Exploring the Liquid Lands of Staking

The Liquid Staking Tsunami

Proof-of-Stake (PoS) blockchains have a combined market cap of ~ $250bn, representing ~27% of the total crypto market capitalisation. The proliferation of PoS blockchains have led to a booming staking industry, where users stake crypto to help provide network security while also earning a yield. Traditionally, staking on PoS-based projects involves lockup periods during which you are unable to transact with your assets. This creates illiquidity for investors and has left many investors at the mercy of the market with no option but to wait until the unbonding period is through.

Liquid Staking Derivatives (LSDs) mint liquid tokens representing staked tokens in an effort to solve the illiquidity  problem.  A LSD token earns investors staking rewards while unlocking liquidity to be able to transfer, store, trade, and earn yield across decentralised finance products just like any other token.

The current LSD market boasts a TVL of ~ $8.1bn, which is much higher than at the start of 2022 and can be mainly attributed to Ethereum's transition to PoS. The current global staked value is ~$92bn, which means that LSDs make up only ~ 8.8% of the current staking landscape. Staking Rewards believes LSDs will make up the majority of the total staked value in the future, even if prices were to remain constant, LSDs can grow 10X from here and still not reach the total staked value. We investigated the state of LSDs across nine Layer1 networks to see what the uptake of LSDs has been and how they measure against vanilla staking on these networks, let's dive in!

Ethereum Liquid Staking

For the purposes of this document, please take note of the following definitions:

  • Liquid Staking Share: The % share of the total stake that is currently liquid staked

The Ethereum Liquid Staking market has grown to ~ $6.84bn, with more than ~ 5.2 million ETH committed through staking pools, which represents ~ 38.17% of the total staked ETH. Ethereum boasts the highest liquid staking share (38.17%) in this report, which is mostly attributable to the fact that ETH stakers cannot withdraw their assets until the Shanghai upgrade in 2023. In addition, the minimum stake is very high (32ETH) and outprices the majority of users looking to stake their ETH. Consequently, staking pools solve both of these problems by lowering the minimum stake to 0.01 ETH and providing a LSD for users to keep their staked ETH liquid.

The Ethereum Liquid Staking market is still being dominated by one player - Lido Finance, who currently boast a ~ 78% market share with ~ 4.27m ETH deposited. Lido is a permissioned protocol because it has taken the approach of carefully selecting professional validators to maximise earnings and limit slashing penalties. The protocol has a committee to choose the best-in-class validators to minimise staking risks. Currently, the selection of validators is made from operators who have applied to participate in Lido and can be tracked on rated.network.

A breakdown of the top staking pools can be seen below:

Source: Dune

Ethereum LSDs are further divisible by sub-categories, one being Centralised exchanges (CEXs). CEXs are custodial staking providers that receive ETH from exchange users and stake it with an exclusive curated set of validators. Some CEXs issue their own LSD, enabling stakers liquidity for users within the CEX ecosystem (i.e. BNB Chain). Coinbase is currently dominating the CEX category with a ~ 46.07% market share, which is mostly driven by institutional stakers and the issuing of an  ERC-20 token (cbETH) usable across the vast Ethereum Defi ecosystem.

Source: Dune

Solana Liquid Staking

The Solana Liquid Staking market has grown to ~ $350 mn, with more than ~ 13.3 million SOL committed through staking pools, representing ~ 3.13% of the total staked SOL. Solana is the second largest PoS network by staked value and has one of the highest native staking ratios (76.95%) in this report. However, the liquid staking share is a meagre 3.13%, which is significantly lower than Ethereum (38.17%), but still second overall when compared to the rest of the networks in this report. Even though liquid staking has a number of benefits over native staking, liquid staking on Solana is yet to be adopted by the masses and still has a lot of room to grow from here. 

The Solana Liquid Staking market is currently dominated by Marinade Finance, who hold a ~ 59.04% market share with ~ 6.87m SOL. Marinade was the first Liquid Staking protocol (LSP) on Solana and has used its first mover advantage to gain an edge over Lido Finance. Marinade Finance charges a 2% manager fee versus Lido’s 5% but charges a 0.3% - 3% withdrawal fee if users want to immediately unstake their SOL.

The breakdown of the top Staking Pools on Solana can be seen below:

BSC Liquid Staking

The BSC Liquid Staking market has grown to ~ $116m, with more than ~ 427k BNB committed through staking pools, which represents ~ 2.19% of the total staked BNB. BNB has the highest native staking ratio in this report (80.77%) but still has a comparatively low liquid staking share (2.19%). Given the high user activity, deep liquidity and the flourishing DeFi ecosystem on BSC - liquid staked BNB can thrive here. As more users start to use liquid staking derivatives on BNB, the liquidity in pools for the derivative token will increase and bring in more users.

