Ethereum Shanghai Upgrade: Why Liquid Staking Derivatives are Pumping

Ethereum Shanghai Upgrade is Pumping Liquid Staking Derivative Tokens

The Ethereum network is set to undergo a major upgrade scheduled for March 2023, and Liquid Staking Derivatives have skyrocketed over the past week as a result:

  • $LDO +114%
  • $RPL +89%
  • $SWISE +128%
  • $ANKR +31%
  • $FIS +74%
  • $SD +165%

The upgrade, known as the Shanghai hard fork, will include the EIP 4895 code that will allow withdrawals of ETH staked in the Beacon Chain, a feature presently missing from the network.

Not only this will improve the security of Ethereum’s post-Merge proof-of-stake protocol, it will also provide an opportunity for liquidity staking protocols to grow. As such, liquid staking will be an important narrative in 2023. Here’s why:

What are Liquid Staking Derivatives?

Liquid Staking Derivatives are a type of derivative contract that allows users to stake their assets in order to receive a return on their investment. These derivatives are designed to be liquid, meaning that users can retain liquidity of their tokens even though they are locked in the blockchain. As such, users can easily enter and exit the contracts without having to wait for a long period of time.

This makes them attractive to investors who are looking for a way to earn a return on their assets without having to lock it up for a long period of time. It is popular in decentralized finance (DeFi) because it these derivative tokens can be used elsewhere to generate extra yield: investors can use staked assets in the ecosystem for lending, trading, and as collateral, hence lowering the opportunity cost of locking assets up for staking.

How Does the Ethereum Shanghai Upgrade Help Liquidity Staking Derivatives?

Despite Ethereum being the leading proof-of-stake blockchain, it only has a staking ratio of 14% according to data sourced from Staking Rewards, which is a lot lower compared to other layer-1 blockchains including Cardano, BNB Chain, and Solana.

Source: Staking Rewards

This is mainly because of its entry barrier for staking. Since ETH is pooled, not everyone has 32 ETH to be become a validator. Therefore, liquid staking protocols such as Lido ($LDO), Rocket Pool ($RPL), and Ankr Protocol ($ANKR) allow ETH holders to stake without running a validator node.

The Shanghai Upgrade is designed to significantly reduce the risk and opportunity cost for validators to stake their ETH, as the minimum duration for staking will fall to just 27 hours. As a result, Ethereum’s staking ratio should reach parity with other leading blockchains after the update. This will also provide market opportunity for growth of liquidity staking protocols.

The update brings a lot of flexibility to investors, allowing them to stake their ETH and earn rewards elsewhere as well. Therefore, liquidity hunting will be a popular option to earn more yields, as investors look to use their newly unstaked ETH in other DeFi protocols, especially Liquidity Staking Derivatives.

Key Takeaway

Liquidity Staking Derivatives were able to catalyze a large number of incremental ETH stakers thanks to the creation of new synthetic assets. These derivatives can accrue Ethereum’s staking rewards automatically, and are liquid and tradable as soon as they are minted.

With the upcoming Ethereum Shanghai Upgrade, the risk of staking ETH will fall considerably as investors will have a lot of flexibility and reduced opportunity cost. As more people are highly likely to stake ETH after the update, the result could bring positive impact for Liquid Staking Derivatives such as Lido and Rocket Pool. Additionally, it also attracts participation from more centralized players, bringing crypto mass adoption one step closer.

The information provided in this article is intended for general guidance and information purposes only. Contents of this article are under no circumstances intended to be considered as investment, business, legal or tax advice. We do not accept any responsibility for individual decisions made based on this article and we strongly encourage you to do your own research before taking any action. Although best efforts are made to ensure that all information provided herein is accurate and up to date, omissions, errors, or mistakes may occur. 
Disclosure: Authors are invested in cryptocurrency projects and have cryptocurrency holdings - including those covered on this website. 

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