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Ethereum Liquid Staking Derivatives Explained

The switch from Proof-of-Work to Proof-of-Stake that Ethereum underwent has changed the whole dynamics of not only the second biggest cryptocurrency, but of the whole staking game as such. Many companies, projects, platforms or protocols are now trying to benefit greatly from the new and emerging trends that have sprung into life only thanks to The Merge.

In such subsector, which is expected to be on its rise even more in the coming months and years is the sector of Liquid Staking Derivatives (LSDs). What they are and why have they seen such a rise? That will be the main topic of the following few paragraphs.

What is staking?

Before we dive down the rabbit hole of LSDs, let’s first coin some terms that are inherently connected to this sector. The first one obviously is staking. Staking is a consensus mechanism that Proof-of-Stake blockchains use to secure the network. When users stake something, they usually take coins or tokens that they own and dedicate them to some cause, which makes the whole network more robust, stronger and protected.

The main reason why they do so is based on monetisation as they are paid for staking their tokens. Thanks to this, they are in essence earning passive income on their investment solely due to locking their holdings for some period of time.

The lock-up period that is usually imposed by the given blockchain is very important as it ensures stability and security of the whole network. If there was no lock-up period and the users would decide at one point to withdraw a significant chunk of their staked assets out of the staking, the network could run into danger due to sharp decrease of its computational power. This would endanger the network, making it more prone to hacks for instance.

While this has a logical explanation that does not mean that this solution is optimal. In fact, it is the opposite of optimal, since the users cannot unstake their tokens whenever they want. Their capital thus becomes inefficient. And that is what liquid staking is currently trying to solve.

What is liquid staking?

Liquid staking is a way through which the investors can benefit from normal staking and its pros, while eliminating the biggest con – the lock-up period. This gives the flexibility to use the assets back to the hands of users and stakers via staking derivatives which they receive in exchange for staking their chosen assets.

One of the biggest pros of this solution is the fact that the stakers can still earn staking yields on these LSD assets as well as use them on underlying tokens in other parts of the DeFi world. Most of them turn their heads on Ethereum when it comes to DeFi and thus also LSDs. 

That however does not mean that Ethereum is the most popular PoS blockchain. On the contrary, while it does have the biggest capitalisation and probably also the biggest fan base, there are other PoS blockchains that have higher staking ratios than Ethereum, as the chart below shows.

Comparison of Ethereum and other PoS Staking ratio, Source: chaindebrief.com

With only about 14 % tokens being staked, Ethereum has one of the lowest percentages of tokens locked in staking protocols. Binance token (BNB) has for instance about 90 % locked, with Cardano (ADA) having 72 % and Solana (SOL) having 68 % on December 16th, as per Messari.

Nevertheless, this does not mean that liquid staking is unpopular. Liquid staking offers liquid tokens, which represent the staked tokens and are a solution mostly to the illiquidity problem. They earn the investors staking rewards, which means that they add a financial incentive for the stakers to use them. These are for instance Cosmos, Near, Polkadot or Avalanche, which all have billions in staked value.

Market share to market cap ratio, Source: chaindebrief.com

Liquid staking and the Shanghai upgrade

Ethereum is due to another major upgrade. Shanghai upgrade, which is expected to be implemented in March this year, should allow the stakers in the Beacon Chain to retrieve their holdings back, as the original protocol did not allow for that. Shanghai upgrade will be tested at the end of February.

Many believe that unstaking of millions of ETH coins that are currently being held in Beacon Chain will spur the competition between liquid staking protocols, as these would want to compete for the potential tsunami of the new capital.

That is one of the reasons why many believe that the ratio of liquid staking ETH will either increase with the Shanghai upgrade or will at least remain the same. So which projects are the most popular for liquid staking and can benefit from this move the most?

1. Lido DAO (LDO)

Lido is probably the best-known liquid staking platform. Most of the time it offers higher annual yield and market share than other platforms and protocols, which is one of the reasons why it is currently the leader in the field. For instance, over 88 % of all staked Ether is in this protocol.

However, many believe that the biggest weakness of Lido DAO is its LDO token. While it is a governance token, it does not give the right to the holders to the share of generated yield.

While Lido will probably be the go-to platform for anyone who wants to try liquid staking, there are other projects that might be interesting for the users. Here are some of them, which currently do not have the same capacities as Lido, but offer interesting products and services nevertheless.

2. StakeWise (SWISE)

StakeWise is offering a very close staking yield to Lido. At some point, the yield at StakeWise was even higher than that of Lido and it still does happen regularly. When compared with other protocols such as Rocketpool or Ankr, it is considered to be cheaper, since its governance token is comparatively less inflated (when looking at ratio of market capitalisation to Staked Ether) to the tokens of the two protocols.

Holdings of SWISE tokens smart wallets, Source- nansen.ai

The problem with StakeWise is that the private investors and the team behind the project own more than 47 % of the supply of the token. This is often very problematic from the standpoint of centralization and dependency on few entities. An analytic firm Nansen has stated that ever since April 2021, these entities are hoarding more and more tokens.

3. Rocketpool (RPL)

Another interesting project in this field is RocketPool. Rocketpool is a decentralized and permissionless platform with sole focus on Ethereum. It is smaller than Lido, however, its market capitalization to Staked Ethereum is five times that of Lido. That means that it can be overpriced.

Rocketpool differentiates itself mostly through its token RPL, which has an additional utility. Other than the traditional governance, RPL serves also as an insurance token for its users. This means that the node operators stake RPL as an insurance and in the case of loss of operator’s fault, the users receive the staked RPL tokens.

The Ethereum liquid staking market, Source: dune.com

There are many other liquid staking protocols and derivatives. Some of them include for instance Coinbase, ANKR or Cream Finance. Yet, these do not include only decentralized projects, but also centralized projects such as Coinbase, which currently holds about 46 % market share in the CEXes.


Liquid staking derivatives are one of the more complicated topics connected to cryptocurrencies. People who are interested in studying their benefits, reasons for development or current sentiment need to be at least a bit knowledgeable about the cryptocurrency sector, its dynamics and drawbacks as such.

That is why we have brought this short explanation of the current stage of ETH LSDs. However, it is very important to note that a lot of this will change with the Shanghai upgrade that Ethereum is due in March of this year.


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