The BNB Liquid Staking market is currently dominated by ANKR, who holds a ~ 81.9% market share with ~ 349k BNB. ANKR has liquidity pools for their derivative token (aBNBc) on PancakeSwap where users can trade their LSD for native BNB, but the liquidity in the pool is somewhat low at the moment. As more people start to stake through ANKR and provide liquidity to the pool, it should give other investors confidence to do the same and result in a ‘flywheel’ effect where deeper liquidity attracts new investors which leads to more liquidity being added to the pool. 

The breakdown between Staking Pools can be seen below:

Polygon Liquid Staking

The Polygon Liquid Staking market has grown to ~ $84m, with more than ~ 96.5m MATIC committed through staking pools, which represents ~ 2.93% of the total staked MATIC. The native staking ratio for Matic is ~ 38.82%, which is relatively low when compared to other networks in this report and is partly attributable to users having to pay ETH gas fees when delegating their stake. As you might have experienced before, this can be a costly exercise and is a disincentive for most users. Consequently, it is not surprising that the liquid staking share is relatively high (2.93%) and sits in third place in this report, as MATIC stakers are taking advantage of the benefits that liquid staking is offering them.

Polygon has a buzzing Defi ecosystem with more than 37 000 dApps built on the network, each with the potential to integrate LSDs into their protocol to create new levels of composability and value capture for the network. The MATIC Liquid Staking market is currently being led by LIDO, who holds a ~ 53.55% market share with ~ 51.7m MATIC. However, STADER is just behind them with a 43.48% market share and ~ 42m MATIC.

The breakdown between Staking Pools can be seen below:

Avalanche Liquid Staking

The Avalanche Liquid Staking market has grown to ~ $78m, with more than ~ 5m AVAX committed through staking pools, which represents ~ 1.93% of the total staked AVAX. 

The AVAX Liquid Staking market is currently dominated by BENQI, who holds a ~ 53.55% market share with ~ 51.7M AVAX. BENQI was the first LSP on Avalanche and has since maintained its top spot and seems to be cementing its lead as liquidity for their derivative token (sAVAX) grows. BENQI has 12,756 unique stakers and has a number of Defi integrations in the Avalanche Defi ecosystem.

The breakdown between Staking Pools can be seen below:

Polkadot Liquid Staking

The Polkadot Liquid Staking market has grown to ~ $51.17m, with more than ~ 8.3m DOT committed through staking pools, which represents ~ 1.31% of the total staked DOT. Polkadot staking is one of the best inflation adjusted staking assets available to investors, the inflation adjusted yield is 5.94% and ranks just behind Ethereum. However, Polkadot has the second lowest liquid staking share in this report (1.31%).  

Some reasons for this may be that the Defi space on Polkadot is not as active as in other ecosystems, consequently, the ability to earn yield on a liquid asset may not be as clear on Polkadot. In addition, Acala Network was promised to be the Defi hub on Polkadot, where institutions can access highly secure Defi products. But Acala has had some challenges with the recent hack and consequent de-peg of the aUSD stablecoin which resulted in the halting of a number of services on Acala. DOT stakers may be taking a more risk off approach for now before committing more stake to LSPs.

Despite the recent challenges Acala have been facing, the DOT Liquid Staking market is still currently being led by Acala, who holds a ~ 51.51% market share with ~ 4.3M DOT. The breakdown between Staking Pools can be seen below:

NEAR Liquid Staking

The NEAR Liquid Staking market has grown to ~ $43m, with more than ~ 8.8m NEAR committed through staking pools, which represents ~ 1.87% of the total staked NEAR.  The NEAR Liquid Staking market is currently being led by Meta Pool, who holds a ~ 59.37% market share with ~ 4.2M NEAR. Meta Pool uses a different liquid staking design to most other protocols, their derivative token (stNEAR) is not a rebasing asset, which means that there is no potential for market pressure to cause a depeg in the price of stNEAR. In addition, users receive NEAR as rewards instead of stNEAR. By receiving the L1 tokens as a reward, Meta Pool avoids the issue of constant minting for rewards.

The breakdown between Staking Pools can be seen below:

Cosmos Liquid Staking

The Cosmos Liquid Staking market has only just been birthed and is still in its infancy with a market cap of ~ $5.5m, with ~ 447k ATOM committed through staking pools, which represents ~ 0.22% of the total staked ATOM. 

The ATOM Liquid Staking market is currently being led by Stride, who hold an ~ 80.47% market share with ~ 360k ATOM. Stride was the first liquid staking protocol on Cosmos and introduced Multi Chain Liquid Staking, something that is unique to the Cosmos Ecosystem. The Stride derivative token (stATOM) can be utilised throughout the entire Cosmos IBC ecosystem. Given the juicy inflation adjusted APR on ATOM (5.8%), users were forced to make a tradeoff between staking their tokens for passive yield or participating in DeFi, exposing themselves to greater risk for greater yields. Stride solves that problem and opens up the floodgates for the Cosmos Defi ecosystem to draw on unlocked liquidity that was stuck in staked ATOM. 

