Erik Weijers, 2 months ago

Liquid staking wars after Ethereum Shanghai fork?

On April 12th, the Shanghai/Shapella fork of Ethereum will go live. The most important upgrade will be that people who have been staking Ethereum can finally unstake their ETH. This flood of ETH will create an opportunity for so-called liquid staking pools, which will compete for liquidity. 

The market leader by far in liquid staking pools is Lido (LDO). Liquid staking pools create a tokenized version of your staked Ether. This token you can trade or you can use it like any other coin, while still earning staking rewards. Of course, liquid staking pools charge a fee for their service.

So, as millions of Ether will gradually become available in the coming months, these different pools will compete. This reminds us of the Curve wars. A short intermezzo. 

In 2021 and early 2022 the so-called Curve wars raged. Competing DeFi protocols, including Convex Finance and Yearn Finance, tried to out-compete each other in locking up as much CRV as possible to get the governance rights and supreme payouts of Curve Finance. The goal was to end up winning the largest yield for their depositors. Convex ended up winning, and hence secured majority governance voting power over Curve Finance. 

In a similar way, we might see liquid staking pools try to differentiate themselves through usability and yield. By offering the highest yield, some protocols will attract a lot of liquidity providers: users who fund liquidity pools. Liquidity providers are users like you and me who make trading possible in liquidity pools. In return, they get yield. 

After Shanghai, adding liquidity to an ETH-denominated liquidity pool will be less profitable than when they are denominated in a liquid staking token. After all, the ETH that floats around unstaked, doesn't collect yield, wheras staked ETH does.  

So, after staked Ethereum becomes unlocked in mid-April, holders will feel the pull to move their ETH from one liquidity staking token solution to another, always seeking the highest potential returns in liquidity pools. Liquid staking protocols will be incentivized to capture market share and having their token become the most liquid. 


Will Lido (LDO) win? It currently has 75% of the total value locked in liquid staking protocols. But young guns such as Rocket Pool and Frax won't let this happen without a fight. And this is of course a good 'war': one that will be good for a healthy Ethereum staking ecosystem and good for depositors' yield.

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