This guide follows the topic of staking and details rapidly growing liquid staking derivatives.
In September 2022, after the “merge” event takes place, Ethereum becomes a proof-of-stake chain: users can now stake their ETH and earn roughly 3–6% annual returns in exchange for their services. However, there is currently a major disadvantage of staking Ethereum: users cannot withdraw the mortgaged ETH. An upcoming Shanghai upgrade in March is said to fix this issue.
To avoid this potential inconvenience, more and more traders are turning to liquid staking alternatives. What is liquid staking and how does its derivative work? What are some ways to benefit from LSD? let’s find out.
Why are liquid staking derivatives (LSDs) good?
Liquid staking is gaining popularity in the DeFi industry, making it an innovative way to generate passive income from crypto assets. It is also a great option for crypto enthusiasts to take advantage of the crypto market. For example, if the price of your staked token goes up, you can spin off your wealth and trade it on a decentralized exchange, making it more likely to maximize your total turnover.
Another thing Liquid Staking excels at is the ability to create diversified portfolios, meaning traders can stake multiple tokens in different wallets and earn additional staking rewards, while liquidity providers earn transaction fees.
What is the Shanghai upgrade?
It is worth noting that at the time of writing, the ETH staked by users cannot be withdrawn. Ethereum’s upcoming (possibly delayed) Shanghai upgrade in March 2023 aims to add this most important option and increase the overall staking potential of the Ethereum network.
When it comes to staking basics, Ethereum is on par with other proof-of-stake chains. According to the Staking Rewards website, as of the end of January 2023, only 14.07% of the total ETH supply was staked. Compared to other networks, this number is much lower, with the average pledge rate hovering around 60%, which is about 4 times higher than Ethereum. For example, Cardano has a staking ratio of 72.11%; Tron — 44.96%; Polygon — 39.64%; and BNB Chain — 96.63%. The reason the performance is so poor is that the network cannot withdraw the pledged ETH and does not know when it will be available.
In addition, the Shanghai upgrade aims to achieve more useful functions, such as: Increase the number of transactions processed by a block; Allow clients to save the entire blockchain state to participate in blockchain activities without a request; Increase processing gas incentives; Reduced withdrawal time to 27 hours, etc.
Going back to the purpose of liquid staking, it aims to solve the current staking problem by creating derivatives of users’ Ethereum staking and further representing them in various DeFi applications. Therefore, these Liquid Staking Derivatives (LSDs) are ERC-20 tokens.
