What is Ethereum Liquid Staking and why is it crucial when Shanghai approaches an upgrade?

What is Ethereum Liquid Staking and why is it crucial when Shanghai approaches an upgrade?

Ethereum is the largest smart contract platform in the industry and has experienced a big change in 2022 through the transition to a new consensus salgorithm.

What is commonly referred to as The Merge provided that the Proof of Work network was given up and overturned to Proof of Stake in order to meet its wider timetable towards scalability, decentralization and security.

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With the introduction of Proof of Stake in the Beacon chain some time ago, users were able to store 32 ETH to become complete validators of the network.

This is part of the core components of Ethereum - namely decentralization and transparency. Essentially, users around the world are able to wait and maintain the network by operating their own validation nodes.

However, this also brought with it some restrictions. Let's take a look at some of them when it comes to self-staking.

restrictions on self-staking

Those who want to become a full validator are faced with some remarkable disadvantages. For example, you are unable to move the required minimum amount (32 ETH), which makes it completely illiquid for the time when the user wants to remain a full validator.

Users who bind their ETH to the Beacon input contract to secure the network must not withdraw their ETH until this function is activated. The Core developers from Ethereum said that this would be possible with the Shanghai update. It is expected that the public test network will come to the main network in February and possibly in March.

Learn more about the Shanghai update in our podcast with Consensys product manager Matt Nelson.

It is important to note that around 16 million ETHs worth almost $ 25 billion (at current prices) are currently stipulated in the contract. In contrast to this considerable restriction, liquid staking platforms offer an Alternative.

What is Ethereum Liquid Staking?

Ethereum Liquid Staking is a concept that has been around for some time, but which won the journey in early 2023 when the majority of the platforms that offer these functions recorded enormous growth.

Essentially, Liquid Staking is an alternative to locking the use of a user. In this way, it enables users to stake and remove any desired amount of ETH without having to be activated in the Mainset (e.g. before the Shanghai upgrade).

This is done by issuing a tokenized version of the funds used - a kind of derivative. It can be transferred, saved, traded, output or even blocked as you would do with a normal token.

The functionality is very simple. A user would store ETH on a third -party platform. The ETH would deposit the platform for the Beacon input contract (by operating its own validators). In return, the protocol would shape a representative ETH that the user stand out, act, use, and so on.

There are some advantages of Ethereum Liquid Staking, such as:

• No risk of long -term stopping
• availability stored token
• similar returns to the blocked ETH-Staking

The upcoming Shanghai upgrade has driven the story of Ethereum Liquid Staking considerably, and most of the platforms that offer such services have experienced a sudden increase in their native cryptocurrencies since the beginning of 2023

Let us 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 protocol for Ethereum Liquid Staking, measured both in the entire market capitalization and on the blocked total value ($ 7.68 billion at the time of writing this article) on its platform.

When users use ETH with Lido, you will receive an alternative token called Steth, which represents your share in a ratio of 1: 1. The tokens are shaped during the deposit and then burned when they are redeemed.

The Steth token credit is issued 1: 1 to the ETH, which is staked by Lido. The Steth-token oaldes are also updated daily if the oracle reports the change in the overall assignment.

The native cryptocurrency of Lido is called Ldo.

rocket pool

At the time of writing this article, Rocket Pool is the second largest Ethereum Liquid Staking protocol, measured by the total value blocked on its platform (around $ 800 million).

Similar to Lido, users can use their ETH at Rocket Pool and receive an alternative token called Reth.

The minimum deposit is 0.01 ETH, there is no limitation of how many users can use, and they can continue and take off as desired.

The native cryptocurrency of Rocket Pool is called Rpl.

ankr

The Ankr protocol is in second place in relation to the total value of the ETH blocked on its platform. At the time of writing this article, it is around $ 153 million.

The alternative token that the protocol output is called Ankreth. Similar to the other platforms, users can withdraw at any time and take part in various defi farms with the Ankreth token.

Liquid Staking vs. Exchange Staking: What is the difference?

Some stock exchanges, such as Coinbase and Binance, also make it possible to pay ETH and use it for the Beacon deposit contract and earn rewards.

In addition, they also spend their own ETH tokens, which the users can take off and act as they can. At Binance, for example, the token is called Beth, and users can exchange it for USt at any time. The main thing that you should take into account is that you have to have Beth in your account in order to be justified for the staking return.

Another important consideration is that these are centralized counterparties that, as such, keep their tokens-in this case the ETH alternatives. Therefore, all disadvantages and restrictions apply for keeping your crypto on a stock exchange, with all the advantages.

Why Ethereum Liquid Staking Coins increase?

As mentioned at the beginning of the guide, almost all protocols that Ethereum-Liquid-Staking capabilities offer have experienced a sudden increase in prices of their native cryptocurrencies since the beginning of 2023.

For example, LDO has increased by over 100 % in the last 30 days. Ankr has increased by about 45 % in the last 14 days. Frax Shares (FXS) has increased by over 100 % in the past two weeks. Rocket Pool's RPL token rose by about 70 % last month. Other Ethereum Liquid Staking Coins, such as Stakewise (Swise) Stafi (FIS) and others, have also risen to similar percentages.

The consensus seems to be that dealers assume that the upcoming Shanghai upgrade for Ethereum will be very advantageous for these platforms. The reason for this is that over 15 million ETH will be activated and the users will search for liquid alternatives where they would use their ETH. And since these protocols offer some clear advantages, the current narrative that Shanghai will boost the demand for their services.

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