Snapshot of the Liquid Staking category

In this article, we will cover the four leading Liquid Staking providers, their solutions, and their position before Shanghai/Capella. We will follow the same structure in each analysis.

PROJECT DESCRIPTION AND MAIN METRICS. What’s the market positioning and relative size of each liquid staking provider.

AVAILABLE TOKENS . What are the types of tokens involved in liquid staking.

* Rebasing tokens adjust their supply to reflect the staking yield. Protocols that issue rebasing tokens re-calculate regularly the total supply of their LSD (generally minting new ones) and assign the newly added tokens to stakers based on a weighted average. Rebasing tokens are expected to remain close to a 1:1 peg to ETH.
* Reward-bearing tokens. Reward-bearing tokens incorporate the yields earned in the price of the liquid staking tokens. Reward-bearing LSTs change in price, as one reward-bearing token represents a portion of an increasing amount of underlying staked ETH + rewards.
* Base tokens are simple 1:1 equivalents to staked ETH. Some liquid staking protocols have dual token systems that use a base token accompanied by another token that accrues rewards.
* Governance tokens. Besides the liquid staking tokens per se, many liquid staking providers have native tokens used for purposes such as governance or reward distribution.

DEFI PRESENCE. The main goal of liquid staking is to be able to earn staking rewards AND still be able to deploy funds across DeFi. But every project has a different strategy and a different outreach in DeFi

VALIDATOR SITUATION. Validator selection is key in various aspects:
* it determines the scalability of a project: more validators means higher capacity.
* it affects reward performance: better validators equals less risk of slashing.
* it defines risks. A more centralized set of validators can cause rejection from ecosystem participants, wary of the impact of liquid staking on the balance of the incentive structure, and creates regulatory risks (since more centralization means less censorship resistance.

ROADMAP MILESTONES. All liquid staking providers are in constant evolution, tryng to leverage their unique value propositions and improve on them.

LIDO

Project description and main metrics

Lido is the number one DeFi protocol by TVL and the undisputed leader of the Liquid Staking category, with 30% of the 18M ETH staked under their management (+70% of the liquid staking market share). Lido currently offers a 4.2% APR on staked ETH

Lido coordinates 29 DAO-approved node operators that run more than 170.000 validators

Available tokens

stETH. Lido’s main LSD is stETH. There’s a circulating supply of around 6M stETH with a market cap of $11B. stETH is a rebasing token.

wstETH. Rebasing tokens are not allowed in certain DeFi protocols (like Uniswap or 1INCH). Lido had to launch a wrapped version of stETH that could be used in them.

LDO. Another way of getting exposure to Lido is through LDO, its governance token. LDO is used to vote in proposals that include initiatives like liquidity mining programs, validator selection and the general evolution of the project.

DeFi presence

Lido is the strongest in Curve and Convex on Ethereum (where the ETH-stETH pools have $1.7B and $900M TVL, respectively).

The project is also incentivizing pools in Balancer and Kyberswap and trying to reach out to optimistic L2s Arbitrum and Optimism.

Optimism allocated Lido with $OP rewards that the project is planning to use to incentivize liquidity on this chain.

Validator situation

Lido has often been flagged for posing a risk on the Ethereum ecosystem. Their limited number of validators (29), paired with the enormous portion of ETH in their hands, makes Lido a potential central point of failure.

That is why Lido is working on decentralizing validator selection, although in an orderly manner since the optimization centralized control provides is one of the reasons why Lido has reached its current size.

Roadmap milestones

Lido recently announced the launch of V2, with two relevant improvements.

• They laid out the withdrawal mechanism. Claiming staked ETH is a process that might take between 1 and 5 days in normal conditions. Lido will issue stakers an NFT representing a position in the withdrawal queue. The NFTs can be traded in the secondary market.
• They announced the deployment of staking routers, the first piece of the infrastructure needed to decentralize validation.

COINBASE

Project description and main metrics

Coinbase burst into the liquid staking arena in the summer of 2022. They had already been providing their massive customer base (100M users, 9M active monthly users) with access to staking, when they launched cbETH, their liquid staking derivative. Through cbETH, Coinbase made staking on their centralized exchange liquid.

Coinbase manages over 1M staked ETH, and their LSD, cbETH, has $2.25B market cap.

cbETH offers a smaller APR of 3.7%, as Coinbase has the highest commission (they keep 25% of the rewards), in exchange for the streamlined UX and security of centralized services.

Available tokens

Coinbase’s cbETH is a reward-bearing token. Its price changes as the token accrues value from staking rewards.

DeFi presence

cbETH is tradeable mainly on Uniswap.

Validator situation

Coinbase is a solo node operator for their staked ETH.

Roadmap milestones

Coinbase’s VC arm, Coinbase Ventures, recently joined RocketPool’s OracleDAO (oDAO). RocketPool is the most decentralized of the leading liquid staking providers. Its oDAO is composed of a select group of validators that perform extra tasks for the protocol (”the administrative duties required by the protocol that cannot be achieved by Smart Contracts due to technical limitations”).

