, but Shanghai doesn’t seem as urgent anymore.
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