The next ethereum update in Shanghai will allow validators to take off for the first time. While the discussion revolved around whether these powerful users will choose to sell at a loss or stay locked in the network for better days, Another hot issue is liquid staking derivatives (DLDs).
Indeed, the LSD protocols were among the biggest winners during the first three weeks of 2023, with platforms such as Lido, Aura Finance, Convex and Rocket Pool recording serious gains. This is because lsd protocols are attractive to a broader population than staking, since you don't need to put as much as 32 eth just to become a validator and win juicy rewards.
With LSD, you're only betting what you can afford. The competition between the different platforms ensures a juicy apy for those who launch themselves into the liquidity pool.
LSD: a key driving force for growth challenge?
Defi has had several phases in its short life span, and the growth of the defi ecosystem has been unbelievable. From yield farms and indexes to daos, loan protocols, NFT auction houses, synthetic assets and stabilizers, the pace of innovation is truly mind-boggling. But with the broader crypto marketplace in a kind of slump, commentators are now wondering what the evolution of the challenge looks like in 2023 and beyond.
Of course, a matter of weeks does not provide enough sample size to say that lsd protocols will be a major driver of growth long-term challenge. But with Lido Finance having recently surpassed MakerDAO as the largest DeFi protocol by total value locked (TLV), it seems like a distinct possibility. Especially since users of top web3 wallet METAMASK have recently gained access to liquid staking providers courtesy of a new integration by ConsenSys.
Despite claims from Ethereum Foundation researcher Danny Ryan that LSDs pose ‘significant risks’ to Ethereum 2.0, users have given liquid staking a resounding thumbs up, whether because they think it’ll improve the security and decentralization of Ethereum’s proof-of-stake (PoS) blockchain, appreciate the ability to freely transfer or trade their assets rather than lock them up, or because they find the lucrative rewards themselves too moreish.
One thing has become clear, the transition from the aether of the proof of work (pow) to the proof of the putting in place presaged a solution of staking course to the armaments, and several competing projects to connect users to the new network infrastructure. Aura Finance is one such example: built on top of Balancer, it incentivizes liquidity providers and stakers through social aggregation of BAL deposits and its own native token. In other words, users can deposit their staked assets into a variety of Aura pools to earn yield.
The total fixed value in the aura is currently $433 million, compared to $263 million in the middle of September. Not bad at all, especially since we are bogged down in what is known as a bear market.
The Shanghai upgrade will be out in March, things are going to become extremely interesting for the challenge space as the tag chain withdrawals are green and previously untraceable become liquid again. One thesis that’s been put forward is that cascading ETH withdrawals will be a boon for projects like Aura and Convex Finance, which benefit from fierce competition between the likes of Lido, StakeWise, and Rocket Pool (since they offer users access to pools consisting of these platforms’ staked asset, st ETH, rETH, etc).
Time will tell if that theory is premonitory or merely provocative. Meanwhile, challenge is being prepared with bated breath for the upgrade of Shanghai and its far-reaching implications.