Liquid Staking Derivatives have quickly gained immense popularity in the Ethereum network in recent months, and with more liquid staking protocols offering a more flexible way to stake or earn, they're providing new ways of generating passive income.
Ethereum Liquid Staking Derivatives (LSDs) are the hottest crypto narrative of 2023 so far. That's because these derivatives serve as a solution to the limitations of staking ETH in the Ethereum network, allowing token holders to unlock liquidity and earn additional rewards.
As opposed to the conventional staking process, liquid staking helps to solve both the issues of the staked ETH being illiquid and the high capital requirement to participate in ETH staking. And with the Shanghai upgrade acting as a catalyst, staked assets can now be unlocked and used for decentralized finance (DeFi) activities such as swapping, lending and using as collateral for borrowing, while still earning staking rewards.
Liquid Staking Derivatives – The Future of Staking
According to research, the combined total value locked in liquid staking is approximately $18.99 billion . Liquid staking is offering a different approach to the traditional staking process by enabling users to earn staking rewards while still retaining the flexibility to use their staked assets for crypto-based activities like arbitrage trading or collaterals for loan in the DeFi space.
LSDs are tokens created by DeFi protocols to reward users who stake ETH on their platform. Stakers receive a tradeable and liquid receipt (liquid staking tokens) based on a 1:1 ratio in exchange for the underlying assets, representing their claim on the underlying pool and yield. These liquid tokens can be used to farm yield across different applications.
Users do not need to stake their tokens and manage their own nodes themselves, instead they can deposit their tokens with a liquid staking protocol. These platforms eliminate the minimum 32 ETH staking requirements, making it attractive to ETH holders who want to participate in staking while still enjoying rewards.
What is The Impact of The Shapella (Shanghai) Upgrade on The Ethereum network?
To become a validator, users are required to stake a minimum of 32 ETH to activate the validator software. Since the launch of the Beacon chain in Dec 2020, users can stake Ethereum to become validators, perform tasks and earn rewards in their wallet, however they were unable to withdraw their staked ETH.
The Ethereum Shanghai upgrade gives network validators the ability to unlock and withdraw staked coins. The ability to unstake Ethereum will de-risk the Ethereum staking in a massive way, resulting in more users liquid staking their ETH, thus increasing the revenue of liquid platforms. Consequently, this will incentivize more investors to stake more ETH, thus improving the Ethereum network.
Exploring The Hottest Liquid Staking Derivative Platforms and Their Tokens
Liquid staking offers an efficient and flexible way to stake your crypto and generate passive income. There are many liquid platforms that provide liquid staking derivatives, each with its own advantages and weaknesses, yields, fees, and supported tokens. Here are some of the hottest liquid staking derivatives platforms and their tokens:
Rocket Pool is one of the most decentralized Ethereum staking platforms that enables users to earn staking rewards by depositing their ETH into a pool to get rETH – the LSD token received in exchange for the staked ETH.
To run a node on Rocket Pool, stakers are required to stake both ETH and RPL, the governance token of the project. They are required to hold 16 ETH and 1.6 ETH of RPL.
Rocket Pool provides easier access to the full benefits of ETH staking by offering mini pools where stakers only need 16 ETH to become a node operator instead of the usual 32 ETH requirement. The mini pool allows full node operators to enjoy a higher ROI with both RPL and ETH staking rewards.
rETH can be traded on Ethereum DEXs such as Balancer and Bancor.
Tenet is one of the cutting-edge liquid staking derivatives protocols that introduces a revolutionary Proof of Stake framework which retains all of its benefits while increasing security.
The staking provider allows users to unlock the earning potential of their LSDs by using them in the native DeFi ecosystem to mint a stablecoin, provide liquidity, or trade on leverage.
Staking TENET, you will receive tTENET, the LSD governance token of the project. tTENET employs a tokenomic model inspired by a class of tokenomic primitives called veTokenomics. tTENET can be locked to produce veTENET.
Tenet uses veTokenomics at the chain level to direct emissions from block rewards and other dAPP user incentives. Users locking the Tenet asset in this mechanism receive yield from protocols deployed across the ecosystem.
Lido currently is the top staking provider with about 79% market share. The platform deploys dual ETH tokens mechanism, stETH which uses a rebase model – its supply is automated through a smart contract to maintain price stability, and wstETH which is wrapped stETH that uses a value accrual model.
stETH is the largest staked token with the most liquidity. Users can stake ETH on the platform and receive the stETH in exchange at a rate of 1:1. With its derivative tokens, stETH, Lido offers liquidity to stakers (stETH, stSOL and bLUNA).
stETH can be traded on various ETH Decentralized exchanges like Uniswap and SushiSwap.
Frax share is the first fractional-algorithmic stablecoin and the fastest growing ETH liquid staking provider.
The protocol implements a two token system design – one for staking rewards (sfrxETH), and one for farming and withdrawing back to ETH (frxETH). Depositors receive frxETH in exchange for their ETH based on a 1:1 ratio while sfrxETH is staked frxETH (Frax Ether).
To get started, ETH holders can deposit their tokens into the Frax ETH Minter smart contract. Stakers receive an annual reward of 6 - 10% on staked ETH. They can earn an additional 10% yield (highest returns of all LSD tokens) by providing liquidity in CRV with the frxETH on the curve platform. To unlock staaking rewards, stakers must convert the frxETH tokens into sfrxETH.
Liquid staking derivatives have surpassed lending in the combined total value locked (TVL), making it the second largest DeFi service in the market. These tokens have been gaining momentum in recent months as it provides a way for investors to earn rewards while supporting the network’s security and efficiency.
By offering investors a new way to earn passive income on their digital assets, LSD is taking the cryptocurrency world by storm. Investors can position themselves to leverage the opportunities presented by liquid staking derivatives by watching out for the latest developments in this rapidly evolving space.
However, it's advisable that you do your own research before choosing the right liquid staking platform for you to ensure that your staked assets are safe and you're maximizing your returns.