By staking 32 ETH for the Ethereum Merge (the transition of Ethereum from Proof of Work, to Proof of Stake consensus) the tokens are effectively locked away for an undetermined amount of time.
Liquid staking provides a solution to this problem by allowing users to unlock their staked ETH and re-deploying it elsewhere using derivatives. Liquid staking increases capital efficiency on the Ethereum blockchain and enables users to take advantage of other opportunities while still partaking in its indigenous Proof-of-Stake system.
Ethereum liquid staking is a new and innovative way to earn rewards through staked Ethereum.
To better understand, liquid staking, we will revisit the Ethereum Merge, the Shanghai upgrade, and where Liquid staking derivatives fit into all of these.
The Ethereum network underwent a significant transformation with the Transition from Proof-of-Work to Proof-of-Stake. This initiation manifested in the improvement of its existing capability to manage cryptocurrency transactions and integrate new layers of the infrastructure.
Initially, the Beacon Chain was activated on blockchain as a first step towards switching from proof-of-work for consensus but continued to coexist alongside the Mainnet using two different protocols. This was done to ensure a smooth transition and eliminate potential risks associated with a single chain. After running successfully for months, both networks finally merged together on September 2022 thus completing the transition successfully, thereby changing the consensus algorithm permanently. The Merge marked a significant milestone in Ethereum’s development journey as well as an important feature necessary for ETH 2.0’s success.
The process of staking Ethereum on the Beacon chain prior to the implementation of EIP-4895 was an intimidating endeavor. Not only did users need to commit to locking up their ETH for an undetermined amount of time, but they were also required to contribute a minimum of 32 ETH in order to participate at all. This meant that if an individual wanted the potential for a high APY staking reward, they had to make a very large investment – one that was potentially too costly for many prospective participants.
This ineffective system definitely turned people away; thankfully, Ethereum developers recognized this shortcoming and introduced EIP-4895 (the star of Shanghai) as a more accessible solution.
The Merge upgrade was critical in laying the groundwork for a successful transition to proof-of-stake. Though anticipated features such as withdrawing staked ETH could not be included during The Merge, it is planned for release during the follow-up Shanghai upgrade.
Ethereum developers are hard at work finalizing plans for the successful Q1 release of their cryptocurrency. With the Shanghai Public Testnet slated to begin in February 2023, progress has been encouraging as regular updates indicate that March 2023 is when users will be able to redeem their staked Ethereum.
Despite some technical hurdles along the way, it appears that their plans for the Q1 launch are right on track. Developers certainly have their work cut out for them in the coming months, but with continued dedication and focus, come March we can expect a smooth launch of this revolutionary cryptocurrency.
Liquid Staking Derivatives
Liquid staking is an automated process that allows users to stake their Ethereum tokens on the Beacon chain. The user’s funds are locked in a smart contract, and they receive rewards based on the amount of ETH they have staked. In exchange for staking ETH, the users are given Liquid staking derivatives (LSD) which represent their staked ETH and can be used for DeFi or traded in the market.
LSDs have revolutionized the way we earn passive income on our digital assets. Whereas in traditional staking, users were limited to a certain blockchain protocol or harvest yield from their staked ETH, LSD allows them to trade their tokens and access new yield opportunities.
Lido Staked ETH, one of the most successful LSD tokens currently on the market, has seen tremendous growth over the past few months. It now boasts over $8.4B worth of ETH staked and 260K stakers from all around the world. By utilizing this token, users can easily make the most out of their digital assets and access lucrative earnings through yield farming or other decentralized protocols.
How will the Shanghai upgrade impact the ETH price
The crypto community is wary that the Shanghai Upgrade could lead to selling pressure. Some arguments suggest the opposite:
While we can’t accurately predict the preference of ETH holders whose position is currently underwater or ‘in the money’, it is important to consider the mechanisms put in place to limit the amount of ETH released post-upgrade.
With full withdrawals, only 1,350 validators can exit per epoch initiated – equating to a modest 0.8% of the daily trading volume. Meanwhile, partial withdrawal will allow users to collect up to 2ETH in rewards per validator, meaning that there could be up to 1M ETH on the market if all 500K validators take this option. This would still represent just 10% of the ETH’s daily trading volume – and it is likely that some tokens staked appropriately will remain locked for a period afterward.
How to stake Ethereum
Solo staking on Ethereum is becoming increasingly popular due to the numerous benefits it offers. Not only does it provide full participation rewards, but it also improves the decentralization of the network and keeps funds fully in the control of users. To get started with solo staking, users should have at least 32 ETH and a dedicated computer that is connected to the internet around the clock. Although some technical know-how can be helpful for more complex setups, many new, easy-to-use tools now exist that allow anyone to confidently set up their own self-sovereign staking node and take advantage of this golden opportunity for earning passive income.
