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“Behind every stock is a company. Find out what it’s doing.”
- Peter Lynch |
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| In today's issue: Liquid staking derivatives (LSDs) were created in response to the launch of the Ethereum Beacon Chain in December 2020. Ethereum's switch from proof of work to proof of stake created opportunities for crypto users to stake their assets to generate additional income.
Liquid staking protocols offer the prospect of unlocked liquidity through native tokens. Users who stake ETH on these protocols receive equal amounts of native tokens whose values are linked to ETH. These tokens can be further invested in DeFi projects while their ETH continues to earn staking rewards.
In today's Liquid Staking Sector Report, we examine the top LSDs to determine which might be best for crypto investors. We look at Lido, the top LSD, as well as a few up-and-coming protocols like Coinbase Wrapped ETH, Rocket Pool, Frax Finance, and StakeWise.
Thanks to liquid staking protocols, anyone with ETH can not only take advantage of staking, but additional revenue opportunities. These protocols have attracted over $17.8 billion worth of ETH in just over 2.5 years, making them well worth investigating.
If you're ready to learn more about liquid staking and the top protocols, read on. |
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| | | Must Read Today's most important story for crypto investors. |
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| Seemingly out of the blue, a crypto startup called Prometheum has been highlighted as a model of compliance within the crypto industry by the Securities and Exchange Commission (SEC).
Prometheum describes itself as a "market ecosystem for digital asset securities." It claims to be the first crypto-centric broker-dealer registered with the SEC and a member of the Financial Industry Regulatory Authority (FINRA). The company's co-CEO, Aaron Kaplan, recently testified before the House Financial Services Committee, asserting a clear path to compliance has been laid out by the SEC.
Kaplan's comments have been met with criticism from many in the digital assets industry. They argue Prometheum, a relatively unknown firm with only 25 employees, has received preferential treatment from regulators for echoing the SEC's stance. Kaplan, however, says the firm's regulatory status is the result of hard work, and it represents an important step forward in the crypto industry.
Despite this, the company has faced scrutiny from industry observers. Prometheum's business model, its lack of support for trading bitcoin and Ethereum, and its connections to two China-affiliated firms have all been points of contention. Critics say the SEC's endorsement of Prometheum, despite these issues, raises red flags about the regulator's approach to the crypto industry. |
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Investor takeaway: While the approval has raised eyebrows, it's promising that there does seem to be a path forward for crypto companies wanting to register as special-purpose broker-dealers with the SEC. More to come. |
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NFT Investor Scorecard: Artblocks |
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Artblocks is a collection of NFTs meant to unify artists to create groundbreaking digital artwork. The platform allows artists to create code, mint their work, and generate unique pieces of art that immutably live on the Ethereum blockchain. The project boasts over 275 artists creating over 300 collections and 200K individual NFTs, making it a significant player in the NFT and digital art space. |
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| But is it art? Our new Artblocks NFT Investor Scorecard looks at things like rarity, utility, and potential future value to help investors determine the long-term potential of investing in Artblocks.
Premium members: Download the Artblocks NFT Investor Scorecard here. Visit ourPremium page to compare the potential of this NFT collection with others.
Not yet a Premium member? Sign up now to get access to our on-demand library of NFT Investor and Risk Scorecards. |
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Sector Report: Liquid Staking by Preetam Kaushik |
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| Executive Summary: Ethereum staking has attracted almost $35 billion since December 2020. With low barriers of entry, liquid staking derivatives (LSDs) account for over 30% of the total staked ETH. Lido Finance, the leader, has $13 billion worth of ETH in its staking pools.
As liquid staking becomes more popular, we explore this sector in detail and provide a balanced investor thesis. We also take a closer look at other alternatives to Lido like Rocket Pool, Coinbase cbETH, StakeWise, and Frax Ether.
Industry Overview
The rise of liquid staking protocols was driven by the launch of the Ethereum Beacon Chain in December 2020. When the world's second most popular blockchain switched from proof of work to proof of stake, it created exciting new opportunities for crypto users to stake their crypto to generate additional income.
