What is Ethereum Liquid Staking and why is it crucial as the Shanghai Upgrade looms?

Ethereum, the largest smart contract platform in the industry, has undergone a major change by moving to a new consensus algorithm in 2022.

What is commonly referred to as consolidation saw the network abandon Proof of Work and move to Proof of Stake in pursuit of a broader roadmap towards scalability, decentralization, and security.

speedy transfer

  • Self-entry restrictions
  • What is Ethereum Liquid Staking?
  • Top 3 protocols for staking Ethereum liquidity: Lido, Rocketball, Anker
  • Liquidity Staking and Exchange Staking: What’s the Difference?
  • Top 3 protocols for staking Ethereum liquidity: Lido, Rocketball, Anker
  • Why are Ethereum Liquid Staking Coins Rising?

With the introduction of Proof of Stake on the Beacon chain a while ago, users were able to deposit 32 ETH to become full validators of the network.

This is part of the core components of Ethereum – namely decentralization and transparency. Essentially, users around the world can maintain and enforce the network by running their own verification nodes.

However, this in itself also brought some limitations. Let’s take a look at some of them when it comes to self-effort.

Self-entry restrictions

Those who aspire to become full auditors face some notable drawbacks. For example, they cannot transfer the minimum required amount (32 ETH), which makes it completely illiquid for the time the user wants to remain fully validated.

Users who share their ETH to a Beacon stakeholder contract in an effort to secure the network may not withdraw ETH until this functionality is enabled. The core developers of Ethereum said that this will become possible with the Shanghai Update. It is expected to hit the public test network in February and possibly the main network in March.

Read more about the Shanghai Update this spring Podcast With Matt Nelson, ConsenSys Product Manager.

It is important to note that there are currently around 16 million ETH worth close to $25 billion (at current prices) locked in contracts. Against this significant limitation, liquid insertion pads offer an alternative.

What is Ethereum Liquid Staking?

Staking Liquid Ethereum is a concept that has been around for quite some time but it took off in early 2023 when the majority of platforms offering these features saw exponential growth.

Basically, liquid betting is an alternative to locking the user’s stake. By doing so, it allows users to stake and disable any amount of ETH they want without having to enable this feature on the mainnet (eg before the Shanghai upgrade).

This is done by issuing a tokenized version of the money being bet on – a type of derivative. It can be transferred, stored, traded, spent or even locked, as with a regular token.

The way it works is very simple. The user deposits ETH to a third-party platform. The platform will deposit ETh into their Beacon deposit contract (by running their own validators). In return, the protocol will generate an analog ETH, which the user can withdraw, trade, bet, and more.

There are some advantages of Ethereum Liquid Staking, such as:

  • There is no risk of a long term contract
  • Availability of deposited tokens
  • The exchange is similar to a locked ETH stake

The story of Ethereum Liquid Staking has been largely driven by the upcoming Shanghai Upgrade, and most of the platforms offering services of this type have seen their native cryptocurrency rally since the beginning of 2023.

Having said that, let’s take a quick look at some of the most popular Ethereum Liquid Staking protocols.

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Top 3 Ethereum Staking Liquid Protocols

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Lido is the largest Ethereum Liquid Staking protocol by total market cap and total value locked ($7.68 billion at the time of writing) on ​​its platform.

When users stake ETH with Lido, they receive an alternative token called stETH that represents their stake at a 1:1 ratio. Tokens are stamped upon deposit and then burned upon redemption.

StETH token balances are issued at a ratio of 1:1 to the ETH stored by Lido. The stETH token balances are also updated daily when the oracle reports the change in the total bet.

The original cryptocurrency is called LDO.

Rocket assembly

As of this writing, Rocket Pool is the second largest Ethereum Liquid Staking Protocol in terms of the total value locked on its platform (around $800 million).

Similar to Lido, users can share their ETH on Rocket Pool and get an alternative token called rETH.

The minimum deposit is 0.01 ETH, there is no limit to how much users can bet, and they can keep betting and withdrawing as they see fit.

Rocket Pool’s original cryptocurrency is called RPL.

Langerhans

The Ankr protocol is next in line in terms of the total value of ETH locked on its platform. As of this writing, it’s about $153 million.

The alternative token issued by the protocol is called ankrETH. Similar to other platforms, users can withdraw whenever they want and participate in different DeFi farms using ankrETH tokens.

Liquidity Staking and Exchange Staking: What’s the Difference?

Some exchanges, such as Coinbase and Binance, also allow users to deposit and stake ETH against a Beacon deposit contract and earn rewards.

Additionally, they are issuing their own ETH tokens which users can withdraw and trade with as they wish. With Binance, for example, the token is called BETH, and users can trade it for USDT whenever they want. The most important thing to remember is that you must have BETH in your account to be eligible for a bet refund.

Another important factor is that these parties are central counterparties and therefore hold custody of your tokens – in this case ETH options. Therefore, all the disadvantages and limitations of holding cryptocurrencies on an exchange apply, with all the advantages as well.

Why are Ethereum Liquid Staking Coins Rising?

As mentioned at the beginning of the guide, all of the protocols that provide liquid storage capabilities on Ethereum have seen the price of the native cryptocurrency skyrocket since the beginning of 2023.

For example, LDO is up over 100% in the last 30 days. ANKR is up about 45% in the last 14 days. Shares of Frax (FXS) are up over 100% in the past two weeks. Rocket Pool’s RPL token is up 70% in the past month. Other floating Ethereum coins, such as StakeWise (SWISE) Stafi (FIS) and others, are also up in similar percentages.

The consensus seems to be that traders are anticipating that Ethereum’s upcoming Shanghai Upgrade will be very beneficial for these platforms. The reason is that more than 15 million ETH will be unlocked and users will look for floating options where they will stake their ETH. Since these protocols offer some clear advantages, the current narrative is that Shanghai will drive the demand for its services.

Post What is Ethereum Liquid Staking and why is it important as the Shanghai Upgrade looms? It first appeared on CryptoPotato.

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