Liquid staking derivatives on Ethereum are going strong. Lido Finance started this trend, but others have entered the playing field. Of all staked Ethereum, liquid staking providers stake almost 40%. That is over six million staked ETH out of 16 million.
Therefore, we are showing you four different liquid staking players for Ethereum. Each has a different philosophy, which we will explain. As a basis, we use a Blockwork Research article.
Liquid staking derivatives continue to be at the front of the market as the Shanghai hard fork nears.
When ETH withdrawals open, price action for ETH could go either way… 👀
Here's the full scoop on LSDs 🧵 pic.twitter.com/uNOwgwofeE
— Blockworks Research (@blockworksres) January 31, 2023
What Are Liquid Staking Derivatives?
To explain liquid staking derivatives (LSD), I will explain two things briefly.
The first one is liquid staking. This is a simple idea. You stake tokens from project “X.” Generally, a project will lock these staked tokens. In other words, you receive yield, but you can’t do anything else with this token.
However, with liquid staking, project “X” will give you a new token after you stake with them. This is the derivative, the liquid staking token. It’s also the second thing I want to explain. A derivative is a financial instrument backed by an underlying asset. In this case, the underlying asset is your staked token. It represents the value of your staked assets.
Now you can use his liquid token in DeFi. You can get more yield by adding it to a pool or staking it again. On the other hand, you can also sell these tokens and get liquid again. To clarify, the owner of the liquid staking tokens can redeem the staked tokens. Thus, we have two tokens. The native token that you stake and the liquid staking token. Or, in other words, the derivative. The picture below shows the four different protocols we will discuss. It shows all the different and important aspects.
The Lido Finance derivative is stETH. It was the first LSD that saw real adoption. They have a 29% stake (pardon the pun) in all staked ETH. Lido has deep liquidity. Furthermore, you can use their stETH in many DeFi protocols. They are, without a doubt, the leaders of all Ethereum-based LSD providers.
Lido takes a 10% commission on all staking yield. This is good and healthy for their DAO. The DAO receives 5% while the node operators share the other 5%.
However, on the downside, their staking share is so big, it worries plenty of people. Lido has a fair share of control over the governance with their number of allotted votes. In turn, this can jeopardize Ethereum’s decentralization. The picture below shows Lido’s share of LSDs.
Coinbase didn’t launch their LSD until August 2022. One of the reasons for launching was Lido’s dominance. As explained before, Lido may jeopardize the decentralization aspect. In this short time frame, Coinbase managed to get 7% of the total market share. That’s a whopping 1.1 million ETH. Their liquid token is the cbETH.
However, they charge the most of all LSD providers, a steep 25%. Nonetheless, through their CEX, they find enough takers. This also puts them on a different playing field compared to DeFi. That’s where all their competitors are active. In the centralized exchange space, they hardly have any competition at all.
The downside of this is that they have limited on-chain liquidity. Furthermore, their cbETH token doesn’t have a lot of utility in DeFi. They attract non-savvy crypto investors and institutions. Coinbase also keeps custody over their LSD derivatives. On the upside of this, you can argue that they are the most regulated exchange. They’re also based in the United States.
Enterprise-grade liquid staking is coming.
Learn how @CoinbaseCloud and @Figment_io are teaming up with @alluvialfinance to build a multi-chain liquid staking solution. pic.twitter.com/IiDWZuKK7J
— Coinbase 🛡️ (@coinbase) May 27, 2022
Rocket Pool already launched their LSD in September 2021. They are the most decentralized option of all the providers we discuss here. To clarify, they use independent node operators to pair their rETH depositors with. As of February 1, 2023, they staked 379,000 ETH, which is 2% of the total staked ETH.
Rocket Pool currently uses 2,045 node operators. They use 16 ETH from depositors, and the chosen validator posts the other 16 ETH. As you may know, to become an ETH validator, you need to stake 32 ETH.
Furthermore, validators must add a minimum of 10% of their 16 ETH stake as collateral. This acts as insurance in case they get slashed. The node operators take a 15% commission. The collateral is in RPL, Rocket Pool’s token. That’s where Rocket Pool makes its money.
A new $rETH DeFi integration has just landed – you can now earn interest on $rETH deposits or borrow $ETH & $XAI against it as collateral up to 80% LTV with @SiloFinance!
Check out Silo's risk-isolating bridge asset design: https://t.co/keHb8e5ehr pic.twitter.com/l2ImTKNm21
— Rocket Pool (@Rocket_Pool) February 1, 2023
Frax has a dual token design. As a result, they can offer the highest yield, at around 8%. They offer a liquidity pool on Curve with frxETH/ETH or stake frxETH as sfrxETH. However, note that the liquidity pool rewards are in CVX, CRV, or FXS, but not in ETH. You will only earn staking rewards if you stake sfrxETH.
Frax currently has close to 1,900 validators. Three months ago, they started with zero frxETH, and now they already have 81,000 frxETH. The picture below shows their UI for frxETH.
Source: Frax UI
The market for liquid staking is growing fast. Many providers are offering their services. If you’re looking for high yield, frxETH/sfrxETH is the clear winner. On the other hand, Rocket Pool might be your pick if you seek decentralized options. Lido and its stETH token offer the most liquidity and the best DeFi options. However, their dominance among LSD providers can be a potential problem. Coinbase services institutions and non-savvy crypto users. But, be aware of their 25% commission.
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