Top Liquid Staking Protocols on Ethereum Ahead of Shanghai Upgrade
We are only a few days away from the ETH Shanghai upgrade, the next important milestone in Ethereum’s journey toward becoming a more efficient ecosystem for decentralized applications (dApps). The highly anticipated hard fork to the Ethereum mainnet will improve its scalability, security, and efficiency. More importantly, it will enable users to unlock their staked ETH from the network.
Liquid staking protocols are expected to play a significant role in the upgrade, as they enable users to stake their ETH while still having the ability to use it for other purposes, such as DeFi loans or trading. Since the Beacon Chain started supporting ETH staking in December 2020, liquid staking has become a popular way for ETH holders to stake their tokens and participate in Ethereum’s PoS consensus mechanism.
Overview of Upcoming Ethereum Shanghai Upgrade
The Merge in September 2022 brought the PoS consensus from the Beacon Chain to the Ethereum mainnet, and further drove up interest in staking ETH among crypto investors. The top liquid staking protocols in the market played a key role in making ETH staking more accessible by lowering entry barriers and letting small investors also stake their tokens without locking up liquidity.
This article explores the benefits of liquid staking and offers a detailed analysis on the top liquid staking protocols on Ethereum. The Shanghai upgrade is expected to drive higher interest in staking Ether. It could help liquid staking protocols garner significant attention among investors in the run-up to the Shanghai/Capella upgrade and shortly after that.
We’ve also covered how the Ethereum Shanghai upgrade could impact the Ether price in our next series blog post.
How Does Liquid Staking on Ethereum Work?
Liquid staking is a process that lets users stake their Ethereum and receive an ERC-20 liquidity token that represents their staked ETH. This token can be easily traded or used in DeFi applications without the need to unstake the ETH first. Here’s how it works:
- Liquid staking protocols serve as validators and let ETH holders deposit their tokens with them.
- These protocols then deposit the users’ ETH to the Ethereum deposit contract - the smart contract on the Ethereum blockchain that holds the staked Ether.
- The protocols then earn rewards as validators and distribute them among their users as liquidity tokens.
- This way, such protocols pool ETH tokens from multiple users, reducing the need for each user to perform a validator function and deposit a minimum of 32 ETH to participate in staking. The minimum deposit amount on liquid staking protocols is far less than 32 ETH.
- Users can trade the liquidity tokens on exchanges and DeFi platforms without unstaking or unlocking their staked ETH. The liquidity tokens earned double as governance tokens on the respective protocols, letting users enjoy voting rights.
Liquid Staking and Benefits for ETH
Liquid staking protocols have contributed significantly to the popularity and adoption of Ethereum staking. The process offers a more flexible and accessible alternative to traditional staking methods, reducing the complexity and risks associated with self-staking and exchange staking and promoting wider participation in the Ethereum network.
Lowering the Entry Barrier for ETH Stakers
One of the biggest benefits of liquid staking is that it allows users to stake any amount of ETH without having to meet the minimum threshold of 32 ETH required for self-staking. Several pooling solutions exist to help users who do not have or feel comfortable staking 32 ETH, making staking as simple as a token swap. In this manner, liquid staking protocols have effectively lowered the entry barrier to ETH staking, allowing more users with smaller ETH holdings to participate in the staking activities on the PoS Ethereum network and earn rewards.
Offering Higher Flexibility and Reduced Complexity
Liquid staking also reduces the risk associated with self-staking by allowing users to exit their staked tokens anytime, making it a more flexible option than traditional staking methods. These protocols also reduce the complexity associated with exchange staking by eliminating the need for users to send their tokens to an exchange and trust the exchange to manage the staking process and their holdings.
Top ETH Liquid Staking Protocols
There are several liquid staking protocols in the market in terms of popularity and performance. Here are some of them to watch out for if you are interested in liquid staking projects on Ethereum:
Lido Finance is ETH’s largest liquid staking protocol, letting users stake their Ether without needing to lock tokens or invest in expensive infrastructure. In addition, users who stake ETH via Lido can continue to use their stETH tokens to participate in on-chain activities, such as trading and lending.
More than 74% of the total value locked in ETH liquid staking derivatives (LSDs) comes from Lido Finance, as of data on Defi Llama. At the time of writing, the platform’s TVL exceeds $11 billion.
Lido operates on Ethereum, Polygon, Solana, Polkadot, and Kusama networks. Its cross-chain operations make the platform a robust choice for liquid staking, not just ETH but other leading crypto tokens.
Its native token, LDO, works as the governance token, letting holders become members of the Lido DAO. The DAO governs Lido’s liquid staking processes, decides on key factors such as fees, and is responsible for executing upgrades that improve the platform’s stability and efficiency.