The breakdown between Staking Pools can be seen below:

Final thoughts on the growth of Liquid Staking 

Liquid staking offers key benefits to stakers, namely unlocking liquidity while earning staking rewards. Despite the clear benefits and utility that liquid staking brings, current liquid staking data shows that the uptake is still very low and it seems that stakers aren’t buying into this as quickly as we may have thought. Some reasons for this are:

“Depegs” and Low Liquidity

Most LSD tokens trade on an open market where investors can exchange their LSD for the native token equivalent (i.e. stMATIC for MATIC). Even if this LSD trades below a 1:1 ratio with the native token, it can still be unstaked via the liquid staking protocol and the user will get their native token (After the lockup period). The problem is that if there is a liquidity crunch and too many people want to sell stMATIC for MATIC, it can cause the stMATIC price to fluctuate and fall below a 1:1 ratio. 

Given that LSDs are being used as collaterals in different protocols, if someone is highly leveraged they can be liquidated if the LSD trades at a significant discount against the native token. If many people are levered up on their position (Which they are) it puts the LSD at risk of a potential liquidation cascade when there is enough selling pressure.

While these are normal market forces, ordinary users tend to look at a derivative token that is worth less than the native token and think there is something wrong with it and without a proper understanding of the mechanism, they steer away from it. We believe that this is more of a confidence issue from investors and this improves as liquidity for LSDs on secondary markets improves.

Smart Contract Risks

LSDs work through smart contracts. Users incur additional smart contract risk when using LSDs and further add to that risk when they interact with other Defi protocols. This risk cannot be overstated, we’ve seen a number of Defi hacks in 2022 - even those that were ‘audited’.  

Safety in numbers

It is our belief that LSDs will grow to a critical point where the ‘herd’ considers it safe, after which people will have the confidence to use these protocols as liquidity risk diminishes. As more people use LSDs the depth of liquidity will rise significantly while reducing a large portion of the de-peg and low liquidity risk that remains. Liquid staking is here to stay and we expect it to become the de facto approach for users to stake their crypto in the near future.

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Circle has announced a partnership with Axelar that enables native USDC to be used in cross-chain applications. Avalanche, Cosmos, Ethereum, Polygon, and Sui will be the first chains a part of this new initiative.

Polkadot co-founder Gavin Wood is stepping down as CEO of Parity Technologies Ltd, a key developer of the Polkadot blockchain ecosystem. Parity co-founder Björn Wagner is taking on the role of CEO.

Maker Improvement Proposal (MIP) 81, which would see MakerDAO move up to $1.6 billion USDC into Coinbase custody to earn institutional rewards, was ratified. The community also ratified MIP 82 to facilitate a $500 million USDC loan to Coinbase, with ETH and BTC as collateral.

Near Foundation announced a $40 million grant toward replacing a collateral gap of USN, a decentralized stablecoin on Near Protocol that had become undercollateralized earlier this year.

Staking Assets

Staking rewards for ether and for ether-backed liquid staking derivatives have shot up in recent weeks. This has been due to an increase in maximal extractable value (MEV) and other activity on the network.

Avalanche Banff unlocks the ability for Subnet creators to activate PoS validation and uptime-based rewards using their own token on their own Subnet. This means that anyone can become a validator of an Avalanche Subnet for the first time by simply staking its token on the P-Chain.

Aptos, which originated from the Facebook blockchain project Libra, has been one of the hottest topics in the blockchain and cryptocurrency industry over the past week. APT spiked more than 30% after a rough first week of trading. The price surge was primarily driven by a short squeeze.

Staking Providers

Frax Finance launches its ETH staking derivative fxrETH, allowing users to mint and stake fxsETH for sfxsETH and earn yields with 6.13% APR.

Bitstamp is expanding its white-label service, known as “Bitstamp-as-a-Service,” to a three-tiered offering. IRA Financial, a provider of self-directed retirement plans, will use this new service as a partner.

Crypto investment platform Freeway announced a halt to services amid “market volatility.” Confusion appeared to reign among users as to the future of the platform. The extent of the financial impact wasn’t immediately known.

Help us to educate more people about staking and advance the state of the staking industry with a contribution to the 2022 Staking Ecosystem Report. All survey participants will receive a free copy once launched.

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Two Weeks Until the Staking Summit!

Calling on Validators, PoS Protocols, VCs and other projects to join the world’s first staking summit and explore where the $300bn+ industry goes next. Staking Rewards is hosting top-tier speakers, staking experts and investors at LX Factory in Lisbon on 8 November 2022 for a full day, in-person conference.

The event comprises keynotes, panels and discussion groups and an additional area for co-working and networking. Attendees will have extensive opportunities to collaborate and learn. Staking Rewards will host an exclusive afterparty for VIP ticket holders after the event. 

For more information and to book your tickets, please visit: stakingsummit2022.eventbrite.com

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