Liquid Staking Derivatives Explained: A Comprehensive Guide for Crypto Enthusiasts

In light of Ethereum’s upcoming Shangai upgrade, Liquid Staking Derivatives are rapidly growing and will likely disrupt DeFi’s ecosystem in the near future. Liquid Staking Derivatives serve as the evolution of Liquid Staking. That is, the development of Liquid Staking to increase the performance of crypto asset investing.

Liquid staking also known as soft staking is an innovative approach to staking in the world of decentralized finance (DeFi). Unlike Proof-Of-Stake, it allows users to stake their coins and still retain the ability to trade them on a decentralized exchange (DEX). This is accomplished by using smart contract technology to create a derivative of the staked coins, which can be traded on a DEX while the original coins remain locked in the staking wallet.

Liquid Staking Derivatives Explained: A Comprehensive Guide For Crypto Enthusiasts
Liquid Staking Derivatives Explained: A Comprehensive Guide For Crypto Enthusiasts, Image by Freepik

What is The Significance of Liquid Staking?

Liquid Staking has its significance in the DeFi world. Firstly, it allows users to earn staking rewards while also taking advantage of market opportunities. For example, if the price of a staked coin is expected to rise, users can trade the liquid staking derivative and make a profit while still earning staking rewards.

Secondly, it allows users to maximize their returns by holding a diversified portfolio of staked coins. This can be done by staking multiple coins in different wallets and then trading the liquid staking derivatives on a DEX to optimize returns.

Also, liquid staking opens up new possibilities for traders and liquidity providers, as they can now offer liquidity to staked assets on DEX. This means that they can earn both staking rewards and trading fees. Despite all of these benefits, liquid staking has several limitations.

One possible downside of liquid staking is that currently, it does not permit withdrawals of $ETH. However, the proposed upgrade to the Ethereum network aims to resolve it. The Shangai Upgrade intends to improve the overall performance and scalability of Ethereum staking with several changes to the Ethereum protocol, including:

Increasing The Block Gas Limit

The shanghai Upgrade would allow more transactions to be processed in each block, increasing the overall throughput of the network.

Implementing stateless clients

The upgrade proposes to allow stateless clients to participate in the Ethereum network. Stateless clients do not need to store the entire state of the blockchain, which can significantly reduce their storage requirements and make it easier for them to participate in the network.

Changes to the reward scheme for validators

The Shangai Upgrade proposes to reduce block rewards, and instead reward validators for all the gas they process. This would encourage validators to process more transactions and improve network performance.

Trading and Withdrawal Flexibility

The upgrade will allow users to stake their $ETH and continue trading it on DEX by converting it into a wrapped staked Ether without having any implication on its yield. Also, users can withdraw their funds easily without wasting much time.

The future of LSD is bright with massive potential in the future. Once $ETH withdrawal is officially available, it will reduce the unstaking time of assets up to 27 hours. Also, the revenue of the Liquid protocols including the tokens is likely to surge.

Presently, LS is rapidly growing with innovative solutions constantly developed to enhance the growth of the blockchain ecosystem. Here are the top Liquid Staking protocols:

Top Liquid Staking Protocols

Lido finance

Lido Finance is the largest $ETH liquid staking provider controlling 16.03% Total Volume Locked (TVL) of the entire DeFi market. It’s a decentralized lending and borrowing platform built on the Ethereum blockchain that uses a system of collateralized debt positions (CDPs) to enable users to borrow funds while also earning interest on their deposited collateral. The platform uses the Lido token $LDO to facilitate lending and borrowing and allows users to stake their tokens to earn additional interest. Lido’s goal is to provide a decentralized and efficient alternative to traditional lending and borrowing methods.

One of the advantages of Lido is that it allows users to receive a stake reward of over 41% APR of the current Ethereum consensus 24 hours after your initial deposit. Secondly, it has a fair fee and charges 10% on each staking reward split between the node operators and the DAO treasury. The token is currently available on both DEX and CEX such as; Sushiswap, 1inch, Deversifi, Bilaxi, Uniswap, and Hotbit. However, it does not share any revenue with its token holders.

Rocket Pool

Rocket Pool is the second-largest liquid staking protocol. It is a decentralized staking pool that aims to make $ETH staking more accessible to small-scale investors. With RP, you can stake with a little amount of 0.01 ETH and receive rETH immediately. Depending on the non-operator deposits flowing into the network and the availability of node operators, the commission can vary from 5% to 20%. However, it does not share any revenue with token holders.

Stakewise

Stakewise is one of the current staking protocols aiming to improve the Ethereum network’s decentralization. It tokenizes both deposits and rewards, deposits are in sETH2 and rETH2 serves as the token reward. On every stake, Stakewise charges a 10% flat fee and users can withdraw deposits and rewards on exchanges like Suchiswap, Curve, and Uniswap. However, it is not popular as other protocols and that may change when the forthcoming volume 3 eventually launches.

Fraxfinance

The Frax Share (FXS) token is a utility token that is not stable and grants holders rights to governance and other utilities within the protocol. It is creating a strong ecosystem of DeFi products utilizing $FRAX and $FPI stablecoins. ETH in Fraxfiinance comes in both frETH ( Frax Ether) and sfrxETH (Staked Frax Ether) respectively enabling token holders to lock up their FXS tokens to create veFXS and gain special benefits, governance rights, and AMO profits. Unlike most liquidity staking protocols, Fraxfinance shares 8% of the $ETH staking yield with $veFXS holders. However, it is still a growing protocol with less popularity.

Although the Liquid Staking derivative aims to scale Ethereum better, the protocols also offer LS for other crypto assets asides from Ether. Apart from the aforementioned protocols, there are other promising Liquid Staking protocols with innovative models. Some of them are:

Staderlabs

Staderlabs ranks as the second-largest provider of liquid staking solutions for both Polygon and Binance Smart Chain (BSC), trailing only Lido’s stMATIC and Ankr’s ankrBNB. Despite that $ETH staking is not yet available on the protocol, it ranks number eight in TVL (Total Volume Locked).

Benqifinance

Benquifinance is a Liquid Staking solution built on AVAX. On BENQUI, users can deposit AVAX and stake it to receive sAVAX. It allows users to earn rewards on their staked AVAX (sAVAX) and unstake anytime they want to. The accumulating reward stops 2 days after the 15 days of unstake request with zero cost.

Pstakefinance

PSTAKE currently provides LS support for $ETH, $XPRT, and $ATOM and is planning to expand its DeFi products by making more crypto assets available for users.  One of its excellent features is that it allows users to bridge across Ethereum, Cosmos, Persistence, and other blockchains to transfer assets.

Marinadefinance

This is a Liquid Staking solution built on Solana. It is a fast-growing innovation ranking as the 10th LS with the highest TVL. Marinadefinance is flexible, it enables users to deposit SOL and receive mSOL immediately also, they can also choose to unstake their SOL instantly with a 0.3% to 9% fee or wait 1-3 days to unstake at zero cost.

Final Thoughts

Even though LSDs enable users to earn good APR on their crypto assets, the price of stETH may currently fluctuate until the Shangai Upgrade goes live.

Additionally, regulatory uncertainty may come into play for Liquid Staking Derivatives since it is still a relatively new field and laws may not completely cover the specific use case.

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Olaseni Kehinde Precious
Olaseni Kehinde Precious is an SEO content writer, digital marketer, and blockchain enthusiast. She writes about deFi, NFTs, DAOs, Metaverse, gameFi, and other blockchain-related topics.

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