Rocket Pool is the second-largest liquid staking protocol for ETH and aims to solve one of the critical challenges of Lido - centralization. Unlike Lido’s centralized operations, Rocket Pool offers a decentralized, trustless, and community-owned platform for staking Ether without locking up the tokens. Users can stake their ETH tokens and receive rETH tokens in exchange, which can be traded or used in DeFi protocols on the Ethereum network.
Rocket Pool ranks third in terms of contributing to the ETH liquid staking market after Coinbase Wrapped Staked Ether. With over 1.1 billion ETH tokens staked on the protocol, its TVL is just under $2.3 billion.
Rocket Pool is a first-of-its-kind Ethereum PoS infrastructure service compatible with Ethereum 2.0. It provides a user-friendly process for users to stake their ETH tokens and earn rewards. It is designed to be highly decentralized and distributed, supporting the security and reliability of the Ethereum network.
RPL is the native token of the Rocket Pool platform. It is used for protocol governance and can be staked on a Rocket Pool node as insurance. In the process of creating a 16 ETH minipool validator in the protocol, a minimum of 10% of that ETH's value must also be staked in $RPL as a security promise to the protocol.
The next project we feature in our list is Frax Finance’s Frax Ether. The liquid ETH staking derivative forms part of the Frax Finance ecosystem and is designed to leverage the Frax Finance ecosystem to maximize staking yield and simplify the Ethereum staking process.
Users have deposited more than 128,000 ETH into Frax Ether’s LSD, making it the fourth largest in the market. The TVL of the protocol is more than $240 million at the time of writing.
Frax Ether (frxETH) is a liquid ETH staking protocol that acts as a stablecoin loosely pegged to ETH and leverages Frax's successful strategy in stablecoins. Users can deposit ETH into the Frax ETH Minter contract and receive an equivalent amount of frxETH.
Users can exchange frxETH for sfrxETH, making them eligible to earn staking yield redeemed when converting sfrxETH back to frxETH on the platform. The exchange rate of frxETH per sfrxETH increases over time as staking rewards are added to the vault. Frax Ether’s staking token sfrxETH has a relatively higher staking yield compared to other similar products.
The StakeWise liquid Ethereum 2.0 staking service lets users enjoy yields on the Beacon Chain by staking ETH. StakeWise v3 uses a Vault Scoring Model to score all Vaults based on various factors, including the node operator's validation technology, collateral situation, and operational performance. Based on the Vault score, users can choose the Vault to stake and earn staking rewards independently.
StakeWise offers Deposit Tokens and Reward Tokens for every ETH deposited and earned, respectively. Users can use these tokens to store, exchange, and transfer their deposits and rewards across any protocol or wallet that supports ERC-20 tokens. This feature enables users to exit from staking before Phase 2 and generate additional yield.
Over 87,000 ETH tokens have been staked using StakeWise, making it the fifth-largest ETH LSD in the crypto market. It boasts a TVL exceeding $166 million to date.
Stakers are issued sETH2 (staking ETH) and eETH2 (reward EH) tokens in StakeWise Pool. SWISE is the native token of the StakeWise platform, letting its holders become members of the StakeWise DAO and participate in the decentralized governance mechanism of the protocol.
Ankr ETH Liquid Staking is a staking solution offered by Ankr, a decentralized Web3 infrastructure provider where developers, dApps, and stakers can interact easily with numerous blockchains. Ankr ETH Liquid Staking offers Ethereum token holders the opportunity to stake ETH and, in return, claim Ethereum Liquid Staking tokens, also known as ankrETH (ex-aETHc).
Ankr has over 62,000 ETH tokens staked on its platform, ranking seventh in ETH LSD TVL in the crypto market. Ankr’s TVL holds just under $119 million at the time of writing.
The trustless, secure, and scalable ETH liquid staking solution integrates decentralized nodes into Ankr’s liquid staking mechanism, which increases staking security. Ankr’s users can maximize their profits by unlocking their staked ETH liquidity and reusing the tokens on other DeFi platforms in the Ethereum ecosystem.
ANKR serves as the native utility token of the ANKR ecosystem. It is used to pay for transactions and other services on the platform. $ANKR also gives token holders the power to participate in its governance mechanism.
Future of Liquid Staking on Ethereum After ETH Shanghai Update
The ETH Shanghai upgrade is expected to benefit liquid staking providers and further boost the popularity and competitiveness of Ethereum's staking ecosystem. Since the upgrade will allow users to unlock or withdraw their staked ETH tokens from the network, the development could boost Ethereum’s liquidity and competitiveness.
This could positively impact the Ethereum staking ratio. The Shanghai upgrade will also benefit liquidity providers who can enjoy the rapid expansion of the Ethereum staking market, including LSDs. The improved liquidity and flexibility in ETH staking that the Shanghai update could bring would also foster higher levels of innovation in the liquid staking derivatives space.
As staking on Ethereum becomes more accessible and convenient, we could see higher participation from token holders. There could be an increased demand for all kinds of staking services, including direct staking as validators, staking via centralized exchanges such as KuCoin, and even liquid staking.
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