Ethereum is the largest smart contract platform in the industry and underwent a major change by moving to a new consensus algorithm in 2022.
What is commonly known as The Merge saw the network abandon Proof of Work and transition to Proof of Stake in pursuit of meeting its broader roadmap towards scalability, decentralization, and security.
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With the introduction of Proof of Stake on the Beacon chain a while back, users were able to deposit 32 ETH to become full validators of the network.
This is part of the core components of Ethereum, namely decentralization and transparency. In essence, users around the world can maintain the network and maintain it by running their own validation nodes.
However, this, in itself, also brought some limitations. Let’s take a look at some of them when it comes to self-affirmation.
Limitations of self-participation
Those who want to become full validators face some notable drawbacks. For example, they cannot move the minimum amount required (32 ETH), making it completely illiquid for as long as the user wishes to remain a full validator.
Users who stake their ETH to the Beacon depositor contract in an attempt to secure the network cannot withdraw their ETH until this functionality is enabled. The core Ethereum developers said that this will be possible with the Shanghai update. It is expected to hit the public testnet in February and potentially the mainnet in March.
Learn more about the Shanghai update on our podcast with ConsenSys Product Manager Matt Nelson.
It is important to note that there is currently around 16 million ETH worth close to $25 billion (at current prices) locked in the contract. Contrary to this considerable limitation, liquid participation platforms offer an alternative.
What is Ethereum liquid staking?
Ethereum liquid staking is a concept that has been around for quite some time, but it accelerated in early 2023, when most platforms offering these capabilities experienced tremendous growth.
In essence, liquid participation is an alternative to blocking a user’s participation. By doing so, it allows users to stake the amount of ETH they want and withdraw it without the requirement that this capability be enabled on the mainnet (for example, prior to the Shanghai update).
This is done by issuing a tokenized version of the funds being staked, a kind of derivative. It can be transferred, stored, traded, spent, or even locked, just like a normal token.
The way it works is quite simple. A user would deposit ETH on a third-party platform. The platform would deposit the ETh into the Beacon escrow contract for them (running their own validators). In return, the protocol would mint a representative ETH, which the user can withdraw, trade, stake, and so on.
There are some benefits to Ethereum Liquid Staking, such as:
- No long-term holding risk
- Availability of deposited tokens
- Performance similar to locked ETH stake
The upcoming Shanghai update has boosted the Ethereum Liquid Staking narrative considerably, with most platforms offering such services seeing their native cryptocurrencies skyrocket since early 2023.
With that said, let’s take a quick look at some of the most popular Ethereum liquid staking protocols.
Top 3 Ethereum Liquid Stake Protocols
Swimming pool
Lido is the largest protocol for Ethereum Liquid Staking by way of total market capitalization and total value locked ($7.68 billion at the time of writing) on its platform.
When users stake ETH with Lido, they receive an alternate token called stETH that represents their stake at a 1:1 ratio. Tokens are minted upon deposit and subsequently burned when redeemed.
stETH token balances are issued 1:1 to the ETH that is staked by Lido. stETH token balances are also updated daily when the oracle reports the change in total stake.
Lido’s native cryptocurrency is called LDO.
rocket pool
As of this writing, Rocket Pool is the second largest Ethereum Liquid Staking protocol by way of the total value locked on its platform (around $800 million).
Similar to Lido, users can stake their ETH in the Rocket Pool and receive an alternative token called rETH.
The minimum deposit is 0.01 ETH, there is no limit to how much users can bet, and they are allowed to continue betting and withdraw as they see fit.
Rocket Pool’s native cryptocurrency is called RPL.
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Ankr Protocol is next in line in terms of the total value of ETH locked on its platform. At the time of this writing, it is around $153 million.
The alternative token that the protocol issues is called ankrETH. Similar to the other platforms, users can withdraw whenever they want and participate in various DeFi farms using ankrETH tokens.
Liquid Staking vs. Exchange Staking: What’s the difference?
Some exchanges, such as Coinbase and Binance, also allow users to deposit ETH and wager on the Beacon deposit contract and earn rewards.
Furthermore, they also issue their own ETH tokens that users can withdraw and trade as they see fit. With Binance, for example, the token is called BETH and users can exchange it for USDT whenever they want. The most important thing to consider is that you must have BETH in your account to be eligible for the bet return.
Another important consideration is that these are centralized counterparties and as such they maintain custody of your tokens, in this case ETH alternatives. So all the drawbacks and limitations of holding your crypto on an exchange apply, with all the benefits as well.
Why are Ethereum’s liquid staking coins increasing?
As mentioned at the beginning of the guide, almost all of the protocols that provide Ethereum liquid staking capabilities have seen the prices of their native cryptocurrencies skyrocket since early 2023.
For example, LDO is up more than 100% in the last 30 days. ANKR is up about 45% in the last 14 days. Frax Shares (FXS) are up more than 100% in the last two weeks. Rocket Pool’s RPL token is up around 70% in the last month. Other Ethereum liquid staking coins, such as StakeWise (SWISE) Stafi (FIS) and others, also have similar percentages.
The consensus seems to be that traders expect the upcoming Shanghai update for Ethereum to be quite beneficial for these platforms. The reason is that more than 15 million ETH will be unlocked and users will look for liquid alternatives in which they would stake their ETH. And since these protocols provide some clear advantages, the current narrative is that Shanghai will drive demand for its services.
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