The Ethereum network is set to undergo a major upgrade on April 12th in the form of the Shanghai hard fork, which will be the first major update since The Merge in September 2022. The upgrade, dubbed “Shapella” as a combination of the two major proposals Shanghai and Capella, will include EIP-4895, allowing validators to withdraw their staked ETH from the Beacon chain to the EVM (execution layer), which is the user-friendly Ethereum layer that users are familiar with. This upgrade is significant as it allows Ethereum holders who have locked up their tokens for years to withdraw them and potentially cause further volatility to the already teetering market. Therefore, on-chain activity around liquid staking derivatives (LSDs) could be a useful gauge for what the market might do post-unlock.
LSDs are relatively new financial instruments in the DeFi space that serve as bearer instruments for staked ETH, similar to how borrowing and lending protocols give users a share token to represent locked collateral, such as Aave’s a-tokens. Staking ETH generates a wrapped asset used to claim the equivalent amount of Ethereum from the staking platform, and some of the major platforms that offer these instruments include Lido, Rocketpool, Frax, Stakewise, and Coinbase. Wrapped assets allow stakers to continue earning rewards while securing the network without completely giving up the opportunity to participate in other activities within DeFi. LSDs enable staked assets to be traded on secondary markets, and this means that stakers can access the value of their staked ETH before the Shanghai upgrade enables withdrawals or, in the future, while maintaining their staked position.
Among the various LSD providers, RocketPool’s RPL has fared well with a 25% increase over the last thirty days. rETH, which is the wrapped asset issued by Rocketpool, has historically traded at a premium to ETH and other LSDs, likely because of the provider’s reputation as the most decentralized staking solution available to holders today, making rETH a desirable LSD to hold. Conversely, LSDs from the two top staking providers, Lido and Coinbase, both trade at a discount to spot ETH. Together, they represent nearly 90% of all staked ETH, and it’s unsurprising that Lido and Coinbase have both come under scrutiny as centralizing entities given their concentration of staked ETH.
Meanwhile, Frax has come out as the winner recently, with Frax Ether experiencing the most significant jump in total value locked over the last 30 days compared to the other top ten staking providers, with a 14% growth for a $244 million valuation. Frax also totaled only $3.1 million in inflow over thirty days, putting the protocol just above StakeWise’s $2.6 million. The various LSDs’ performance is critical in maintaining liquidity within the Ethereum ecosystem, where over 15% of all Ether that exists is staked with a Beacon chain validator.
Overall, LSDs are an important development in the staking ecosystem as they help to address some of the challenges associated with staking while also expanding the pool of potential participants in the ecosystem. Liquid staking derivatives such as the wrapped Ether offered by staking providers are incredibly crucial as they enable stakers to continue earning rewards and secure the network without completely giving up the opportunity to participate in other activities within DeFi.
Withdrawals being enabled for staked Ethereum on the Beacon chain means that proof-of-stake Ethereum has reached a point of sufficient stability and security, and the stakers who participated in securing the network will be able to retrieve their staked funds. Regardless of the immediate impact of enabled withdrawals, proof-of-stake Ethereum’s continued success relies on incentivizing ETH holders to validate the network, and liquid staking derivatives have proven to be an effective mechanism to do so. However, readers should conduct their research before making any investment or trading moves as every move involves risks, and this article does not contain any investment advice or recommendations.
