The Biggest Crypto Trend of 2023: Liquid Staking Derivatives (LSD)

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ByJames Edwards

Liquid staking derivatives are about to take off, thanks to Shapella. Here’s how you can market yourself as an investor.

Lido is now the largest DeFi application on Ethereum, with approximately $12 billion in capital deposited on the platform.

It is part of a larger group of platforms that provide liquid staking for Ether (ETH).

Liquid taking platforms allow you to stake your ETH and earn yield, but also provide you with a token IOU for your staked ETH.

These tokenized IOUs are known as Liquid Staking Derivatives (LSD). They can be sold, traded, or used in DeFi applications similar to regular ETH, essentially allowing you to have your cake and eat it too.

LSDs were already big, but the network’s recent upgrade, Shapella, just added rocket fuel to the fire.

Here’s how it works and how you can get in on the action.

The staking problem

Every transaction on Ethereum requires ETH to pay gas fees, which you can think of as a road toll. This road toll is then paid to the validators who manage the network (you can think of validators like the construction workers who maintain the roads).

Validators perform this service by staking or blocking their own ETH coins. In return, they earn an annual return on their ETH, which is around 5% as of May 5, 2023.

But there is a catch, you need 32 ETH to serve as a validator. At today’s prices, that’s about $60,000. Plus, you have to use hardware, which can be a steep learning curve for some.

That means you’re locking up over $60,000 of capital, and every seasoned investor knows that liquidity is key.

Entering LSD Bringing liquidity back to staking

Liquid Staking Derivatives (LSD) allow stakers to earn yield without losing the liquidity of their staked assets.

LSDs are issued as an IOU when you stake your ETH and are intended to maintain a 1:1 value.

They also automatically increase yield, so you don’t need to spend money on gas fees to withdraw your staking rewards.

Even better, they remove the 32 ETH barrier to entry, allowing anyone to stake any amount of ETH in exchange for a return.

If you wish, you can keep your LSD and earn yield, trade it, borrow against it, deposit it into a liquidity pool for additional income, or simply sell it when you want to withdraw cash.

Their usefulness has made them so popular that stETH, an LSD issued by Lido, is now the 8th largest cryptocurrency by market cap.

And it looks like they will become even more popular thanks to Ethereum’s recent Shapella update.

Why Shapella is making LSD an even bigger deal

Last month, Ethereum completed a major update called Shapella.

Shapella has changed how staking works on Ethereum. Previously, any staked ETH could not be withdrawn. It was effectively locked up and could not be removed. This had been the case for two years.

After Shapella, users can now withdraw their ETH at will.

This means that approximately $10 million ($1.85 billion) of previously unavailable ETH can now be redirected to the LSD market.

This is not just a theory, on-chain analysis shows that staking through a liquid staking service is extremely popular.

At the time of writing, there are approximately 19.8 million ETH staked, of which approximately 50% is liquid staking.

This suggests that the remaining 50% use staking methods that do not offer LSD.

On-chain data shows that while nearly 1.3 million ETH were not staked after Shapella, around 470,000 were staked in liquid staking protocols.

This suggests that stakingrs withdraw their ETH to relaunch it with a liquid staking service to receive LSD.

And keep in mind that 440,000 of those 1.3 million withdrawals were made by cryptocurrency exchange Kraken, which was forced to shut down its retail service by US authorities.

It is therefore not unlikely that these retail investors will be looking for a new place to stake their ETH, with liquid staking services likely to look attractive.

How to speculate on the success of liquid staking platforms

Several LSD suppliers also have their own DAO or cash token.

Buying DAO tokens is a popular way to invest in a proxy protocol in hopes that any success will increase demand for the associated token.

Here are some of the most popular LSD vendors and their DAO tokens, along with the value proposition for each.

If you think liquid staking has a bright future ahead of it, you might want to do some research on these tokens before adding them to your portfolio.

Keep in mind, however, that DAO tokens do not represent ownership and do not entitle you to a profit share. It is simply an indirect investment that could theoretically benefit from the success of the underlying platforms.

Alternatively, you can participate in liquid staking by staking your ETH and receiving LSD or simply buying LSD like stETH or cbETH directly through an exchange, saving you money on gas fees and offers the same benefits.

Some platforms also reward you with DAO tokens as an incentive to bet with them.

How to Stake ETH and Get LSD

The largest LSD provider is Lido, an on-chain solution that issues stETH in return.

stETH is extremely liquid and accounts for over 70% of the LSD market.

The second largest is Coinbase and Rocket Pool, which issue cbETH and rETH respectively.

Before you begin, educate yourself on how staking works on Ethereum and consider the risks involved.

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