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In the dynamic world of decentralized finance, the concept of liquid staking has emerged as a pivotal innovation, reshaping the landscape of cryptocurrency investment. Since the dawn of 2023, the liquid staking market has witnessed a remarkable growth trajectory, with aggregated assets staked soaring from a modest $7.8 billion in January to an unprecedented $20 billion. This constitutes a staggering 156% increase, a trend that demands a closer examination.
Driving Forces Behind the Growth
The meteoric rise in the liquid staking sector can be attributed to several key factors, most notably the performance of Ethereum (ETH) and its successful Shapella upgrade.
Ethereum's price began the year at approximately $1200 and has since climbed to roughly $1850 as of August 1st. This price appreciation has undoubtedly contributed to the increased interest in staking ETH.
Furthermore, the Shapella upgrade in April has played a crucial role in this growth. By enabling the withdrawals of staked ETH from the Beacon Chain back to Ethereum's execution layer, the upgrade has significantly mitigated the risks associated with ETH staking. This enhancement in security and flexibility has led to a surge in users willing to stake their assets.
Market Leadership: Lido's Dominance
Lido, a pioneer in the liquid staking sector, has firmly established itself as the market leader, commanding a 75% share of assets staked. Launched in December 2020, Lido was the first liquid staking project to hit the market.
The success of liquid staking projects hinges on the adoption and liquidity of their derivative tokens. Lido's first-mover advantage has enabled them to seize the majority of the liquid staking market share, setting a benchmark for others in the industry.
Despite the impressive growth, the liquid staking market still harbors substantial potential for expansion. As of now, only around 20% of the total ETH supply has been staked, a figure that pales in comparison to other Proof of Stake (PoS) chains such as Solana and Avalanche, both boasting staking ratios exceeding 60%.
Source: Token Terminal
Given ETH's higher market capitalization, which stands at approximately $222 billion as of August 2nd, 2023, the stage is set for multibillion-dollar growth in assets staked in the forthcoming quarters.
Decentralized vs. Centralized Models
Rocket Pool and Stader have embraced a decentralized model, allowing anyone to become a node operator. This approach not only enables existing node operators to earn additional yield but also fosters decentralization within the project. By opening the doors to a broader array of participants, these platforms align with the core ethos of decentralization that underpins the Ethereum network.
Contrastingly, other liquid staking providers have opted for a more centralized approach, relying on hand-picked external node operators or operating their nodes themselves. This model, characterized by permissioned or private node operators, offers ease of operation and management.
The complexity of collateral, technical, and security-related risks associated with running a permissionless node operator set has led many providers to choose this path. By leveraging a centralized model, these providers have been able to expedite their launch time, a strategic advantage in a competitive market.
The Demand for Decentralization
Despite the apparent benefits of a centralized approach, there is a growing clamor among consumers for more decentralized and permissionless liquid staking service providers. The ethos of decentralization that permeates Ethereum encourages a diverse array of node operators to maintain network security.
Major projects like Lido, which currently rely on a smaller number of permissioned node operators, have sparked concerns among some Ethereum users. The fear is that the centralizing effect of such a model, should Lido continue to expand its market share, could be at odds with the foundational principles of decentralization.
In response to these concerns, numerous projects are actively working on more decentralized staking models. Prominent examples include StakeWise v3 and Lido v2, both of which signal a recognition of the increasing demand for decentralization within the liquid staking sector.
The Lido development team has recently unveiled its latest development in its Lido V2 update, marking a significant milestone in its ongoing efforts to enhance the utility and functionality of its service. The Lido V2 launch follows a considerable period of intensive development and incorporates two key features, intended to streamline the user experience and broaden the scope for diversified involvement in the platform.
Firstly, back in May 2023, withdrawals were implemented, a move designed to empower platform users by enabling them to withdraw their staked Ethereum ($ETH) directly, rather than relying on secondary markets. In preparation for the launch, the Lido team undertook nine audits, carried out by reputable firms including Sigma Prime, ChainSecurity, and Oxorio. The purpose of these rigorous checks was to validate the quality and security of the code, ensuring it complied with industry best practices. The audit reports, expected to be publicly announced soon, will provide added assurance in the efficacy of the protocol.
Lido's extensive network of node operators, which currently number 29, each with unique setups, contribute significantly to the protocol's integrity. The launch of Lido V2 is only the beginning. The team plans to continue to closely monitor the behavior of the code to ensure that the system operates as expected. This proactive approach demonstrates Lido's ongoing commitment to maintaining the optimal performance of the protocol.
In preparation for the launch, an intensive testnet phase was conducted. During this phase, the Lido team tested various scenarios under different conditions to understand the upgrade's behavior. Moreover, the largest unstaking event ever took place during the testnet, marking another noteworthy achievement for the team.
The idea for Lido V2 was conceptualized to prevent centralized exchanges from dominating the market share from Lido. The new upgrade aims to expand user participation in the protocol without sacrificing decentralization. The introduction of layer-2 solutions promises to boost user engagement and transaction volumes.
The second major feature of the Lido V2 launch is the introduction of a staking router. Designed with flexibility in mind, the staking router accommodates a wide range of Node Operators, from individual stakers and Decentralized Autonomous Organizations (DAOs) to Distributed Validator Technology (DVT) clusters. This inclusive strategy is set to bolster the platform's decentralization by fostering a diverse ecosystem of validators.
The staking router, while not currently supporting bonding, is an important feature that is expected to increase Lido's decentralization, without compromising security or system robustness.
It's important to note that the V2 upgrade brought additional changes besides the aforementioned major additions. The most notable among these was a complete rewrite of the Oracle smart contract. This adjustment was critical to support the new withdrawal feature and allow for an increased number of Node Operators, further reflecting Lido's focus on scalable, inclusive design.
In conclusion, the launch of Lido V2 marks a significant step forward for the Lido community, showcasing the team's commitment to providing a superior user experience and advancing the decentralization and security of the platform. While kadmil.eth and his team are pleased with the successful launch and promising early results, they remain cautiously vigilant, committed to continuously monitoring the system's performance and adapting to ensure the protocol's optimal functioning.
As we look to the future, the ongoing discussion surrounding the next phase - Lido V3 - serves as a reminder that, in the dynamic world of blockchain, innovation, and evolution never cease. It will be fascinating to see how the Lido platform continues to evolve to meet the needs of its growing user base and the wider Ethereum community.