If you want more cryptocurrency analysis including full-length research reports, trading signals, and social media sentiment analysis, use the code "Publish0x" when subscribing to CryptoEQ.io to make your first month of CryptoEQ just $10! Or simply click the button above!

ETH Staking

The launch of Ethereum’s Beacon Chain in December 2020 marked an enormous milestone that has been on the roadmap from the early stages of the project in 2015 and has already become the largest, most decentralized PoS blockchain with ~400,000 validators.

There are several different ways a user can stake ETH. The most autonomous and preferred method is to personally run a staking node. However, this requires at least 32 ETH plus some intermediate technical knowledge around the protocol, nodes, and computer hardware. 

Another option is staking on centralized exchanges like Coinbase, Binance, Kraken, and others. These exchanges take custody of your ETH, stake them on the user's behalf, and take a cut of the profit. This abstracts away the difficulties of running your own validator but comes with the tradeoff of giving up custody and some of the profits. The top four staking entities include traditional centralized exchanges Kraken and Binance, liquid staking protocol Lido, and Staked.us. which make up ~55% of total ETH deposits. 

Eth2 deposits, May 2022. Source: a16z

Decentralized solutions like Lido and Rocket Pool, which enable "liquid" staking are gaining traction. In the case of Lido, users stake ETH and, in return, get stakers tokens (stETH), essentially a derivative product of ETH that trades near 1-to-1 with ETH. This gives stakers more flexibility and liquidity since they can sell their stETH tokens on the open market or use the stETH tokens in other DeFi protocols. 

The price of 1 stETH should never, for economic reasons, exceed 1 ETH. This is because 1 ETH can always be used to mint 1 stETH and since stETH cannot be burned for its underlying ETH on the Lido protocol, the exchange rate relies on the open market and arbitrage. A number of factors come into play for the current (and historical) discount including the fact that stETH has less liquidity, less utility (e.g., can’t be used to pay gas fees), and more technical (smart contract) risk than ETH. 

As of Q2 2022, Lido holds ~33% of all ETH staked. Staking derivatives are the most efficient route for holders of PoS tokens that want to maximize yields and utility in DeFi. Starting in 2021 with just ~17k ETH deposited, Lido’s staking pool has grown to ~4.1m ETH (as of Q2 2022). There are ~70k depositors, however, the top ~50 depositors are responsible for ~45% of all ETH staked, suggesting that a few large whales make up nearly half of the Lido stake. Additionally, the top 100 holders of LDO, the governance token for the Lido DAO, possess 93.1% of the entire LDO supply, according to data from Etherscan.

Source: Galaxy Digital and Nansen

Lido has 22 Ethereum node operators who handle the technical side of running validator node software. By controlling a significant chunk of staked ether and assuming more than 90% of the liquid staking market, Lido’s centralization issue increases the risk of undesirable events such as validator slashing, governance attacks, and smart contract exploits. 

Currently, the Curve stETH:ETH pool is the source of liquidity for stETH. LDO and CRV incentives are used to attract liquidity by increasing the pool’s APY. This pool, along with others like Uniswap and Balancer, gives stETH holders the ability to exit their staked positions for ETH before the unlock.