However, the initial requirements put staking beyond the reach of smaller crypto investors. To run a staking node, an investor needed to commit at least 32 ETH for a minimum lockup period of two years. Liquid staking protocols were created to get around these limitations and make staking accessible to anyone with ETH.
Per Coincarp.com, there are an estimated 233 million ETH holders today. With their ability to democratize staking and make it more accessible, liquid staking protocols tap directly into this massive user base. Not surprisingly, these protocols have attracted over $17.8 billion worth of ETH in just over 2.5 years. |
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| Lido commands the largest TVL by far. Image via DeFiLlama.
The sector received a major boost in April 2023 with the activation of the Shapella upgrade on the Ethereum blockchain. It marked the culmination of Ethereum's transition to proof of stake and ended the lockup period for staked tokens. The freedom to withdraw staked tokens at any time has further increased the interest in ETH staking. Since running a node still requires 32 ETH, liquid staking protocols continue to be great options for smaller crypto investors.
Another factor that contributes to the popularity of liquid staking protocols is the prospect of unlocked liquidity through native tokens. Users who stake ETH on these protocols receive equal amounts of native tokens whose values are linked to ETH. For example, when you lock ETH into Coinbase, you receive a new token called cbETH in return. These tokens can be further invested into DeFi projects, while the underlying ETH continues to earn staking rewards.
(Note: like all derivatives, there's a danger that the staking token could collapse, making it difficult to get your ETH back.)
With over 7.16 million ETH staked, Lido is the dominant player in the liquid staking space by a wide margin. The protocol enjoys a commanding 74.17% share of the market, as it was an early mover. Coinbase Wrapped Staked Ether and Rocket Pool are the other main players, with 1.1 million and 762,000 staked ETH, respectively.
Liquid staking protocols continue to enjoy sustained interest from users, equaling decentralized exchanges (DEXs) in total value locked (TVL). The TVL of all DEXs is around $17.47 billion as of this writing. That's equal to the combined TVL of all staking protocols per CoinTelegraph reports.
Even as money keeps pouring in, storm clouds loom on the horizon of liquid staking and DeFi. Regulators in the US are taking aggressive stances toward major crypto platforms in the aftermath of the collapse of FTX and Terra/LUNA. With lawsuits against Binance and Coinbase and a new bipartisan bill in Congress, plenty is happening on the regulatory front. Future developments in this space could profoundly alter the course of cryptocurrencies and liquid staking protocols. |
Investment Thesis
Mark Twain said, “When everybody is digging for gold, it's good to be in the pick and shovel business.” While everyone is searching for yield from ETH staking, it’s good to be invested in the businesses that provide them with the tools to do so.
Crypto investors have three opportunities:
1) They can stake ETH with these services, receive the companion tokens, then sell them back when they want to claim the "interest." For example, you stake your ETH with Lido and receive stETH in return, un-stake it when you want to claim rewards.
2) They can stake ETH, receive companion tokens, then reinvest them elsewhere. You stake your ETH with Lido, for example, receive stETH in return, then reinvest the stETH in other Web3 products (higher risk = potentially higher rewards).
3) Or they can simply buy a project's token, which is like investing in the underlying "company." For Lido, just buy and hold LDO for the long term.
The latter is the picks-and-shovels play. Betting the yields on staking protocols will turn these leading projects into key pieces of the long-term financial infrastructure.
We believe these platforms have promising futures as the staking rewards from ETH range from around 4.00% APY in staking pools to 8.00% for validator nodes. As a set-it-and-forget-it source of income, ETH staking is superior to savings accounts and competes on favorable terms with even US treasury bond yields. However, the potential risk is far greater with crypto holdings as we’ll see below. |
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| Sources: United States Rates & Bonds - Bloomberg, Liquid Staking Derivatives - DefiLlama
Risks of Liquid Staking
Liquidity Risks
All liquid staking tokens suffer from high liquidity risk. This is a direct result of low supply when compared to the actual crypto involved (ETH, in most cases). Many of the trading markets for staking tokens may also be poorly developed with low trading volumes, further reducing a holder’s ability to quickly sell tokens at favorable prices.
