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What is Ethereum Liquid Staking and Why is it Crucial as Shanghai Nears an Upgrade?
Ethereum is the largest smart contract platform in the industry and has undergone a major change by transitioning to a new consensus algorithm in 2022. What is commonly referred to as The Merge saw the network abandon Proof of Work and move to Proof of Stake to meet its broader roadmap towards scalability, decentralization and security. Quick Navigation With the introduction of Proof of Stake on the Beacon Chain some time ago, users were able to deposit 32 ETH to become full validators of the network. This is part of Ethereum’s core components – namely decentralization and transparency. Essentially, users are…
What is Ethereum Liquid Staking and Why is it Crucial as Shanghai Nears an Upgrade?
Ethereum is the largest smart contract platform in the industry and has undergone a major change by transitioning to a new consensus algorithm in 2022.
What is commonly referred to as The Merge saw the network abandon Proof of Work and move to Proof of Stake to meet its broader roadmap towards scalability, decentralization and security.
Fast navigation
With the introduction of Proof of Stake on the Beacon Chain some time ago, users were able to deposit 32 ETH to become full validators of the network.
This is part of Ethereum’s core components – namely decentralization and transparency. Essentially, users around the world are able to maintain and maintain the network by running their own validator nodes.
However, this also brought with it some limitations. Let’s take a look at some of them when it comes to self-staking.
Self-Staking Limitations
Those who want to become full validators face some notable disadvantages. For example, they are unable to move the minimum amount required (32 ETH), making it completely illiquid for the time the user wants to remain a full validator.
Users who peg their ETH to the Beacon depositor contract to secure the network will not be allowed to withdraw their ETH until this feature is enabled. Ethereum core developers said this will be possible with the Shanghai update. It is expected to hit the public testnet in February and possibly the mainnet in March.
Find out more about the Shanghai update in ourPodcastwith ConsenSys Product Manager Matt Nelson.
It is important to note that there are currently around 16 million ETH locked in the contract, worth almost $25 billion (at current prices). In contrast to this significant limitation, liquid staking platforms offer an alternative.
What is Ethereum Liquid Staking?
Ethereum Liquid Staking is a concept that has been around for quite some time, but gained traction in early 2023 when the majority of platforms offering these features experienced tremendous growth.
Essentially, liquid staking is an alternative to locking a user's stake. This allows users to stake and withdraw any amount of ETH they want without having to enable this feature on the mainnet (e.g. before the Shanghai upgrade).
This is done by issuing a tokenized version of the funds staked – a type of derivative. It can be transferred, stored, traded, spent or even locked as one would a normal token.
How it works is very simple. A user would deposit ETH on a third-party platform. The platform would deposit ETH on the Beacon depositor contract for them (by running their own validators). In return, the protocol would mint a representative ETH that the user could withdraw, trade, stake, and so on.
There are some advantages of Ethereum Liquid Staking, such as:
- Kein Risiko des langfristigen Haltens
- Verfügbarkeit hinterlegter Token
- Ähnliche Rendite wie beim gesperrten ETH-Staking
The upcoming Shanghai upgrade has significantly advanced the Ethereum liquid staking narrative, and most platforms offering such services have seen their native cryptocurrencies skyrocket since early 2023.
Let’s take a quick look at some of the most popular Ethereum liquid staking protocols.
Top 3 Ethereum Liquid Staking Protocols
Lido
Lido is the largest Ethereum liquid staking protocol by both total market cap and total value locked ($7.68 billion at the time of writing) on its platform.
When users stake ETH with Lido, they receive an alternative token called stETH, which represents their stake at a 1:1 ratio. The tokens are minted upon deposit and then burned when redeemed.
The stETH token balances are issued 1:1 to the ETH staked by Lido. stETH token balances are also updated daily when the oracle reports the change in total stake.
Lido’s native cryptocurrency is called LDO.
Rocket pool
At the time of writing, Rocket Pool is the second-largest Ethereum liquid staking protocol in terms of total value locked on its platform (around $800 million).
Similar to Lido, users can stake their ETH on Rocket Pool and receive an alternative token called rETH.
The minimum deposit is 0.01 ETH, there is no limit to how much users can stake, and they are allowed to continue staking and withdrawing at will.
Rocket Pool’s native cryptocurrency is called RPL.
Ankr
Ankr Protocol ranks second in terms of the total value of ETH locked on its platform. At the time of writing this article it is around $153 million.
The alternative token that the protocol issues is called ankrETH. Similar to the other platforms, users can withdraw at any time and participate in various DeFi farms using the ankrETH tokens.
Liquid Staking vs. Exchange Staking: What’s the Difference?
Some exchanges, such as Coinbase and Binance, also allow users to deposit and stake ETH on the Beacon deposit contract and earn rewards.
In addition, they also issue their own ETH tokens, which users can withdraw and trade at their convenience. For example, on Binance, the token is called BETH, and users can exchange it for USDT at any time. The main thing to keep in mind is that you must have BETH in your account to be eligible for staking returns.
Another important consideration is that these are centralized counterparties and as such hold custody of your tokens – in this case the ETH alternatives. Therefore, all the disadvantages and limitations of holding your crypto on an exchange apply, with all the advantages.
Why Ethereum Liquid Staking Coins Rise?
As mentioned at the beginning of the guide, almost all protocols that offer Ethereum liquid staking capabilities have seen a surge in the prices of their native cryptocurrencies since the beginning of 2023.
For example, LDO is up over 100% in the last 30 days. ANKR is up about 45% in the last 14 days. Frax Shares (FXS) is up over 100% in the last two weeks. Rocket Pool’s RPL token is up around 70% in the last month. Other Ethereum liquid staking coins, such as StakeWise (SWISE) Stafi (FIS) and others, have also increased by similar percentages.
The consensus seems to be that traders believe that the upcoming Shanghai upgrade for Ethereum will be very beneficial for these platforms. The reason for this is that over 15 million ETH will be unlocked and users will be looking for liquid alternatives where they would stake their ETH. And since these protocols offer some clear advantages, the current narrative is that Shanghai will drive demand for their services.
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