Shanghai Update Ethereum — Bull Run OR Staking Accretion ?
Cryptoken Board UÜ team is happy to provide analyses on the recently launched Ethereum staking upgrade “Shanghai”, changes made to the Ethereum staking policy and the (hard-fork) set for April 12th 2023. With this research piece we’re highlighting growth metrics in total value locked, or TVL for both spot / derivatives protocols i) staked Ether (Ticker $ETH) and ii) Liquid Stake Derivative products known by acronym as “LSD”.
With this article, we will cover the following topics:
1] Fundamental analysis of the LSD products
2] TVL analysis of the leading LSD service providers
Finally, with the Shanghai hard-fork, a fundamental shift with Ethereum chain, the users will be able to withdraw their ether “staked” , possibly altering the capital allocations — where most of the Proof Of Stake #PoS token participating in Ethereum blockchain are participating in validation and consensus mechanism, earning token rewards.
However, the Shanghai update enables an unlocking feature (previously ETH staking was depended on time-based smart contracts). The market participants and cryptocurrency community at large are evaluating a possible impact of ETH staked.
We’re presenting below a comprehensive analysis and evaluating whether cost of capital of ETH tokens could lead to recalibrating of yield spot versus derivatives market, and if any such changes could impact ETH price.
The network upgrade, set for April, will address staked ETH withdrawal, and other benefits like reduced gas fees for developers, respectively. This milestone will possibly start a new era for Ethereum ecosystem, following a last year’s much-hyped transition to a more energy-efficient “proof-of-stake” blockchain.
Fundamental LSD Types
Whether the market participants can expect more ETH available token supply coming to market, via unlocked ETH, we’d like to present some relevant data helping the community understand types of possible Derivative Liquid State tokens. For this reason, our team has been able to to outline a three (3) major innovations in Ethereum DeFi and their token model architecture Rebalancing, Value Accruing and Dual Staking.
○ Lido — Rebalancing Tokens
○ Rocket Pool — Value Accruing Tokens
○ Stakewise — Dual Dipping Tokens
Liquidity Crunch
Cryptocurrency markets along with other asset classes like we know in conventional finance have experienced recently falling liquidity and lower trading volumes. Digital assets are not immune to a global sentiment change as it appears increasingly likely money / collateral is experiencing apatite for risk aversion, with many clients in blockchain choosing to safe keep their holdings just like other risk averse investors.
Furthermore, staking rewards for major blockchains have declined significantly over the past 12 months, thereafter — crypto projects were looking to find new ways to entice cryptocurrency holders to stake, even offering higher yields. What we can see with these new LSD products are similar to structured finance thus offering optimism for crypto. However, we must study actual structure (s) of these LSD products and services.
With DeFi major innovations like Curve Finance, and Yearn Finance focusing on spot market yields aggregation, blockchain products were increasingly looking to provide alternative ways to offer better yields.
Currently ETH amount staked is about 15.64% equalling to $ 36.6 billion in AUM staked market capitalization (source DeFi Llama). What has come from the remaining +85% market capitalization of ETH cryptocurrency ?
Coinbase and Lido
This is where Liquid Stake Derivatives came into play, and have became a more and more popular offering new types of blockchain incentives, with Lido Finance (Ticker stETH) and Coinbase Staking (Ticker cbETH) leading the way with total value locked (TVL) reaching $14.21 billion (March 2023), exceeding growth versus deposits in other lending protocols. The below charts includes a top 6 listing providers offering yield (s) in LSD market-place by enabling staking $ETH cryptocurrencies.
We want to highlight here that LSD market-place relies on derivatives to generate value, maintaining ETH to dETH peg — unlike the spot market layer 1 blockchain protocols. For this reason, each of the protocols mentioned above operates by providing a staking representation of the token itself, different from wrapped ETH that is used for instance with Bitcoin on Ethereum chain.
The LSD issues rewards in form of derivatives, and LSD products and services rely heavily on market making and liquidity management. As for every reward pool the ratio of the promised rewards to ETH, via token derivatives → must be redeemed at par value. We have emphasized in our analysis that each of the leading (3) )major LSD token providers like Lido, RocketPool and Stakewise are all based on disparate models with specific code engineered for their respective codebase.
For 📍 Lido and stEth LSD market, they use rebalancing token model methodology, for 📍 Rocket Pool and rETH they use valuing accruing token model methodology and last 📍 Stakewise, has now enabled model of dual derivative rewards, by staking hard currency Ether.
○ Ethereum PoS rewards are ~ 3.75%.
○ LSD market place for Ether synthetics are + 5.00%.
In conclusion, a most recent innovation in DeFi market has turned out to be a battle of token rewards. Since many protocols are (recently) practicing deflationary practices, protecting their base-chains from hyper-inflation, Ethereum LSD products are providing incentives with higher yields and growth metrics in order to generate investor ‘interest’ and maybe outpace competition. We do like innovation and encourage blockchain in the DeFi space — and should entice adoption of decentralized finance dapps bringing bridging a gap between legacy and digital finance helping users. Ultimately leading to more user onboarding, but we should note that Liquid Staking Derivatives growth should be noted as derivatives of tokens, which they are.
LSD market innovation is more likekly similar to form of high interest bonds and fixed income securities. Nonetheless, we hope that our analysis here has helped the community gleaning additional insights on the operating modus of LSD, keeping our community informed on all things popular, best token economic practices. Informed decisions lead to better risk mitigating practices.
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