Best Way to Explain the Ultimate Guide to Ethereum Liquid Staking in 2023
Before anything else, we must comprehend the “issue” with Ethereum staking. Following the Merge last September, staking on Ethereum now provides real yield as validators stake 32 ETH to secure the network and collect rewards. However, for the time being, this 32 ETH remains frozen. That doesn’t sound good to me as a capital-efficient degen.
Here comes liquid staking. For those who are too lazy to look up the definition, it refers to freeing your staked ETH using derivatives so that you can reinvest it elsewhere.
No, as well as we’re not referring to that LSD.
In ELI5 words, this simply means that you receive a new token worth the same as the staked ETH and can use it to participate in a new yield farm or protocol. Liquid staking eliminates the major disadvantage of staking: you can now access and use your cash more efficiently.
Lido Staked ETH (stETH) is the most popular LSD in the market right now, with over $7.7B of ETH staked and over 260K stakers.
Why Is Liquid Staking Necessary?
As a new DeFi degen, you may be wondering about the main benefit of liquid staking: rehypothecation.
Re-what?
In ape terms, rehypothecation is the use of assets pledged as security in multiple locations. For example, if you use your house to secure a car loan and a loan for another house, you are rehypothecating it.
Staking ETH in liquid form allows you to secure Ethereum (loan #1). Then, using the same staked ETH as collateral, you stake and secure, say, a DeFi loan (loan #2).
But, first and foremost, why would you stake ETH?
Because failing to do so results in a loss of staking yield. Staking yields, like any proof-of-stake mechanism, are an implied tax on non-stakers.If you are unwilling to safeguard the protocol, that’s great, but don’t complain when others are compensated in yield for doing so!
Ethereum’s staking ratio is lower because: a) ETH has greater economic utility.
b) You can’t (yet) unstake it.
However, this is about to change.
Hasu, a blockchain researcher, and Georgios Konstantopoulos, the CTO of Paradigm, projected that 15-30% of ETH may be staked without liquid staking. However, with liquid staking, this figure might rise to 80% or more!
An further advantage would be greater economic security of Ethereum: the more ETH is staked, the more staked ETH (the derivative) an attacker would have to obtain. The more steps you add, the more difficult it becomes.
Liquid staking systems that provide this service might be thought of as banks for staked collateral. Some providers are centralized, while others are decentralized; we’ll look at both in depth below. Even
Metamask has joined on the liquid staking bandwagon, and its DApp now integrates with staking providers.
And the hype train is unmistakable — just look at the token prices of some staking providers over the last month.Because of the impending Ethereum Shanghai Upgrade, liquid staking is becoming a prominent storyline.
What Is the Shanghai Ethereum Upgrade?
Users will be able to unstake their ETH after the Shanghai Upgrade. Staked ETH has been “stuck” since Ethereum’s PoS transition unless you use a liquid staking provider. This upgrade will enable Ethereum withdrawals and reduce the unstaking time to 27 hours.
13.38% of ETH has been staked.
The market share of liquid staking is 32.96%.
Lido has a holding of 29.12%.
65% of the ETH staked is underwater.
What is the significance of this?
Because some are concerned that the Shanghai Upgrade may trigger selling pressure. However, a few of factors suggest the opposite: we can’t forecast which portion of the ETH underwater or in the money will prefer to take profits or cut losses.
Although the upgrade allows for complete withdrawals, only six validators can quit per epoch (6.4 minutes for Ethereum). As a result, only 1,350 validators can quit each day (43,200 ETH/day). This is only 0.8% of the daily ETH trading volume and should be readily absorbed by the market.
The excess can be withdrawn with a partial withdrawal.On average, each validator has staked 2 ETH in incentives. When multiplied by a little more than 500K validators, this equals to about 1M ETH entering the market. Even if we consider that these stakers are likely to restake much of their balance, it is still barely 10% of ETH’s daily trading volume.
What to Look for in a Liquid Staking Provider
So, how do those liquid staking protocols work?
Of course, you may stake your own ETH. The disadvantage is that it will cost you 32 ETH (the bare minimum for running a node), and you will not be able to rehypothecate your staked ETH even after the Shanghai Upgrade.
You’re in luck because there are numerous centralized and decentralized staking providers!
According to Dune data, 33% of all ETH is staked with decentralized providers, whereas 28% is staked with CEXes. Among these decentralized suppliers, Lido has a commanding 87.5% market share. Coinbase, Kraken, and Binance, on the other hand, control a sizable portion of all ETH staked.
@bluecollarchain compiled an amazing list of critical elements to consider when looking for liquid staking providers:
Tokenomics: Is your liquid staking provider’s yield real (in ETH) or inflated using the provider’s native token?
Protocol revenue model: does the staking service offer anything other than liquid staking (i.e., more utility)?
Current and fully diluted market capitalization: how is the token performing today, and how much more inflation is on the way?
Is there contract auditing, bug bounty programs, and does the team have a track record?
Depeg risk: what is the service’s runway (treasury)?
The frequency and kind of taxable events: what form of reward is used by the service, and are you subject to capital gains or income tax?
Tokensthat are more than just liquid staking derivatives will likely fare better in the long run
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