In today’s post, we dive into Ethereum LSDs (Liquid Staking Derivatives).
With the buzz surrounding the upcoming Ethereum Shanghai, LSDs have quickly become the hottest trend in crypto.
But what’s all the hype about?
Well, LSDs are revolutionizing ETH staking by allowing stakers to maximize profits.
To learn more about LSDs, roll up your sleeve and let’s get started!
What Are Ethereum LSDs?
Ethereum LSDs are tokens representing staked ETH and rewards earned by ETH holders who participate in Ethereum’s Proof of Stake (PoS) consensus mechanism.
The tokens can be traded, borrowed, lent, and used for other purposes without unstaking the ETH.
How Ethereum LSDs started
Liquid staking derivatives (LSDs) came as a solution to the problem of illiquidity faced by participants in Ethereum’s PoS blockchain.
As you know, ETH holders were allowed to stake ETH after the launch of the Ethereum Beacon chain.
To be eligible, one must become a validator and stake at least 32 ETH as collateral to earn staking rewards.
While the staking reward offered was attractive, the tokens had to be locked up for a predetermined period called the Shanghai.
This was not so easy for ETH holders; not only is 32 ETH too high, but the pending lock-up period rendered the stakes illiquid.
Enter Ethereum LSDS!
LSDs were introduced to allow ETH holders to stake any amount of ETH while also being able to use their tokens for other purposes freely.
How do LSDs work?
Here is how:
When ETH holders stake their ETH with an LSD provider, they get a token representing their staked ETH and rewards.
They can make additional earnings by reinvesting the token into trading, aping in yield farming, lending and borrowing, etc. Interesting, right?
Curious about the LSD providers? Check out the list below!
Top Ethereum LSD Providers
i. Lido Finance
Lido Finance is a DeFi platform allowing users to stake ETH on the mainnet and receive stETH tokens in return, representing their stake.
These stETH tokens can be traded on various exchanges and used to hunt DeFi opportunities.
Lido Finance is the largest LSD provider in the market, with over $10 billion worth of ETH currently (March 2023) staked on its platform.
To join Lido, simply visit the platform and click on the “Stake Ethereum” button to proceed. As of this writing, Lido is currently offering an APY of up to 5.9%, which is paid out in its native token, LDO.
ii. Rocket Pool
Rocket Pool is another popular Ethereum LSD provider.
It allows users to stake their ETH by depositing it into a smart contract that acts as an Ethereum staking pool.
Users who deposit Ethereum into the pool receive Rocket Pool’s rETH and RPL tokens, in return.
Rocket Pool’s platform has over 400 thousand ETH staked and offers an APY of up to 7.11%.
Did you know?
Metamask has integrated support for Lido Finance and Rocket Pool. This means that you can directly stake ETH in these two LSD providers directly from your wallet.
Coinbase is one of the centralized Ethereum LSD providers.
The exchange lets users stake ETH to receive cbETH (Coinbase Wrapped Staked ETH).
As observed on Defillama, cbETH is the second largest Ethereum LSD, following Lido.
Coinbase provides a 3.76% APY for cbETH, and the exchange currently holds $2.1 billion worth of staked ETH.
Other top LSD providers include Stakewise, Fras Ether, Anker, StakeHound, Binance, etc.
How do Ethereum LSDs generate rewards? Continue below!
The Reward Mechanisms of Ethereum LSDs
LSDs can earn rewards through any of the three mechanisms chosen by the provider.
i. Two-token System
This simply means the use of a dual token system.
While one token represents the value of ETH staked, the other token is used to provide incentives.
This mechanism is used by LSD providers like Lido and Rocket Pool.
ii. Rebase tokens
These LSDs adjust token balances based on daily staking rewards. This happens in such a way that the number of tokens increases while the value of the LSD token remains the same.
Imagine you have 1 ETH and you want to stake it to earn a daily 1% staking reward.
1 ETH is equal to 1 LSD token. You staked your 1 ETH and got 1 LSD token.
A day later, your 1 LSD increases to 1.001 LSD tokens. While 0.001 is your staking reward, it does not change the 1:1 peg of ETH and LSD.
iii. Value-accruing tokens
These tokens earn rewards by increasing the value of the LSD tokens.
Back to the previous example:
If you had staked your ETH with this type of LSD, only the value of your LSD token would increase by 1%.
Why is there so much hype about Ethereum LSDs, and for how long will it last? Continue below!
What Is The Future Of Ethereum LSDs?
With Ethereum’s transition to PoS, it’s clear that LSDs are here to stay for the foreseeable future.
According to a chart released by Messari in December 2022, ETH has the lowest staking ratio among PoS blockchains, accounting for only 14%.
This makes sense because, as ETH is valuable, some ETH holders may worry about not being able to unstake it until a later time.
However, this is about to change with the forthcoming Ethereum Shanghai slated for April 12, 2023.
The upgrade is anticipated to address the aforementioned staked ETH withdrawal concern and attract more stakers to LSD platforms.
Luckily, LSDs are making ETH staking more profitable than the conventional staking approach. So, many investors who have ETH sitting idle won’t want to miss out.
In addition, Shanghai might be a catalyst for the emergence of more LSD providers.
Already, Justin Sun, Tron’s founder, has disclosed in an interview with CoinDesk that the blockchain plans to launch an LSD provider following Shanghai.
Nevertheless, here are a few things to cross-check before using an LSD provider:
- The project’s team
- Smart contract audits
- The project’s Treasury Fund (in the event of potential de-pegging risk)
- The project’s revenue model
With that, we’ve come to the end of the post. It’s time to get your opinion.
What do you think about Ethereum LSDs?
Put your thoughts in the comment box below, and I will respond. Thanks for reading!