For years, various blockchain projects have been rumored to be the future “killers of Ethereum”, projects that would unseat Ether from its throne and usurp the title of leading digital asset. That day seems to have arrived, although it seems that it was an inside job. Liquid staked Ethereum (stETH) and other liquid staked derivatives are poised to obsolete Ether (ETH) as an asset.
The transition from proof-of-work (PoW) to proof-of-stake (PoW) allows everyday decentralized finance (DeFi) users to benefit from rewards previously reserved for miners by simply holding stETH or any other derivatives. of liquid ETH staking. This has led to a groundswell of interest across the industry, from individuals to Centralized Finance Institutions (CeFi) and DeFi. In the last month, ETH liquid staking derivatives have received a ton of attention, and industry titans – including Coinbase and Frax – have launched ETH liquid staking derivatives.
Liquid staking derivatives offer all the benefits of regular ETH while being a yield-generating asset. This means that holders can gain exposure to ETH’s price action and maintain liquidity while reaping the benefits of staking. Wallets holding stETH will see their holdings gradually increase as staking returns are regularly added to the initial sum.
While most staking strategies require funds to be locked in a validator, liquid staking derivatives allow users to maintain liquidity while benefiting from staking returns. ETH locked in staking validators is not available for withdrawal until an ambiguous time in the future, likely with the Shanghai update. While stETH is still trading at a slight discount compared to ETH, this gap is expected to close permanently once withdrawals are enabled. Simply put, ETH liquid staking tokens are simply more capital efficient than standard ETH or more traditional staking practices.
From a user point of view, there is little reason to hold normal ETH, where the only potential advantage would be an increase in price when they could hold a liquid staking derivative that would increase their potential profits through staking yield. Project founders have adopted a similar mindset. From DeFi to non-fungible token (NFT) projects, the Web3 teams have integrated stETH into their protocols, with giants like Curve and Aave making it even easier for DeFi users to integrate stETH into their investment strategies.
For lending protocols, stETH offers the ability to increase yield collateral without having to make risky investment decisions to keep users satisfied. NFT projects are able to establish a source of income through their mint income rather than sticking with a finite lump sum. By making it easy for Web3 projects to stay afloat and their community happy, ETH liquid staking derivatives free project leaders to stop worrying about money and drive true innovation.
In addition to being much more capital efficient, ETH liquid staking derivatives help maintain the Ethereum network. stETH and other derivatives represent Ether, which has been deposited in an Ethereum validator to help provide network security.
The centralization of staked ETH has been a major criticism of the PoS consensus model, with Lido accounting for over 80% of the liquid staking derivatives market share while controlling over 30% of staked ETH. However, the recent proliferation of alternatives is about to allay these concerns, as market share is spread across multiple organizations. The exchange of ETH for liquid staking derivatives is a means for users to support decentralization while replenishing their exchanges.
As the benefits of staking continue to appear in the press, liquid staking derivatives are sure to become a core part of even the simplest DeFi strategies. The fact that Coinbase offers “cbETH” means that even retail investors will be familiar with the strategy. We are likely to see a sharp rise in protocols accepting liquid staking derivatives as users begin to flock to this essentially free performance. Soon many DeFi users could have just ETH to cover their gas expenses.
The proliferation of liquid staking derivatives will help bolster the amount of ETH deposited in various validator systems, improving network security while providing performance to offer financial benefits to supporters. The days of ETH seem to be numbered. Beyond a nominal gas allocation, any ETH that is not converted into a liquid staking derivative will simply be money left on the table. The long-heralded killer of ETH seems to have finally surfaced, though it appears it will only boost the security of Ethereum and its supporters’ exchanges.
Sam Forman is the founder of Sturdy, a DeFi lending protocol. He became passionate about cryptography in high school before studying mathematics and computer science at Stanford. When he’s not working at Sturdy, Sam practices Brazilian jiu-jitsu and cheers on the New York Giants.
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