“LSD narrative” is a keyword on Twitter that is getting a lot of attention from the Ethereum community for the past few days. What is happening? How is it related to The Merge and the update which took place on 3/2022? Let’s find out with Defilearn from this article.
What are Liquid Staking Derivatives?
Liquid staking derivatives (abbreviated as LSD) are intermediary protocols that allow users to participate in staking ETH in small amounts, instead of needing 32ETH to stake directly on the Beaconchain.
Participants receive liquid tokens (stETH, rETH…) when depositing ETH into the protocol. These tokens can participate in Defi activities and could be traded just like ETH, helping unlock liquidity while still staked on Ethereum to receive rewards for participating in network security.
Staking of ETH on the beacon chain starts from 11/2020, and will not be unstaked until the Shanghai upgrade takes place (scheduled for 3/2023).
In short, the next event of The Merge will have a huge impact on the ETH price and the LSD market in the Ethereum ecosystem.
Impacts of Shanghai Upgrade
ETH selling pressure when unstaking
According to data from @hildobby Dune dashboard, the amount of ETH being staked in Beaconchain is ~15.9M ETH.
– Liquid staking: ~7M ETH
– CEXes: ~2.52M ETH
– Staking pool: 1.6M ETH
– Whales: 4.5M ETH
– Other parties 0.3M ETH
The amount of ETH staking through Liquid staking, CEXes is not liquidated because the depositors received “derivative ETH” which is tradable.
The selling pressure could come from the ETH of the Staking pool (non-liquid), Whales, and other parties who directly staked ETH into the beacon chain.
However, data from Dune also shows that currently, only 23.1% (~ 3.7M ETH) of staking is profitable. The rest is still in a bad state. So the number of ETH creating selling pressure when unstaked is not likely to be the case.
Another important piece of information that could be misunderstood is that it is impossible to unstake all ETH at one time.
The number of active validators across the chain at the time of this writing is 498.1K or 32ETH/validator. => To unstake every 32 ETH, 1 validator needs to leave the chain.
According to Ethereum.Org only 6 validators are exited every epoch (~6.4 minutes) => There only can be a maximum of 1350 Validators (~43200 ETH) exit the network per day=> need ~370 days for all ETH to be unstaked
Long-term ETH staking ratio
According to stakingreward.com, Ethereum is currently the blockchain with the lowest staking ratio with a staking ratio of only 13.77%. The cause may come from the risks of not being able to unstake. But after the Shanghai upgrade, the barrier is removed, and long-term ETH staking is predicted to increase several times up to at least 60% like other major blockchains.
Liquid Staking on Ethereum
The Biggest LSD projects on Ethereum
The LSD market on Ethereum reaps the benefits. The token price and TVL of the protocols increased rapidly thanks to the Shanghai Upgrade.
Overview of the top LSD protocols on Ethereum.
Opportunity to compete against LIDO of other LSD protocols?
Opportunity to compete against LIDO of other LSD protocols? Lido is currently the LSD protocol that dominates the majority of the market with over 88% market share. This could change in March 2023, when ETH is unstaked. LSD protocols with good performance will have the opportunity to grow when attracting:
– New ETH staked as the LSD market expands.
– ETH source can freely move between LSD protocols to maximize yield.
– ETH staked directly into the beacon chain is converted to liquid staking.
The bottom line
After “Ethereum deflation”, Liquid staking derivatives are the next positive story resulting from The Merge. In the short term, unstaking ETH could temporarily lead to increased selling pressure and a decrease in TVL on LSD protocols. However, in the long run, the ability to stake/unstake with a high level of flexibility after the update will increase the staking ratio => LSD protocols will have the opportunity to grow as the market expands.
Analysis articles about potential LSD projects that you can dive into: