Ethereum’s future Shanghai upgrade will allow users to withdraw locked Ether (ETH), which will increase the liquidity and competitiveness of the network, while bringing its staking ratio closer to that of its competitors.
The Shanghai Update is an Ethereum hard fork scheduled for early April. It implements five Ethereum enhancement proposals, the main one being EIP-4895, which allows users to withdraw their locked tokens representing staked Ether from the Beacon Chain.
The ability to withdraw Ether locked in the protocol could increase market liquidity and make it easier for users to access their funds. Ethereum’s liquid staking platforms, which sprung up largely to ease the blockchain’s prohibitive locking and staking requirements, could also benefit from the upgrade.
Since the Ethereum network went proof-of-stake (PoS) in September 2022, increasing the staked percentage of Ether has become important to help secure the protocol. But many have been hesitant to lock up their ETH tokens due to the unavailability of withdrawals. Consequently, only around 15% of ETH is currently locked up, while all other major Layer 1 networks have a staking ratio of over 40%.
According to The DeFi Investor, many investors will opt for a liquid staking option after the Shanghai update, as they can use liquid staking derivatives on other DeFi networks without losing performance on their holdings.
Because liquid staking derivatives can be used across DeFi without giving up the staking yield.
After withdrawing staked $ETH becomes available, the revenue of liquid staking providers will likely take off.
revenue goes up -> their tokens benefit as well
— The DeFi Investor (@TheDeFinvestor) January 4, 2023
The DeFi Investor added that once the locked ETH becomes available for withdrawal, revenue from liquid staking providers will likely increase significantly, which may have a positive impact on their token prices.
Furthermore, increased competition between these platforms will likely benefit their users with lower fees and additional perks in exchange for their loyalty.
Lido is the largest provider of ETH liquid staking and is a market leader in its segment. Other notable liquid staking providers include Rocket Pool, Ankr, Coinbase, and Frax Finance, all of which are expected to increase in usage following the Shanghai rollout.
Ethereum leads liquid staking activity
Deposits on the Ethereum Beacon Chain across all staking providers have been on an upward trend since the network officially opened to deposits in late 2020, indicating a strong and sustained interest in ETH staking following the upgrade Shanghai. Although Lido accounts for most of the liquid staking on Ethereum, competition is intensifying as multiple vendors introduce enhancements to their products, which could reduce the risk of a single staking provider becoming a centralization point for the ethereum network.
Liquid staking is also possible with the tokens of other Layer 1 networks. For example, Polkadot’s DOT token (DOT) can be liquidated via Ankr. For example, Polkadot’s DOT (DOT) can be settled through Ankr, Cosmos’s ATOM (ATOM) through StaFi, and Solana’s SOL (SOL) on Lido and Marinade Finance.
Although competing networks have their own liquid staking solutions in the offing, Ethereum maintains the lead, with over 7 million ETH in liquid staking across all sources. By comparison, at least 3.6 million SOLs are in liquid staking solutions: 1.21 million SOLs through Marinade Finance and 2.39 million SOLs through Lido.
Liquid staking and staking pools give Ethereum an advantage over its competitors by improving the interoperability of decentralized applications in the ecosystem. This increased participation reinforces the security and usefulness of all protocols that use Ethereum’s PoS consensus mechanism.
Providers like Lido and Rocket Pool remove the barrier to entry so that ETH holders can participate in the staking process without committing 32 ETH or running a validator node.
This brings Ethereum closer to networks like Solana, which has a lower barrier to entry for staking.
While the concentration of ETH locked through third parties raises decentralization concerns on Lido and Coinbase in particular, there has been a roughly 9% increase in total validator nodes on the network over the past 30 days, driving the number up. total Ethereum nodes to 11,786 at press time. This means that centralization problems are growing and shrinking at the same time.
Total Ethereum node count from February 6 to March 8. Source: Etherscan/Ethereum Node Tracker
With the Shanghai Update, which lowers the risk of staking thanks to improved liquidity and reduced lock-up requirements, institutions can also view Ethereum and ETH staking as an asset in a more positive light.
Shanghai makes it pretty attractive for big institutions to play long-term bets on $ETH.
â–» Liquidity is improved
â–» Uncertain lock-up requirements go away
â–» Withdrawals are enabled
Now big institutions are looking at ETH staking as a possible risk-free, decentralized yield.
— Stader Ethereum (@staderlabs_eth) February 16, 2023
However, the United States Securities and Exchange Commission has recently cracked down on staking protocols that it considers to be investment contracts. Although providers like Lido are working towards further decentralization, whether the SEC will classify them as securities and how an unfavorable verdict might affect the range of ETH staking providers remains to be seen.
A turbulent macroeconomic outlook also looms over cryptocurrencies in 2023, which may lead more ETH holders to divest and sell on the open market after the arrival of the Shanghai update, although the Ethereum Foundation limits the amount of ETH that can be withdrawal daily.
However, Ethereum staking deposits have continued to grow regardless of the source, and savvy investors will likely find solutions to whatever regulatory hurdles the space challenges.
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