Liquid Staking replaces DeFi Lending as the second largest crypto sector
Liquid staking, which allows users to earn rewards for locking cryptocurrency into a blockchain network while retaining the liquidity of the locked funds, is now larger than decentralized lending and borrowing.
The total value of crypto assets deposited in liquid stake protocols was $14.1 billion as of European hours on Monday, making it the second largest crypto market sector, according to data source DeFi Llama. The total value locked in DeFi lending and borrowing protocols was $13.7 billion, the third largest, while decentralized exchanges, with deposits of $19.4 billion, held the top spot.
Ethereum’s upcoming Shanghai upgrade, which will allow stakers to withdraw their staked ether (ETH) and accumulated rewards for the first time, has piqued investor interest in floating stakes. Liquid staking is the best performing crypto sector this year, with growth in total value locked (TVL) approaching 60%.
“It [the upgrade] will innovate the current space by allowing healthy competition between liquid staking solutions, will strengthen ETH’s position by providing returns from staking/unstaking, and will give users the security to maintain sovereignty over their assets,” Messari CEO Ryan Selkis said in a newsletter published Friday.
By opening up withdrawals, the upgrade is expected to improve overall liquidity. Since December 2020, more than 16.5 million ETH have been staked in Ethereum’s Beacon Chain, of which 42% have been locked through floating staking protocols, mainly Lido.
Users of floating staking protocols such as Lido receive derivative tokens as staked ether (stETH) on a 1:1 basis. These derived tokens represent the user’s effort and can be used to generate additional returns across Defi protocols. Lido’s governance token LDO has risen 220% this year, outperforming industry leaders bitcoin and ether by a huge margin. Control tokens of Lido’s rivals Rocket Pool and Frax have also increased, according to CoinDesk data.
Liquid staking’s increased popularity in relation to decentralized lending can also be attributed to the yield difference between the two sectors.
Controlling over 75% of the liquid staking market, Lido offers an annual percentage return (APR) of 4.8% on staked ether, 6% on staked solana and 6.3% on Polygon’s MATIC token. That’s higher than the rates available for lending the top stablecoins USDT, USDC and DAI on DeFi giant Aave.
Liquid stakes are expected to grow further, as the ETH stake ratio, which measures the percentage of the cryptocurrency’s supply, is significantly lower than other Tier 1 cryptocurrencies.
“Only 14% of ETH is currently staking against 58%, the average for Tier 1 coins,” Markus Thielen, head of research and strategy at Matrixport, told CoinDesk. Its likely interest in staking will continue to increase.”
Binance Research recently expressed a similar opinion, predicting more inflow of money into staking protocols after the Shanghai upgrade.
“It can be argued that many groups of individuals had been waiting for Shanghai to stake their ETH, as withdrawals will remove the liquidity risk and uncertainty of a previously undefined lock-up period,” Binance Research said in a report earlier this month.