In exchange, oDAO members obtain 15% of the RPL inflation.

ROCKET POOL

Project description and main metrics

Rocket Pool is the third project by staked ETH, with 460K ETH under management. Rocket Pool was designed to the the most decentralized liquid staking protocol. Their value proposition is centered in matching validators with stakers in a permissionless way. This makes their value proposition the most validator-centric.

Rocket Pool currently offers ~3,84% for regular stakers and ~7,08% + RPL rewards for node operators (RPL is the native, governance token).

Rocket Pool has a community of around 2,000 validators

Available tokens

rETH. Rocket Pools liquid staking derivative is the rETH. rETH is a reward-bearing token that changes its price according to the accrued rewards.

RPL. They also issue RPL, their governance token, which is used to steer the project through voting processes, but also as a reward mechanism, especially to incentivize validators.

DeFi presence

Rocket Pool openly criticized Lido’s liquidity incentive policy, as they see it as an artificial way to grow market share. They are generally less active in deploying rewards across DeFi, and this affects their results.

rETH is the strongest in Balancer (which helps them with Balancer forks like Beethoven X), where the rETH-WETH pool holds $80M TVL.

Their pDAO (Protocol DAO) receives 15% of the RPL emissions to devise and launch incentive programs (as well as grant programs). They are currently managing $OP rewards that they plan to use to incentivize liquidity on this L2.

Validator situation

Rocket Pool has an unmatched focus on validators. Their project is based on the premise of permisionlessness, so they are the main protocol that allows validators to join automatically.

Node operators can create mini-pools through Rocket Pool: minipools allow them to create validators with half the 32ETH required. And they are planning to bring it further down to 6ETH.

Roadmap milestones

Rocket Pool expects to launch their Atlas shortly after Shanghai (Shanghai is expected to happen on April 12th, and Atlas on April 18th). The upgrade primarily aims to help Rocket Pool meet increasing demand while maintaining decentralization. Two main features in Atlas are the decrease in ETH required for minipools from 16ETH to 8ETH and the implementation of a streamlined process for solo staker migration.

This might result in a more attractive offer for node operators who are locked in past choices until un-staking is implemented.

FRAX

Project description and main metrics

Frax is a stablecoin Swiss-army knife of a protocol. They offer a broad scope of DeFi services built around the needs of creating and managing stablecoins. Frax entered the staking business with a stablecoin approach applied to the design of their service.

There are 130k ETH staked with Frax, with a TVL of $240.55M. Frax offers the highest APR (5.49%) thanks to its dual token design.

Available tokens

Frax offers a unique dual token design that optimizes yields.

frxETH. frxETH is basically an ETH stablecoin. Users can stake ETH on Frax and obtain frxETH, which will remain pegged to ETH. frxETH can be traded across DeFi protocols.

sfrxETH. Users can stake their frxETH in exchange for sfrxETH, which is a reward-bearing token that accrues the value of the staking rewards.

All ETH staked through Frax earns staking rewards, but only sfrxETH holders earn them. Some investors might choose to keep and trade frxETH instead in exchange for LP incentives. LPing frxETH is strongly incentivized in some DeFi protocols such as Curve and Convex thanks to Frax’s strong voting power. Since sfrxETH accrues the rewards from all staked ETH, Frax’s APR is higher.

FXS. The Frax Share is Frax’s governance token, and it has been used to back Frax’s stablecoin.

DeFi presence

Frax has a very significant bribing power, both Convex and Curve, which allows them to direct CRV and CVX emissions to the pools of their interest. Thus, frxETH’s strongest pools are the ETH-FRXETH in Curve on Ethereum ($136M), and the ETH-FRXETH in Convex Finance on Ethereum ($133M).

Validator situation

Frax validator selection is centrally managed by the project developers. The FraxMINT smart contract can create and launch validators autonomously according to ETH locking trends. This gives Frax greater scalability, but it creates risks related to centralization.

Roadmap milestones

Ffrax leaders recently teased the launch of a V3 version for Frax. Although this would probably bring a revamped version of all of Frax’s branches, there are rumors about Frax wanting to make frxETH the most widespread ERC-20 version of ETH across DeFi.

ETH itself is not an ERC-20 token, and therefore it can’t be easily traded. ETH needs to be wrapped into WETH to be deployed in protocols like Aave or Uniswap. frxETH, thanks to its stable peg to ETH and increased liquidity, can become a contender as ETH’s ERC-20 equivalent.

HONORABLE MENTIONS

Many other projects are offering different flavors of staking, and more will probably come once the Shanghai upgrade finished the Proof of Stake infrastructure. Projects like Stakewise, with an alternative double token structure, offer alternatives to the LSDs covered above. Investors can also approach risk differently through indexes (Indexcoop has icETH, and Gitcoin has gtcETH, which is a version of icETH that shares part of the revenue with Gitcoin).

There is also a very relevant trend approaching the staking area: re-staking, a work in progress through Eigen Layer, could create an alternative to vanilla or liquid staking, potentially creating a spinoff of this category.