With the arrival of the Shanghai update, the behavior of Ether (ETH) holders should change significantly. We expect an increase in the number of users wishing to deposit their ETH in staking and therefore in the popularity of Liquidity Staking protocols. Find out which crypto projects to watch as Shanghai approaches.
Shanghai propels Liquidity Staking
The Ethereum (ETH) network is only a few weeks away from the Shanghai update, while liquidity staking solutions are starting to catch the eye of investors. As a reminder, Shanghai will allow users to withdraw their Beacon Chain-locked Ethers before The Merge.
Logically, these users will want to stake their ETH again. Indeed, in addition to participating in blockchain security support and transaction validation, this makes it possible to generate an interesting return of around 4 or 5%.
But what are the solutions available to these users? The most obvious would be to follow the ordinary staking process, consisting of creating its own validation node by depositing 32 ETH on the blockchain. Since Ether holders often do not have the funds or technical expertise for this option, they turn to Liquidity Staking.
The best known protocols are Lido, Rocket Pool or even Frax Finance. Their advantages are multiple: they remove the technical entry barrier to staking on Ethereum, but above all they solve the problem of illiquidity of locked tokens.
Indeed, if you stake Ethers, then you can no longer use them: they are illiquid. Whereas when you deposit 1 ETH on a Liquidity Staking protocol such as Lido for example, you receive 1 stETH in return. This token indicates that we have 1 ETH in staking but it can especially be used in various decentralized applications.
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At present, only 14% of Ethers are locked to contribute to the functioning of the network, which is much less than other blockchains. There are elements currently holding users back from participating in staking, including the fear that locked tokens may never be recovered. A problem that will be solved by Shanghai.
Faced with these elements, we can anticipate an increase in the number of users wishing to stake their Ethers. Thus, Liquidity Staking protocols could become increasingly popular. Whether it’s because of the new Ethers released, or unsophisticated users looking for a simple solution to make a return on their ETH, they should see their user numbers grow in 2023.
Increase in the amount of ETH locked in Liquidity Staking
As shown in the figure above, the trend can already be seen on-chain. It is also felt in the cryptocurrency market. While Bitcoin (BTC) records a 40% increase over 2023, Liquidity Staking protocol tokens print even more phenomenal growth :
- Frax Finance (FXS): 135%;
- Rocket Pool (RPL): 94%;
- Lido DAO (LDO): 91%.
Note that these are the governance tokens of these protocols. Their interest is simple, since they allow to receive part of the rewards of the protocol. They therefore represent an alternative means of exposure to the upcoming trend of Liquidity Staking.
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Lilian Aliaga
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