The LSD narrative is once again making waves on Twitter, and this time, it's gaining even more momentum. This is all thanks to the Ethereum Shanghai Upgrade that was implemented on April 12, 2023.
As of today May 21, 2023, approximately 18 million ETH has been unlocked, worth an estimated $35 billion. The unlock process is expected to continue over the next few months, with the total amount of ETH unlocked reaching 25 million.
The Shanghai Upgrade was a major milestone for Ethereum, as it enabled the withdrawal of ETH that had been staked since December 2020. This has increased liquidity in the Ethereum ecosystem and made it easier for users to access their staked ETH. The unlock process has also been met with positive market sentiment, with ETH prices rising to their highest level in the 11 months following the upgrade.
The Shanghai Upgrade is part of a larger effort by Ethereum to transition to a proof-of-stake consensus mechanism. This will make Ethereum more scalable and energy efficient and is expected to make it more attractive to institutional investors. The upgrade is a significant step forward for Ethereum and is expected to have a positive impact on the network in the long term.
Some additional details:
The upgrade included 11 EIPs.
The upgrade also included several other EIPs, mostly designed to reduce gas costs for Ethereum developers.
For those not in the know, the LSD narrative revolves around the belief that liquid-staking derivatives are poised to become the next major phenomenon in the realm of decentralized finance (DeFi). Liquid staking enables individuals to earn staking rewards on their ETH without being required to lock it up for the entire staking duration.
This breakthrough allows users to maintain access to their ETH while still benefiting from staking rewards, while also opening up exciting possibilities for DeFi applications. Notable LSD projects that have gained popularity include Lido, Rocket Pool, and Frax Finance.
Some of the key benefits of LSDs include:
Increased liquidity: LSDs allow users to stake their tokens while still maintaining liquidity. This can be beneficial for both users and DeFi protocols, as it increases the amount of liquidity available for trading and other DeFi applications.
Yield farming opportunities: LSDs can be used to create yield farming opportunities, which allow users to earn rewards for staking their tokens. This can be a great way to generate passive income from DeFi.
Synthetic assets: LSDs can be used to create synthetic assets, which are tokens that track the price of other assets. This can be a great way to gain exposure to assets that are not otherwise available on DeFi platforms.
Before delving into the topic at hand, let's take a moment to examine some interesting statistics related to Ethereum (ETH).
From the chart above, it is apparent that the average number of daily Ethereum transactions has maintained a steady pace. This suggests that there has been a relatively limited influx of new capital into the Ethereum network, and overall activity has not experienced significant fluctuations since the surge witnessed in December and January.
There was a surge in fees in March. I don’t really know why but it seems like good news to validators and stakers.
The annual issuance rate for Ethereum has now reached zero and sometimes, even negative. This means that new Ether tokens are no longer being created through the mining process as they were under the previous Proof of Work (PoW) system. Instead, the network relies on validators who hold a certain amount of Ether and stake it to secure the blockchain and validate transactions.
With no new tokens being minted, the existing supply becomes relatively fixed, which may have implications for the ETH scarcity and potential price dynamics. This could potentially create a supply-demand dynamic where the limited supply of ETH, coupled with continued demand, may lead to price appreciation over time, all else being equal.
This chart simply screams increasing scarcity. A decreasing circulating supply of Ethereum, combined with a zero annual issuance rate, can have significant implications. It creates increased scarcity, potentially driving up demand and contributing to price appreciation. The limited supply can enhance the overall value of the Ethereum network and its digital asset, while also potentially increasing price volatility. Additionally, it may incentivize efficient token usage and ecosystem development.
That said, when it comes to efficient token usage, we think of staking ETH to secure the network. The top three exchanges leading the way are Coinbase with a 12.63% share, followed by Kraken at 6.67%, and Binance at 5.53%.
However, it is worth noting that @LidoFinance dominates the Liquid staking derivative (LSD) market with an impressive 73.27% share. This strong presence seems to reflect the trust and confidence placed in their platform by the staking community.
LSDs Overview
Lido Finance:
Earlier, I made mention of LidoFinance’s domination of the Liquid staking derivative (LSD) market with an impressive 73.27% share. But you know what?…they’ve dropped their market share of staked ether (stEth) to a more maneagable 30.6%. This is despite its attractive Annual Percentage Rate (APR) of 5% on stEth holdings.
Though this is not slack to Lido's expertise and trustworthiness, it just means that there are more protocols out there fighting for their spot. Don’t we love the competition?
Rocket Pool:
Rocket Pool is a prominent player in the Ethereum ecosystem, holding a 2.4% share. As an enticing incentive, Rocket Pool provides a base Annual Percentage Rate (APR) of 7.01% for Smart Node Operators (SNOs) and 5% for individual stakers. This ensures attractive yields for those participating in their staking program.
Additionally, the ETH withdrawal fees associated with Rocket Pool are minimal, further enhancing the overall appeal of their platform.
Tbh, nothing much to see here
Frax Finance:
Fraxfinance is another prominent player in the Ethereum ecosystem that has been rightly and smartly gaining market share despite its relative newness to the scene. It holds a considerable 0.7% market share within the ecosystem.
Now, notable among several of Frax Finance’s features, is a key feature called sfrxETH. sfrxETH is an ERC-4626 vault designed to capture the staking yield generated by Frax ETH validators. It allows users to exchange frxETH for sfrxETH, enabling them to earn staking rewards on their frxETH holdings.
As validators accumulate staking rewards, an equivalent amount of frxETH is minted and added to the vault, increasing the redemption value of sfrxETH. The exchange rate of frxETH per sfrxETH rises over time due to the accumulation of staking rewards in the vault.
By holding sfrxETH, you possess a percentage claim on the growing amount of frxETH within the vault, and staking rewards are distributed among sfrxETH holders proportionally to their share of total sfrxETH. This mechanism is similar to auto-compounding tokens like Aave's aUSDC and Compound's cUSDC.
Currently, sfrxETH provides an attractive Annual Percentage Rate (APR) of 6.23%. This yield isn’t even affected by ETH withdrawals on the Frax platform!
Just take a look at the stats below. See the surge in ETH deposits coinciding with the implementation of the Shanghai upgrade?
Yea. That an underdog becoming a top-dog.
Comparing yields
No, let’s compare these juicy yields.
Lido Finance: 5%
Rocket pool: 5.17%
Frax Finance: 6.23%
Are ya thinking what I’m thinking???
I ain’t saying much but I think I know where my staked ether is going to.
If you’re thinking of doing the same, you can transition your staked assets, and earn 24% higher.
Moreover, we invite you to mint $FRAX with a maximum Loan-to-Value (LTV) ratio of 75% and an annual percentage yield (APY) as low as 1.8%. This means that even while your $ETH remains staked and earning yields, you can utilize the minted $FRAX for other purposes. Courtesy of Fraxlend.
Read this article to know more.
Conclusion:
I you trade really big sizes (circa $100m), you might want to evaluate the liquidity of sfrxETH over time, specifically in relation to leveraged staking strategies and its resilience against de-pegging risks.
PS: sfrxETH can be easily converted to frxETH at a guaranteed exchange rate, further enhancing its value proposition. Notably, the frxETH:ETH curve pool demonstrates a closer peg of 1:1 compared to the stETH:LDO pair. Personally, I feel that adds an additional layer of stability and attractiveness to the Frax ecosystem.