Thanks to the recent Ethereum Shanghai upgrade, liquid staking derivatives (LSDs) have become the latest trend in the decentralized finance space (DeFi), offering stakers unconventional ways to unlock liquidity for their staked crypto assets and earn additional yields.
Liquid staking derivatives are gaining momentum across the Ethereum network and have the potential to dominate other ecosystems, including major layer-1 blockchains like Avalanche and Polygon.
Recent data from DeFiLlama shows that approximately $17.99 billion is currently locked up in LSDs, with Lido (currently the largest liquid staking protocol) dominating the space with approximately $11.95 billion total value locked (TVL).
Following the major ethereum upgrade (also known as the Shanghai or Shapella upgrade), there has been a sharp rise in interest in LSDs, which has led to a surge in cash flow in DeFi and made staking more accessible to a lot of people who can now take advantage of both staking rewards and liquidity. The upgrade enables withdrawals from Ethereum staking contracts, significantly reducing the risk of holding staked Ethereum (stETH).
What are liquid staking derivatives (LSDs)?
Liquid Staking Derivatives (or Liquid Staking Tokens) are a unique kind of token that allows stakers to earn yield without losing the liquidity of their staked assets. These liquid tokens can be used in various ways; they can be sold, traded or used in Defi applications just like regular ETH.Staking tokens in proof-of-stake blockchains means locking tokens as collateral to secure the network and earn rewards, however, due to the lock-up nature, these tokens become illiquid.
The Ethereum Shanghai Upgrade Revolution
After the merge in September 2022, ethereum blockchain successfully swapped from Proof-of-Work (PoW) consensus mechanism to Proof-of-Stake (PoS) mechanism. By moving from PoW to PoS, the Ethereum blockchain now relies on validators instead of miners to run it.
Since the launch of Ethereum’s Beacon Chain in December 2020, the first phase of the PoS transition, individuals could stake their ETH and serve as validators to process transactions and secure the network. To become a validator, stakers needed a specialized hardware and at least 32 ETH stake to run nodes themselves and receive rewards in blocks. However, they were unable to unstake their tokens and withdraw their rewards. Thanks to the Ethereum Shanghai upgrade, validators can now unstake their staked ETH and withdraw their rewards.
Why are LSD tokens on the Rise?
The recent upgrade includes a code referred to as EIP 4895, which allows Beacon Chain staked ETH withdrawals, enabling a 1:1 exchange of staked Ether for Ether. With this development, ETH holders can now stake their tokens through liquid staking pools to generate yields, thus increasing the demand for LSDs and triggering rapid growth in DeFi TVL.
Liquid staking derivatives solve the problem of capital inefficiency by providing users with a liquid and usable token representing their staked asset. They also eliminate the 32 ETH entry barrier, enabling anyone to stake any amount of ETH they can afford in exchange for additional yields.
Best LSD Crypto Tokens In 2023
LSD tokens have quickly become the biggest crypto trend in 2023. As such, an increasing number of DeFi protocols have rolled out to offer a more flexible way to stake and earn by providing LSDs.
Currently, 18.5 million ETH (~33.40 billion) are being staked in liquid staking pools. The annual percentage rate (APR) for staking ETH currently sits at around 8.98% today.
As Ethereum staking ratio increases, the use cases for liquid staking protocols and their tokens will also increase. Here are some of the best LSD protocols and their tokens for ETH holders looking to earn yield through staking.
1) Lido ($LDO)
As a crypto trader, this is one of the best LSD tokens in the market to look out for. Lido is currently the largest liquid staking protocol dominating the space with an estimated $11.95 billion TVL at the time of writing. It has a market cap of about $2 billion, 85% of the total 1 billion LDO tokens are already in circulation.
Lido allows users to stake their ETH and earn additional rewards – with no lock ups and daily rewards. It supports Ethereum, Solana, Polygon, Terra, Kusama and Polkadot.
LDO – the native utility token, is used for granting governance rights and managing fee distribution. The token is available for trading on various exchanges, with cryptocurrency and stablecoin pairs currently available.
With LSDs on the rise, LDO has the potential to offer higher annual yield and market share than other protocols.
2) Rocket Pool ($RPL)
Rocket Pool is one of the largest decentralized Ethereum LSD protocols after the Lido protocol. The protocol aims to reduce both the capital and hardware requirements for staking on ETH 2.0, adding to the decentralization and security of Ethereum.
RPL is the ERC-20 utility token of Rocket Pool, and it’s used to govern the PDAO and can be staked by node operators.
Users can run their own nodes with only 16 ETH and 1.6 ETH worth of RPL. Node operators stake RPL as insurance, where users stake Ether and receive rETH, a liquid ERC-20 token, in return. This token automatically accrues staking rewards based on the performance of the entire network of node operators.
On Rocket Pool, node operatives receive a delegation of 15 per cent, which covers their operational costs and incentivizes them to provide high quality services to their users.
The current Rocket Pool market capis $958,730,935 with a circulating supply of 19,401,735 RPL. Over the last year, Rocket Pool price has increased by 102.20%. During the last month, the price of RPL has risen by 5.09%.
RPL is available on UniSwap (V3), Hoo, BKEX, XT.COM, Hotbit, and Bvnex.
3) Tenet Protocol ($TENET)
Tenet, the first layer-1 blockchain to create a DeFi ecosystem for LSDs. The DeFi ecosystem implants a unique model called Diversified Proof of Stake (DiPoS), which supports staking with any LSD asset from other chains, such as ETH, BNB, ATOM, SOL and ADA. As such, Tenet becomes partially secured by all its supported networks, thus improving security compared to standard single-token Proof of Stake.
$TENET is the native token of TENET. It is used at the base layer of the blockchain to pay for transaction execution as a gas token. TENET can also be staked in a Validator to secure the blockchain through TENET’s revolutionary DiPoS–mechanism. When you stake TENET you will receive an LSD of TENET called tTENET. tTenet also needs to be locked up with the corresponding staking provider to receive Validation rewards from securing the blockchain.
By participating in Tenet validation and earning network transaction fees with LSDs like stETH and cbETH, one can still benefit from the ETH staking yield that these LSDs provide.
The platform offers a zero management fee, that is, it eliminates the 10% management fee charged by protocols like Lido, as a form of security incentivization.
With its unique blockchain mechanism and utility, the token is sure to be a promising one with significant use cases.
4) Ankr ($ANKR)
Ankr is a leading blockchain infrastructure provider which offers multi-chain API connections and runs RPC nodes besides staking solutions. The LSD protocol aims to make the adoption of Web3 easier by offering a platform where users can deploy nodes on PoS blockchains, stake their PoS tokens and access decentralized finance (DeFi) applications.
ANKR, the native utility and governance token of Ankr, has many use cases, including as payment for services within the Ankr ecosystem and as a means of earning passive income by staking. The Ethereum token can be used for on-chain governance and also as an insurance for network participants.
With a market cap of over $250 million and a maximum supply of 10 billion (100%), Ankr is one of the largest Ethereum staker and go-to staking infrastructure providers for ecosystems like the BNB, Polygon, and more.
The Shanghai upgrade helped to bring back confidence in the Ethereum blockchain and served as fuel for LSD protocols. Issues like capital inefficiency and lock up periods that made stakes illiquid are now being resolved with the emergence of LSD protocols. By providing liquidity and yield opportunities for stakers, these protocols are unlocking the potential of the rapidly growing LSD market.
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