Staking as a service
Staking-as-a-service offers a great option for those who don’t have the knowledge or resources to manage their own hardware setup, but still want to stake their 32 ETH. Setup is easy and only requires you to create validator credentials, upload your signing keys, and deposit your ETH. This allows the provider to do the job of validating blocks on behalf of you. However, it’s important to build trust in the provider before investing as your withdrawal keys remain in your possession. So make sure you carefully select a provider who is both secure and reputable before making any significant investments.
Liquid staking is rapidly gaining traction among Ethereum users who do not have 32 ETH to stake or are not comfortable with staking the full amount. This solution involves minting an ERC-20 liquidity token that represents the staked ETH, thereby allowing users to hold custody of their assets in their own Ethereum wallet and make exits anytime. However, it is important to note that pooled or liquid staking options are created by third parties, and therefore carry some risks that should be taken into consideration prior to usage.
Using a centralized exchange as a fallback for staking ETH is an attractive option to many users, given the reward opportunities, low oversight, and effort requirements. However, in doing so, users are keeping their valuable assets with a centralized exchange that pools large amounts of ETH. This means that the security of the network and its users are compromised; such large amounts of ETH concentrated in one place means that it becomes a much easier target for attacks or bugs, leaving both the network and users vulnerable.
Factors to consider while choosing a liquid staking provider
When choosing a liquid staking provider, it is important to consider the following factors:
• Security and reputation of the provider
• Fees associated with the service
• Expedited withdrawal time frames
• Quality of customer support
• Methodology used for staking rewards distribution.
• Tokenomics used by the platform for governance and liquidity pooling.
Always read reviews of providers before making any investments to make sure that you’re selecting the best option available.
Liquid staking reward mechanisms
1. Rebase tokens – these represent a new investment opportunity, allowing users to benefit from a constantly increasing value. Every time ETH is staked, you are rewarded with one staked token for each ETH that was staked. As your balance of ETH increases, so does your balance of the staked token – meaning the combined value of your ETH and staked token together is growing. The advantage comes from the fact that the price of the staked token always keeps growing. The downside is that this can make it difficult to integrate into DeFi protocols and may lead to unfavorable liquidity issues in certain cases. Examples include LidoFinance
: $stETH, stDOT, $stKSM
2. Value-accruing tokens – they are a great way to get the most out of your investment. Similar to staking ETH, when you hold this token, you receive one token in return for every ETH that you put into it. This means that even if the total number of tokens remains constant, its value is constantly on a rise due to the yield you have earned throughout the staking period. Your tokens can be used as a usual ERC20 but with one difference – their worth steadily increases and does not mirror the original cost of your investment. Examples include Fraxfinance: $sfrxETH and ANKR: $ankrETH, $ankrBNB
3. Two-token system – this system keeps the price of ETH consistent. Your staking rewards are paid out in a separate reward token. This setup makes managing your portfolio simpler since there are no fluctuations or other unexpected changes within your principal. It’s also an automated procedure; as long as you have enough ETH tokens staked, you can just sit back and watch your rewards grow without having to make any periodic adjustments or transfers. Examples include Stakewise_io
with $sETH2 and $rETH2.
4. Token reward system – Instead of the standard reward token, users receive an original token that is exclusive and provides a different form of incentive. This method may become especially relevant after the Shanghai Upgrade for Ethereum (ETH). Examples include Algem_io with $nASTR.
Platforms that provide Ethereum staking.
- Binance – Binance is one of the largest exchanges, and offers a wide range of staking options for Ethereum. The platform allows users to stake their ETH at no extra cost, and rewards are automatically distributed to their accounts.
- Coinbase – Coinbase is a popular and trusted exchange, and it allows users to stake their ETH with minimal effort. Users simply need to link their wallets to the platform and start staking.
- Lido FInance – Lido is a staking protocol that allows users to stake their ETH and earn rewards in the form of rebase tokens. It offers competitive rewards and a secure platform for staking.
- Kraken – Kraken is one of the oldest and most reliable exchanges, offering robust staking options. Users can stake their ETH to earn rewards in the form of ETH tokens or other compatible assets.
- Rocket pool – Rocket Pool is a decentralized staking platform that allows users to earn rewards in ETH tokens. The platform also offers low-cost service fees and flexible staking options.
- FRAX – FRAX is a staking platform that allows users to stake ETH and receive rewards in the form of value-accruing tokens. The platform also provides users with a secure environment and competitive rewards.
- ANKR – ANKR is a staking protocol that enables users to stake ETH and earn rewards in the form of various tokens.
The future of liquid staking
Liquid staking is quickly becoming one of the most popular ways to generate passive income with ETH. With more platforms and protocols developing innovative solutions, staking will become more accessible and profitable in the future. As the Shanghai upgrade approaches, more users will be able to take advantage of these liquid staking options, as they are designed to make it easier for users to manage their portfolios. Additionally, as platforms start offering higher rewards and better liquidity options, staking activity is expected to increase significantly in the coming years.
Liquid staking is an innovative way to generate passive income with ETH. It allows users to securely stake their tokens, earn rewards in the form of tokens or other assets and grow their portfolios without having to make any adjustments. With more platforms and protocols offering liquid staking options, the growing utility of liquid staking looks bright.