The cryptocurrency market witnessed the DeFi summer of 2020, in which apps like Compound and Uniswap turned Ether (ETH) and Bitcoin (BTC) into return-producing assets through yield farming and liquidity mining rewards. The price of Ether nearly doubled to $490 as the total liquidity of DeFi protocols quickly reached $10 billion.
Towards the end of 2020 and the beginning of 2021, the COVID-19 induced quantitative easing in all global markets was in full effect, causing a mega bull run that lasted almost a year. During this time, the price of Ether rose almost tenfold to peak above $4,800.
After the euphoric bullish phase ended, a painful cooldown ensued, which was exacerbated by the UST-LUNA crash that began in early 2022. This pushed the price of Ether up to $800. A ray of hope finally arrived in the Q3, when the market experienced a positive rally led by the Ethereum merger narrative.
The move to an environmentally friendly proof-of-stake (PoS) consensus mechanism was a big step forward. The event also reduced Ether inflation after the merger. During the run-up to the upgrade, on September 15, 2021, ETH peaked at over $2,000. However, the bullish momentum quickly faded, turning the upgrade into a buy on rumor and sell on news event.
A similar bullish opportunity could be brewing in Ether, as the next Shanghai update, scheduled for March 2023, grabs the market’s attention. The update will finally make it possible to withdraw funds from Ethereum staking contracts, which are currently locked. The upgrade will significantly reduce the risk of staking ETH.
It will be an opportunity for liquidity staking protocols to grow. Governance tokens for some of these protocols have skyrocketed since the start of the new year as hype builds around them.
There is a possibility that the update could push these tokens towards the highs of last year’s update. Furthermore, the Ethereum staking space is still in its early stages, which presents a market opportunity for the growth of these protocols.
The percentage of Ether locked is low
Currently, 13.18% of the total Ether supply is locked on the Beacon Chain, which is low compared to other proof-of-stake (PoS) chains like Cosmos Hub (ATOM) with a 62.5% lock ratio, Cardano ( ADA) with 71.8%, and Solana (SOL) with 71.4%. The reason for the low block ratio on the Ethereum network is that ETH tokens in their current state are inaccessible, but this will change in March.
The upcoming Shanghai update will include a code known as EIP 4895 that will enable withdrawals of Ether locked on the Beacon Chain, allowing for a 1-to-1 exchange of staked Ether for ETH. Ethereum’s blocking ratio should reach parity with other leading PoS networks after this update. A significant portion of which will likely move to liquid staking protocols.
Risk reduction of liquid staking derivatives
Liquid staking protocols like Lido and Rocket Pool allow Ether holders to stake without needing to run a validator node. Since Ether pools, a single user does not have a minimum threshold of 32 ETH (about $40,000 worth) to be a solo validator. People can allocate small or large fractions of Ether, lowering the barrier to entry for staking.
The protocols also allow for the provision of liquidity for locked assets, which would otherwise be locked into staking contracts. DeFi contracts offer a derivative token (for example, Lido’s stETH) in exchange for Ether locked in the PoS network. A user can trade stETH while earning returns from the staking contract.
As the proportion of Ethereum locked increases after the March update, the use of liquid staking protocols is likely to increase with it. Currently, liquid staking protocols represent 32.65% of the total Ether locked. Due to the advantages mentioned above, its market share should remain near or above current levels after the Shanghai update.
Governance tokens from liquid staking protocols could also benefit from their higher value locked, similar to DeFi tokens, which benefited from an increase in total value locked (TVL) in the last bull market.
How do liquid staking protocol governance tokens fare for Shanghai?
Lido DAO (LDO)
Lido DAO is the leader in the liquid staking space with higher annual returns and market share than other protocols. Lido controls 88.55% of the total ETH locked in these protocols.
Let’s take the amount of Ether locked as an approximation to evaluate the protocol. We again find that Lido has the most competitive ratio between market cap and locked Ether.
The weak point of the project’s token economy is that LDO is a governance token. It does not entitle holders to a share of the generated income or commissions. In addition, the token has additional inflation due to the unlocking of investor tokens until May of this year.
Technically, the LDO token broke through the short-term resistance around $1.17 with significant buying volume. Bulls are likely to target $1.80, taking advantage of the buzz around the Shanghai update.
The token is heavily shorted in the futures market after the recent 26% rise in its price since January 1. The funding rate for the LDO perpetual swap turned negative by large magnitude, providing an opportunity for further uptrend on a short-squeeze. The current support levels for LDO are 1.17 and 1.
Rocket Pool (RPL)
Rocket Pool is similar to Lido, although smaller in size. The ratio of market cap to Ether locked on the platform is five times that of Lido, which likely makes it overvalued.
However, the RPL token has an additional utility, besides governance, as a secure token for users. Node operators lock RPL as an insurance, where users receive the locked RPL in case of loss due to the operator.
RPL’s post-merger high in September 2021 was $34.30. Since the beginning of 2023, its price has risen by 10%, last trading at $22.40. If the buyers manage to create support above the $20 level, there is a chance that RPL will reach last year’s high of $30, which was reached around the Ethereum merger.
ANKR (ANKR)
Ankr is a blockchain infrastructure provider that offers API endpoints and runs RPC nodes in addition to staking solutions. Like LDO, ANKR is only used for governance purposes.
The token price has been relatively flat in recent days. The ratio of market cap to Ether locked in Ankr is on the higher side on par with Rocket Pool, which is a negative sign.
Still, if the buzz around the Shanghai update increases, ANKR may hit August 2021 highs of $0.05. The recent breakout level of $0.03 will act as resistance for the buyers. Currently, the token is trading around USD 0.015.
Stakewise (SWISE)
Stakewise offers the highest yield per locked funds at 4.43%. Its governance token is comparatively less inflated than RPL and ANKR in the market cap/locked Ether ratio, making it cheaper than RPL and ANKR.
However, the token distribution is negatively skewed towards private investors and the founding team, who hold 46.9% of the total SWISE supply. According to Nansen data, wallets identified as “smart money” have been slowly accumulating SWISE since April 2021.
SWISE’s post-merger high was $0.23, which will be the likely target for buyers. Support lies near the 2022 lows around $0.07.
Shared Stake is marked in red because the protocol was suspected of an internal exploit, which caused a 95% drop in the token price in June 2021. The high profitability of Shared Stake staking compared to others is also a detail. That attracts attention. On the other hand, Cream Finance has discontinued its Ether staking service.
The upcoming Shanghai update offers an opportunity for the liquid staking solutions space to grow. Lido DAO is the clear leader in this space with an optimal market price. The de-risking of ETH staking and the hype surrounding the event could translate into a series of rallies that would push the price of LDO and other liquid staking protocols back to their post-merger highs of last year.
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