DeFi Market Risks
The entire rationale of investing in liquid staking hinges on its ability to free up funds for DeFi protocols. DeFi investing is an incredibly high-risk/high-reward endeavor. Although potential rewards are often astronomically high, with APYs above 20%, the risks are also high. If you lose your staking tokens, you automatically lose access to ETH held on the liquid staking protocol.
Validator Risks
Investors in liquid staking pools rely on third-party validators to bring in staking rewards. If the validator is inefficient, error-prone, or malicious (this is rare), it could result in losses for participants in the staking pools. The losses can range in severity from a minor decrease in reward APY to wholesale forfeiture of invested ETH through a penalty called “slashing.”
Legal Risk
Major regulators around the world, particularly in the EU and the US, are starting to crack down on crypto projects and businesses. There are also concerns the exchange of ETH for an ERC-20 token could be considered a taxable event. Now, the SEC is arguing that liquid staking protocols fall into the category of securities, and thus be subject to strict regulations.
Who’s Investing: Institutional Backing
Liquid staking protocols are generally geared toward smaller crypto investors. Given the immense possibilities of the retail market, these protocols have received considerable backing from institutional investors.
Lido leads the pack here as well, having received over $160 million in funding across multiple rounds from major investors like Andreessen Horowitz, Dragonfly Capital, and Paradigm. Coinbase Wrapped Ether is a protocol owned by the CEX Coinbase, a major entity with a market cap of $12.49 billion in 2023.
Rocket Pool is a fully decentralized protocol that received seed funding from Consensys Capital in the early days of 2018. Since then, it has largely remained operational without seeking any external funding.
Stakewise has also received funding to the tune of $2 million to date, from investors like Blockdaemon and Boldstart Ventures. Finally, the Frax Ether protocol is operated by Frax Finance, a blockchain company specializing in stablecoins.
Top Liquid Staking Protocols |
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Lido (LDO)
TVL: $13.26b Assets Staked: $12.33b Daily Active Users: 451 LDO Price: $2.22 Twitter Followers: 145.9k
Lido was the first ever non-custodial staking protocol for ETH. It launched soon after the Beacon Chain and has dominated the sector ever since. Lido accounts for 29% of the entire ETH staking market.
The native staking token on Lido is called stETH. The protocol charges a standard 10% fee on staking rewards. LDO is the governance token on the protocol. Holders can vote on the future trajectory of upgrades and features on the protocol. |
| Lido market cap and TVL over time. Image via Token Terminal.
Lido has grown massively after the Shapella upgrade, but all that growth comes at a price. With a small pool of around 30 validators, the project is becoming increasingly centralized. As it gains more market share in staked ETH, some think this centralization could pose a threat to Ethereum’s decentralized architecture.
Per Vitalik Buterin and other major figures associated with Ethereum, protocols should not exceed 15% to 20% in their share of the ETH staking market. Lido is double that limit and shows no sign of slowing down. Consequently, it may not be the best option for staking from a long-term sustainability perspective. |
| Coinbase Wrapped Staked Ether (cbETH)
TVL: $2.14b Assets Staked: $2.16b Daily Active Users: N/A DAO Token Price: N/A Twitter Followers: 5.8m
Coinbase is the leading U.S. crypto exchange, launched in 2012 by Brian Armstrong. The exchange announced its liquid staking protocol in June 2022. The token representing staked ETH on the platform is called cbETH.
The protocol has rapidly increased its number of users since its launch. While Lido is beyond reach at this point, Coinbase has posted impressive growth to capture the second spot ahead of older, more established protocols like Rocket Pool. |
| As it's owned by a centralized exchange, the protocol doesn't have a DAO or governing token. Apart from cbETH, Coinbase has also launched a liquid staking protocol for institutional investors with the ERC-20 token lsETH.
