Liquid Staking is Booming — Here is Why
Reviewing the current state of liquid staking and its yield opportunities.
Proof of Stake consensus mechanism requires validators to lock their tokens in order to have a chance of validating the next blocks and receive token rewards. Users can benefit from these staking rewards by delegating and locking their tokens to validators. In exchange, they receive a synthetic version of the original token, which keeps a tight price peg with the original blockchain token. This is what is known as liquid staking; a concept that allows validators and users both benefit with greater yields at the same time that improves capital efficiency and decentralization.
The benefits for validators offering these liquid staking tokens are that their coin stake grows thanks to users interested in holding their token, so they have a larger chance of being selected as block validators and hence be able to earn greater yields. The users win as well since these tokens earn an annual return close to the annual staking yield that the blockchain distributes. This boosts capital efficiency, since users can earn the staking yield without having their coins locked. This is also a boost of convenience and freedom that leads to greater yields, since these liquid tokens can be financialised by lending or supplying them as liquidity. The rewards from financializing these tokens would be a plus over the base staking yield that these liquid solutions offer, which vary from 5 to 15% depending on the chain:
Therefore one can be earning greater returns with liquid staking tokens than the traditional delegating and locking of tokens, which would be limited to the staking APY. Ideologically it also helps to secure the network, since more capital is at stake in the validators, the more expensive it would be for an external entity to attack the blockchain due to needing a larger stake. Here it can be seen how much of the total supply is locked with validators:
Despite the compelling benefits, there are risks that users have to keep in mind when holding liquid staking tokens. The main one is that the price peg with the original token is kept by market incentives such as arbitrage, and not secured by a unique authority as a validator. The arbitrage happens between public trading pools and validators that assure a native conversion between the blockchain token and the original token, and usually the other way around, allowing to exchange the liquid token for the original token.
Lido dominates in Ethereum
Lido continues being the larger party with more than $6.87bn in ETH staked with them. This stake is divided among more than 20 different professional validators. A key for Its growth can be explained by the increasing amount of integrations that they have conducted with more than 25 DeFi protocols. It is ubiquitous to find their liquid token stETH in most of the top DeFi protocol on Ethereum. For example, protocols like Curve or Balancer offer pools that offer 4–5% APY by supplying liquidity. The interest over Lido has grown recently likely due to these new integrations with top protocols as well as as renewed interest from investors, as can be seen here the daily volume in USD transacted in stETH is reaching all time highs of over $1.5bn:
Rocket pool growth has been remarkable as well. In spite of having less ETH locked ($362M) than Lido, they have managed to bootstrap a network of over 900 node operators. They just launched their rETH-stETH Curve pool as well. Right now most of its trading volume is through their Uniswap v3 pool, which is paying over 5% APR to its liquidity providers, depending on the range width of the liquidity that is provided.
Avalanche & Polygon Just Getting Started
Liquid staking via Avalanche’s popular money market Benqi was released last month. So far sAVAX has a very reduced supply compared to AVAX, but its current yield opportunities are a compelling reason for investors to hold its token, with 10% APY farms of sAVAX-AVAX on both Traderjoe and Pangolin.
In the same way Polygon partnered with Lido to bring liquid staquid to the Matic ecosystem as stMATIC. Currently seems not to be incentivized yet, but the main pool stMATIC-MATIC pool on Balancer will be the chosen one according to Lido’s plan.
Solana variety shines
The offer from the Solana ecosystem regarding liquid staking tokens is quite overwhelming: Marinade (mSOL), Lido (stSOL), Monkedao (daoSOL), aSOL Protocol (aSOL), Parrot (prtSOL), Socean (scnSOL). Their differences might vary slightly in the yields provided although the main difference is in the chosen node operators where the stake is delegated. Regarding the current yields, most of them are farms in the stablecoin dex of Solana, Saber with APY varying from 2% up to 8%.
Cosmos Superfluid Innovation
Superfluid staking is a new concept introduced by the Osmosis team where not only the native blockchain tokens can be used for validator selection but also the main liquidity providing tokens for the native token such as LP tokens of OSMO-ATOM. This is quite innovative since it combines in a simple way to earn yields from three of the main ways to earn in DeFi: trading fees, liquidity mining rewards and staking rewards.
Despite the boom in protocols offering access to staking yields it is a reality that most of the crypto balances are held in centralized exchanges with no intention to access to DeFi yields: less than 15% of the current market cap of crypto is allocated in DeF at the moment. Staking yield is among the safest types of yields that users can have access to, and nowadays users have few excuses to not learn about these mechanics since tens of protocols are easing that access and allowing users all the benefits. Our expectation is that the amount of users that will opt to hold liquid staking tokens will grow, with more node validators, more liquid staking operators, and even better ways to financialize these assets.
