While the DeFi sector has been making strong inroads into the mainstream, things have been changing behind the scenes too. For the first time in the history of decentralized finance (DeFi) - liquid staking - which is a kind of DeFi platform that allows users to earn rewards for locking crypto assets up in a blockchain network while also retaining the liquidity of the locked funds, has now flipped decentralized lending and borrowing sector in terms of total-value-locked in DeFi.
As of writing, according to data from DefiLlama the total value of crypto assets deposited in liquid staking protocols stands at about $14.4 billion while at the same time, TVL of DeFi lending and borrowing is at about $13.81 billion. This makes liquid staking protocols the second-largest crypto market sector, with the first position being held strongly by decentralized exchanges (DEX) - which had about $19.76 billion of TVL in DeFi as of press time.
This sudden spike in the TVL of liquid staking platforms can be largely attributed to the successful execution of the Shapella Upgrade on the Sepolia testnet of the Ethereum blockchain.
This was the second testnet execution of the highly anticipated Ethereum Shanghai Upgrade, which is expected to bring about a series of new features and developments to the network, the biggest of which is unlocking staked ETH tokens from the Beacon Chain.
This is one of the biggest developments to come to the Ethereum network since the Ethereum Merge which went live last year on 15 September. The Ethereum Merge was the first step in a series of steps that the largest smart contract-capable network is trying to undertake to make its blockchain more efficient and cheap. Ethereum has been plagued with the problem of slugging execution and skyrocketing transaction fees for quite some time now and that is being addressed with this upgrade.
The Ethereum Merge was the first step where the network transitioned from a Proof-of-Work (PoW) consensus mechanism to a Proof-of-Stake (PoS) based one - which began back in December 2020 with the launch of the Beacon Chain. The next step is to bring about the unlocking feature for staked ETH tokens on the ETH 2.0 contract.
By opening up to withdrawals, the upgrade is also expected to improve the overall liquidity of ETH in the ecosystem. Since December 2020, more than 16.5 million ETH has been staked in Ethereum's Beacon Chain by users, out of which nearly 42% has been locked through liquid staking protocols, mainly Lido and some others.
Additional read: ETH staked through liquid staking protocols touches 7M!
As mentioned in one of our earlier articles, Lido, is the biggest liquid staking player in the market. It is solely responsible for over 73% of all the locked ETH through liquid staking protocols, holding over 5.1 million ETH tokens. 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.
So with the news of finally opening up withdrawals, there has been a renewed investor interest in the sector of liquid staking as more and more people want to be a part of the ecosystem and contribute to securing the Ethereum network. Liquid staking has thus become the best-performing crypto sector this year, with growth in total-value-locked approaching 60%!
This is also expected to grow further too. According to a report by CoinDesk, Markus Thielen, head of research and strategy at digital-assets platform, Matrixport said,
"Only 14% of ETH is currently being staked vs. 58%, the average for layer 1 coins. Its likely interest in staking will continue to swell."
Thus, overall things seem to be going very well in favor of the liquid staking sector of the DeFi economy and more growth can be expected to come out of the industry in the longer run.
Values as on 1 March 2023.
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