In a major milestone development coming out of the largest smart-contract capable network in the crypto industry - Ethereum - the number of ETH tokens locked in liquid staking derivatives protocols has surpassed a total of 7 million bringing the total amount of ETH staked through these liquid staking protocols to a staggering $12 billion in total-value-locked (TVL). This liquid staking platform space is largely dominated by three players which control 95% of the market.
After the launch of the proof-of-stake (PoS) based Beacon chain by the Ethereum network around December 2020, to become a validator on the new PoS-based Ethereum network, one had to stake a minimum of 32 ETH tokens to the ETH 2.0 smart contract on the platform. That's where the liquid staking platforms emerged to capture the section of the retail investors who do not have 32 ETH tokens to stake but also want to participate in the space to put their idle tokens to use.
These liquid staking protocols have essentially filled in the gap by creating a decentralized way of creating a pool of smaller users who can contribute smaller amounts of ETH to the staking program. The protocols ensure that the returns earned from staking are equally distributed amongst all the contributors in accordance with their contributions. These liquid staking protocols also have the added feature of enabling these contributors to have a receipt contract (called stETH) in exchange for their ETH tokens to maintain liquidity on the platform.
These stETH tokens have the same value as a normal ETH token thus helping them to maintain liquidity in the market so that if these users need their money back, they can simply sell them and not get stuck in the staking lock-in period. This is a huge benefit since the ETH 2.0 deposit contract doesn't yet have the functionality to withdraw your ETH tokens whenever you want to, thus creating a huge risk of the investor getting stuck in the lock-in period.
Read more: ETH Shanghai Upgrade
Lido, which was launched at the same time as the Ethereum Beacon chain in December 2020 is the biggest liquid staking player in the market. It is responsible for over 73% of all the locked ETH through liquid staking protocols, holding over 5.1 million ETH tokens. US crypto exchange Coinbase comes in as a distant second with about 1.1 million ETH locked while other decentralized finance (DeFi) protocols like RocketPool and Frax Ether cumulatively have a little over 500,000 ETH staked on their platforms.
Alongside that, the amount of ETH locked on these liquid staking protocols has been on a steady rise ever since Ethereum developers announced that the withdrawal functionality of staked ETH would become the top priority for the upcoming Shanghai Upgrade which is expected to happen sometime next month. This has made the liquid staking option for some additional revenue out of idle tokens more attractive for retail HODLers on the market.
Further, it is interesting to note that roughly 42% of all the ETH tokens staked in the ETH 2.0 contract are contributed through these liquid staking protocols. Out of the total of 16.7 million ETH tokens staked so far, about 7 million is contributed through the liquid staking platforms. This is a testament to the fact that there is a lot of retail interest in the retail sector to be a part of the process to secure the new and updated PoS-based Ethereum network.
While ETH token staking on liquid staking platforms has been on the rise, the overall portfolio and holding value of most ETH stakers are in the red, thanks to the bear run of 2022.
According to a report by Binance Research, around 69% of ETH stakers are seeing red on their holdings due to the fact that a large portion of them staked their tokens when the ETH price was trading above $1600. Further, the report also added that a total of 2 million ETH tokens were also staked back when ETH was trading between $400 to $700 at the very beginning around December 2020, when the Beacon Chain was launched.
The above chart depicts data as on 13 February, 2023.
Binance also noted two very crucial conclusions from the above report. The first is that these early stakers who staked back in December 2020 were probably illiquid as liquid staking wasn't very well known back when they did it. They had put in the entire sum of 32 ETH or above to become a validator on the PoS Ethereum network and haven't been able to withdraw them yet. Secondly, while this cohort is illiquid, these were one of the earliest and the strongest believers in the network and thus they can be expected to hold on even if withdrawals were opened up in the upcoming Shanghai Upgrade.
Amid all this, the overall Ethereum network has been growing stronger in the past couple of months, especially after the Ethereum Merge that took place on 15 September 2022. Since its transition from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism - Ethereum's supply has turned net deflationary with its supply having reduced by over 30,000 ETH, according to data from ultrasound.money. Also at the same time, the ETH token price has rallied about 42% since the beginning of 2023 and thus things seem to be going extremely well for the second-largest crypto asset by market capitalization.
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