For years, several blockchain projects were rumored to be future “Ethereum killers,” projects that would dethrone Ether and usurp its title as the leading digital asset. That day seems to have come, though it seems like it was an inside job. Lido-staking Ethereum (stETH) and other liquid staking derivatives are poised to render Ether (ETH) as an asset obsolete.
The transition from Proof of Work (PoW) to Proof of Stake (PoW) allows everyday users of decentralized finance (DeFi) to benefit from rewards previously reserved for miners simply by holding stETH or any other liquid ETH derivative . This has given way to a wave of interest across the industry, from individuals to institutions through centralized finance (CeFi) and DeFi. Over the past month, ETH liquid staking derivatives have received a lot of attention, with industry titans including Coinbase and Frax launching ETH liquid staking derivatives.
Liquid share derivatives offer all the benefits of regular ETH, while being a yield generating asset. This means holders can gain exposure to ETH price action and maintain liquidity while reaping the benefits of participation. Wallets holding stETH will see their holdings gradually increase as returns on holdings are regularly added to the initial sum.
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While most equity strategies require locking up funds in a validator, liquid equity derivatives allow users to maintain liquidity while benefiting from equity performance. ETH locked in staking validators is not available for withdrawal until some ambiguous time in the future, probably with the Shanghai update. While stETH still trades at a slight discount to ETH, this gap is expected to close permanently once withdrawals are enabled. Simply put, ETH liquid staking tokens are more capital efficient than standard ETH practices or more traditional practices.
From the user’s point of view, there is little reason to hold regular ETH, where the only potential benefit would be an increase in price when they could hold a liquid stake derivative that would increase their potential profits by yielding the participation The founders of the project have adopted a similar mindset. From DeFi to non-fungible token (NFT) projects, the Web3 teams have integrated stETH into their protocols, with giants like Curve and Aave making it even easier for DeFi users to integrate stETH into their investment strategies .
For lending protocols, stETH offers the ability to increase the performance guarantee without having to make risky investment decisions to keep users happy. NFT projects are able to establish a source of income through their mint income rather than being stuck with a finite lump sum. By making it easier for Web3 projects to stay afloat and their community happy, ETH’s liquid staking derivatives free up project leaders to move beyond money concerns and foster true innovation.
Beyond being much more capital efficient, ETH liquid stake derivatives help sustain the Ethereum network. stETH and other derivatives represent Ether, which has been deposited into an Ethereum validator to help provide security to the network.
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The centralization of staked ETH has been a major criticism of the PoS consensus model, with Lido accounting for over 80% of the liquid stake derivatives market share while controlling over 30% of staked ETH. However, the recent proliferation of alternatives is poised to quell these concerns as market share spreads across multiple organizations. Trading ETH for liquid staking derivatives is a means for users to support decentralization while filling their wallets.
As the benefits of staking continue to gain press coverage, liquid staking derivatives are sure to become a central part of even the simplest DeFi strategies. Coinbase provides “cbETH” means that even retail investors will be familiar with the strategy. We are likely to see a sharp increase in protocols accepting liquid betting derivatives as users begin to flock to the essentially free performance. Soon, many DeFi users may only have ETH to cover their gas fees.
The proliferation of liquid staking derivatives will help strengthen the amount of ETH deposited in various validation systems, improving network security while providing performance to provide financial benefits to supporters. ETH’s days seem numbered. Beyond a nominal gas endowment, any ETH not converted into a liquid stake derivative will just be money on the table. It looks like the long overdue ETH killer has finally emerged, although it looks like it will only increase the security of Ethereum and the wallets of its followers.
Forman himself is the founder of Sturdy, a DeFi lending protocol. He became passionate about cryptography in high school before studying mathematics and computer science at Stanford. When not working at Sturdy, Sam practices Brazilian Jiu-Jitsu and roots for the New York Giants.
This article is for general information purposes and is not intended and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