Regarding the future of the protocol, Coinbase is facing a lawsuit from the SEC, and its future remains a bit unclear right now. The prospects of the staking protocol will hinge heavily on the outcome of the lawsuit. |
| Rocket Pool (RPL)
TVL: $923.51m Assets Staked: $1.30b Daily Active Users: 56 RPL Price: $47.51 Twitter Followers: 42.2k
Among the major liquid staking protocols, Rocket Pool is the only one that ticks all the boxes of a truly decentralized, non-custodial protocol. It has over 2,000 validators and anyone can become one (unlike Lido, which relies on a limited pool of validators). However, it's much harder to use.
The protocol also has additional steps in place to protect stakers from poorly performing validators. The DAO of the protocol uses a governance token called RPL. The ERC-20 token used to provide liquidity to stakers is called rETH. |
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| Rocket Pool continues to grow its TVL and trade volumes. Image via Token Terminal.
For users who care about decentralization, there's no better choice than Rocket Pool in liquid staking. However, the protocol is held back by its relatively higher fees (15%) and slightly lower returns than other platforms.
In terms of future growth, Rocket Pool is relatively well placed. It doesn't pose a threat to the blockchain, and it has a high proportion of validators. The main threat here is future regulations, which is a common issue for all such protocols. |
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Frax Ether (FXS)
TVL: $446M Assets Staked: $397M Daily Active Users: 27 DAO Token Price: N/A Twitter Followers: 72.7k
Outside the top three, the liquid staking protocols all have TVL under $1 billion. Frax Ether is the leader of the chasing pack with a TVL above $400 million. It was launched by Frax Finance, a decentralized finance protocol specializing in partially algorithmic stablecoins.
Frax Ether protocol uses a unique (and complex) model for its staking process. It involves a dual-token system made up of sfrxETH (an interest-bearing token) and frxETH (a farming token). |
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| Frax is increasing its user base and TVL. Image via Token Terminal.
Through the innovative system, Frax Ether promises higher APY rewards than its competitors. However, in terms of popularity and growth, it faces an uphill battle against protocols like Lido. Still, the data shows a steady growth trajectory for Frax.
One detraction is Frax Finance’s former association with algorithmic stablecoins. The Frax community voted in February 2023 to move away from algorithmic stablecoins fully and focus on entirely collateralized versions instead. We believe this was the right move to build trust and confidence. |
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| StakeWise (SWISE)
TVL: $171m Assets Staked: $166m Daily Active Users: 8 SWISE Price: $0.0803 Twitter Followers: 10k
Launched in 2021, StakeWise is a smaller liquid staking protocol on the Ethereum and Gnosis blockchains. The founders and developers of the project are based in Tallinn, Estonia. The protocol uses an overcollateralized staking derivative called osETH.
The developers are currently testing V3 of StakeWise, a monumental upgrade that will revamp many features and make the protocol more friendly towards solo stakers. The vision of StakeWise developers is to combat growing centralization within the Ethereum ecosystem. |
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| Not the best picture for StakeWise with falling market cap and flat TVL. Image via Token Terminal.
Users who deposit ETH in StakeWise's vaults get an overcollateralized token called osETH in exchange. This token will grant access to DeFi projects and apps. A successful V3 upgrade has the potential to improve StakeWise's appeal among stakers who seek decentralized protocols.
Investor Takeaway
Liquid staking has proven attractive in recent years as it allows users to earn staking rewards and DeFi rewards simultaneously. You earn staking rewards by locking up your ETH, and you earn DeFi rewards by re-investing the corresponding token.
With the new EU MiCA laws and the SEC crackdown on CEXs in the US, however, there's a high degree of uncertainty on the regulatory front. Any investment decision should take into account the potential impacts regulations could have on crypto (especially liquid staking protocols) from a tax and legal perspective.
If you want to invest in these protocols, the better play may be to buy and hold a few of the underlying governance tokens (i.e., buying LDO to invest in the Lido "company"). |
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| | | ICYMI In Case You Missed It |
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Remember that Lido leads the LSDs. |
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Bitcoin Market Journal is a daily newsletter that makes you a better crypto investor. It's created by John Hargrave, Nick Marinoff, Steve Walters, Anatol Antonovici, Matthew Du, Daniel Joel, and Preetam Kaushik.
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