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The Final Puzzle Piece for Ethereum Staking
Final Puzzle Piece for Ethereum Staking: Shanghai Fork in March 2023
Various Betting Methods
Staking Pool Protocol
Investment Ideas for Staking Protocol Tokens
Risk #1. Impact of Withdrawal Feature on Staking Ratio
Risk #2. Competition between Individual Betting Protocols
Conclusion: The Ethereum Betting System Is Complete
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Disclaimer
Final Puzzle Piece for Ethereum Staking: Shanghai Fork in March 2023
Shanghai Fork, the nickname for the Ethereum EIP-4895 upgrade, is getting closer, with an expected date set for March 2023. The exact upgrade date is still uncertain, as Ethereum has delayed its major upgrade several times in the past. Nevertheless, progress is being made, as the test network with its tow function started operating in February. The essence of this fork is the addition of a “withdrawal feature” to the staking ETH.
The Ethereum network consensus algorithm has undergone a complete transition from Proof of Work to Proof of Stake through several enhancements. In Ethereum’s Proof of Stake, validators who verify the validity of transactions recorded on the network must stake a certain amount of ETH as collateral before performing their endorsement tasks. If the verification is done correctly, the validator receives additional ETH as a reward, and if not, the staked ETH will be lost through “deductions”. During this process, the ETH that has been staked has not been able to be taken, but with the upcoming Shanghai Fork, this is expected to change.
Various Betting Methods
There are four main ways to stake ETH from a user perspective: solo staking, Staking-as-a-Service, staking pool protocols, and centralized exchange services. Solo betting is the most difficult, as it requires setting up a computer and collecting a minimum of 32 ETH, but it is also the most profitable because there are no intermediary fees such as fees. Centralized exchange services are the most convenient but may negatively impact the decentralization of the Ethereum network if too much ETH is staked is delegated to the exchange, and there may also be fees that reduce user profitability. The staking-as-a-Service or staking pool protocols are alternatives to consider for those who don’t want to use a centralized exchange service, but also don’t want to set up their own staking environment or collect 32 ETH. Most staking pool protocols also have their own unique tokens that one can consider investing in.
Staking Pool Protocol
Most staking protocols issue derivative tokens (e.g. stETH) which can be traded freely when ETH is staked, hence the name Liquid Staking Protocols (LSD). Well-known staking pool protocols include Lido Finance, Rocket Pool, StakeWise, Frax, and Ankr. Lido Finance is the market leader, with around 30% market share of the total Ethereum staking market. In the staking protocol market, its market share exceeds 85%, further consolidating the advantages of first movers in the staking protocol market such as Uniswap in AMM or Curve in lending protocols. Rocket Pool is a protocol that started in early 2017 and attracted investment from ConsenSys Ventures. Other services include StakeWise, Frax, and Ankr, which provide staking services for various PoS tokens, but with a slightly different emphasis for each service. However, their market share in the Ethereum market is minimal, around 1%.
Comparing the staking protocol metrics in the table above, it can be seen that although Lido Finance has a high market share, most staking protocols offer returns of 4% or less. A noteworthy metric is the TVL/MC ratio, calculated by dividing the TVL (Total Locked Value, amount of locked ETH) by the market capitalization of the protocol token. Representing the amount of ETH locked per dollar of protocol token market cap, a higher ratio indicates a relatively lower valuation.
Comparing Lido Finance and Rocket Pool, even though Lido Finance holds a leading position in the market, its prices are roughly four times cheaper than Rocket Pool on a TVL/MC basis. This is a phenomenon contrary to the general market environment where a premium is added to the evaluation of the value of a leading company with a high market share and a monopolistic position. The market gives a much higher score to Rocket Pool, which has the potential to erode a larger market share of players as the whole Ethereum staking market grows, than Lido Finance, which can only grow as the market develops and has a high market share. . Higher growth potential from players with low market share comes with the risk of not successfully invading the market, and given the rapidly changing environment, value evaluation standards are not widely known, and there are large emotional fluctuations within the volatile crypto market, markets are being shaped. with more weight being given to the potential for faster growth than the risk of protocol failure.
Smaller protocols like Frax and Ankr have lower TVL/MC ratios, but their service involves not only staking Ethereum but staking other tokens and stablecoins as well, so one might be wary of comparing them to Lido Finance and Rocket Pool.
Investment Ideas for Staking Protocol Tokens
The upcoming Shanghai Fork has given rise to various investment opportunities, including staking and investing in Ethereum. This article will discuss token staking protocols from an investor’s point of view. The token staking protocol can be considered a high beta game in the Ethereum ecosystem, offering higher volatility and risk compared to ETH investments. The staking protocol token is poised to become a key infrastructure component in the Ethereum ecosystem and its growth is expected to result in higher volatility compared to ETH. Higher volatility means greater upside potential but also increased risk. Two important risks are as follows.
Risk #1. Impact of Withdrawal Feature on Staking Ratio
The impact of the withdrawal feature on staking participation rates after the Shanghai fork must be considered. Higher staking rates can result in increased market size for the staking pool protocol and, in turn, for the token price. Currently, the Ethereum staking participation rate is around 14%. Compared to other protocols with stable staking systems, this figure is still low. There seems to be no good reason to believe that the staking ratio within the Ethereum ecosystem will remain low. On the other hand, there are concerns that the addition of the withdrawal feature may result in a flood of existing staking supplies into the market. While short-term concerns over increased circulating supply could put downward pressure on ETH and risk the protocol’s token price, there is a higher possibility that this presents a positive investment opportunity in the longer term.
Risk #2. Competition between Individual Betting Protocols
Lido Finance’s prominence as a leader in the staking protocol market is obvious. However, there is no guarantee that those market orders will remain unchanged in the fast crypto market. Challenges such as centralized exchanges offering services with high accessibility to general users, or smaller competitors looking to capture the market with new marketing solutions and strategies, could pose additional risks for individual protocols, even if the overall Ethereum staking market grows as expected. While not perfect, one way to mitigate this risk is to acquire a basket of staking protocol tokens based on market capitalization or Total Value Locked.
Conclusion: The Ethereum Betting System Is Complete
The Shanghai Fork marks a significant milestone in the completion of the Ethereum Staking system. With the addition of the withdrawal feature, the betting cycle is completed and this will increase attention to various betting methods and services. Completion of the Ethereum Betting system has significance from multiple perspectives, including solving the energy problem, finding risk-free crypto interest rates, and computer engineering and game theory initiatives.
The Ethereum Betting System represents a major change in crypto as well as a great investment opportunity as the largest smart contract platform introduces proof of stake. The staking protocol token is an asset at the center of this change and is expected to be an attractive investment target.
Written by SungPil Huh (Head of Investment at Trinito) and contributed by Jiyon Kim (Associate at Trinito).
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