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Every crypto bull cycle has its own narrative. While this isn’t quite a bull market yet, there seems to be a new narrative already forming around Ethereum (ETH) and its staking market.
In particular, liquid staking derivatives (LSD) have been in the spotlight lately. Let’s see what it is and why their token has been one of the best performing since the beginning of the year.
What are Liquid Staking Derivatives (LSD)?
In order to run the Ethereum validator, users need to lock up 32 ETH ($51,200) in a smart contract. It’s relatively inaccessible for those who want to stake but have less than 32. That’s why too only 14% of all ETH is staked at the moment.
The liquid staking protocol allows users to stake ETH without running a validator. The protocol collects ETH deposits and delegates them to one of their validators, who then shares the rewards with the depositors.
In return, shareholders receive a derivative token that represents the ETH they deposited. They can then exchange their derived tokens back into ETH, simply hold them, or engage in various decentralized finance (DeFi) investment strategies such as leveraged staking.
However, there are risks associated with staking fluids. One is the risk of smart contracts, which means that users need to trust the staking protocol to be honest and secure enough.
Despite the risks, LSD and governance tokens have respectively been gaining traction lately.
LSD protocols such as Lido (LDO), Rocket Pool (RPL), and Stakewise (SWISE) have their own token governance that has been broken since the start of the year. Everything has pumped around 100% by 2023. But why?
It all started when the Ethereum Foundation announced that the upcoming Shanghai upgrade would allow current ETH holders to finally withdraw the 16 million ETH staked i.e. currently worth about $26 billion. The upgrade is currently scheduled for March 2023.
While some believe that unlocking large amounts of ETH could bring down the price of ether, others speculate that this is bullish for the LSD protocol. That’s because, perhaps, those who locked up ETH now want to stake in a more liquid way and prefer LSD because of the benefits described above.
Additionally, new products are being developed in the LSD space. For example, Index Coop has launched a new ETH index staking. The index contains three LSDs: Lido-wrapped sETH, reTH Rocket Pool, and sETH2 Stakewise. Investors can reduce smart contracts and centralization risks by investing in all three at the same time.
While it’s unclear how things will turn out once users start withdrawing ETH, it’s clear that the LSD trend is here to stay, at least for the foreseeable future.
Ethereum staking has been one of the most talked about themes over the last few months. Users should consider anticipating a drop in the ETH price after the staking ETH is unlocked. Investors may also view liquid betting as a possible investment strategy.
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