What's Next for Liquid Staking?
Dear Bankless Nation,
Liquid staking derivatives (LSDs) have been one of the hottest conversations of 2023. These protocols take deposited ETH, stake it to secure the network, and pass along staking rewards to holders of their LSD (minus some fees). This massively simplifies the staking process for users, also allowing them to use their LSDs elsewhere in DeFi.
Today, we take a look at some of the promising LSD issuers that are competing with market leader Lido on tech, economics and simplicity.
- Bankless team
Lido’s market share dominance can largely be attributed to them being “early and everywhere.” They’ve been able to leverage their network effects to become the “safest” option for users venturing into the world of ETH staking.
So how can other protocols compete?
Market participants tend to act in their own best interests, despite what some purists would like to believe. To dethrone the king (or even chip away at its dominance), these newcomers have to be offering something markedly better than Lido.
In our eyes, these advantages could be:
- 🤑 = Higher returns
- ⛴️ = Easier onboarding
- ↔️ = More composability and/or security
- ⭐ = Something new
In today’s report, we’re going to be looking at five early-stage contenders hoping to make a name for themselves by offering novel solutions in the land of LSDs.
Making some waves with their inaugural Mirror article, crowning themselves the “endgame for liquid staking tokens,” Prisma’s aim is to leverage the Curve flywheel to propel their stablecoin (acUSD) to high levels of adoption. Similar to projects like Gravita and Lybra, Prisma uses Liquity’s model and adapts it such that acUSD can be minted against any of the top five LSDs (Lido’s stETH, Coinbase’s cbETH, Rocket Pool’s rETH, Frax’s frxETH, and Binance’s WBETH). Weightings and future integrations are currently TBD.
In theory, the desire to hold acUSD will incentivize more users to stake their ETH using liquid staking tokens.
- 🤑 On top of trading fees, acUSD liquidity providers are set to receive CRV, CVX, and PRISMA tokens on top of their standard ETH staking rewards
- ↔️ Launching with Curve, Convex, Frax, Conic, and LlamaNodes, Prisma will have key integrations from day one
Receiving a lot of community attention due to its current Voyage incentive program, Swell’s swETH LSD has shot up the ranks and has cracked $50M in TVL. Swell is marketing themselves as aligned with Etherean values, hoping to make the onboarding process easier for newer users.
- ⛴️ Users can buy ETH directly via Google/Apple pay, credit card, or bank account right from their app
- 🤑⛴️ Partner integrations allow for users to directly earn yield on their swETH via providing liquidity
Disclosure: RSA and David are early investors in Swell. They were not part of the pitching, writing or editing of this piece.
unshETH’s goal is to incentivize healthy competition in the LSD arena, offering a diversified LSD composed of a basket of underlying LSDs. The basket weightings are balanced via governance and currently consist of Lido’s wstETH, RocketPool’s rETH, Coinbase’s cbETH, Frax’s sfrxETH, Anker’s ankrETH, and Swell’s swETH. Since arbitrageurs are incentivized to balance the weightings of LSDs in unshETH’s underlying, economic activity is sure to follow each governance decision.
- 🤑 On top of the standard staking rewards from the basket of underlying LSDs, unshETH earns additional yield from rebalancing fees
- ↔️ Being built on LayerZero means that unshETH can be transferred natively across chains, which allows for entirely new liquidity strategies
- ⭐ Being included in unshETH generates new buying pressure for emerging LSD projects, making unshETH an obvious potential launch partner
4. Origin Ether
By combining automated yield generation strategies with native Ethereum staking rewards, Origin Ether can offer enticing rewards for its depositors. Much like the other LSDs mentioned, OETH is backed 1:1 with deposited ETH, which is distributed across DeFi to sniff out yield. Today, the yield comes from (in order of weighting):
- ETH-OETH Convex liquidity pool
- Rocket Pool’s rETH
- Frax’s sfrxETH
- Lido’s stETH
The high yields have allowed Origin Ether to amass about $71.2M in TVL in a short time.
- 🤑 APRs for Origin Ether have been about 9% over the past 30 days, which is double that of some of its competition
- ⛴️ Origin’s automatic strategies take the guesswork out for users, who no longer have to shop around for the juiciest yields
Diva hopes to combine the composability of liquid staking with the decentralization that comes with Distributed Validation Technology. The TL;DR is that DVT allows for verifiable distribution of validator private keys via trust-minimized key-shares. In practice, users combine the composability of an LSD with most of the decentralization benefits of running their own ETH node, all without a minimum stake.
- ⭐ DVT is new technology that brings further decentralization to ETH staking
- 🤑 DVT allows for node redundancy and much better uptime, which helps stabilize rewards
The end isn't nigh just yet
Let’s take a step back and gain some perspective - with the Merge recently behind us, ETH staking is in its infancy. Compared to other Proof-of-Stake (PoS) Layer 1 networks, the percentage of ETH used for staking is still below 20%.
If we are to assume that ETH staking will eventually align with the PoS majority, there is plenty of time for staking protocols to carve out their little corner of the market. We’ve showcased a few projects here which are offering their own spin on liquid staking derivatives, whether that is easier onboarding, new tech, new use cases, or just juicier APRs, there is a lot to be excited about in LSDfi.