A look at the liquid staking race ahead of Ethereum’s Shanghai Update

When Ethereum transitioned to the proof-of-stake (PoS) consensus mechanism, it allowed users to stake their ETH and participate in the transaction validation process. In return, stakers would receive rewards for every block of transactions they helped add to the blockchain.

However, there are a few issues when it comes to staking ETH. First of all, there is a minimum staking threshold of 32 ETH, which translates to roughly $50,000. The second problem is that staked ETH is locked on the protocol and cannot be withdrawn until the Shanghai Update is completed in March this year.

To sum it up, staking ETH directly on Ethereum is a game for the wealthy, as 32 ETH is not something average investors carry as mere change in their wallets.

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This has led to the introduction of decentralised liquid staking platforms like Lido, Rocket Pool, Frax Share, etc. More recently, several centralised exchanges have also started offering Ethereum staking solutions. As such, the battle between these platforms is really heating up, especially with Ethereum’s Shanghai Update coming up in March.

Here's a look at the race between these staking solutions and where they stand today.

Firstly, unlike Ethereum, these liquid staking protocols do not enforce any entry barriers. Users can stake as much ETH as they want, no matter how small or big the amount is. The staked ETH is then pooled and the rewards are then divided among all the contributors, based on the amount of ETH they have deposited with the platform. In exchange for their services, these liquid staking protocols take a small cut from the yield generated on the staked ETH.

In addition, liquid staking platforms usually provide users with an equivalent amount of staking derivatives in exchange for their staked assets. For instance, users who stake ETH through Lido receive an equivalent amount of stETH, while those who use Coinbase receive cbETH, and so on. These tokens represent the users’ staked tokens and can be used on other DeFi platforms, for example, as collateral on crypto lending protocols.

With the Shanghai Update approaching, more and more users are looking to stake their ETH through liquid staking platforms. According to Dune Analytics, the amount of staked ETH across different pools skyrocketed from 265,000 ETH during the initial months of 2021 to reach a staggering 6.8 million ETH at the moment. That equates to a 2,470 percent increase since 2021.

At the moment, the leading liquid staking protocol (in terms of market capitalisation) is Lido DAO, followed by Coinbase, Rocket Pool, StakeWise and several others. Lido accounts for nearly 75 percent of all ETH staked through liquid staking protocols, followed by Coinbase, Rocket Pool and StakeWise, which make up 17 percent, 3.5 percent and 1.1 percent of the liquid staked ETH.

Therefore, while Lido is currently leading the liquid staking race, Coinbase has managed to capture a significant amount of the market in a relatively short period. However, one thing that holds back centralised exchanges is that users have to move their tokens onto the platform to begin staking. On other hand, decentralised liquid staking platforms allow users to stake tokens directly from their wallets.

Some of the decentralised staking projects have also set up DAOs that allow investors to participate in the governance of the platform. And owing to the growing popularity of liquid staking solutions, their native DAO tokens have registered significant rallies over the last few weeks as well.

Being one of the leading liquid staking protocols, Lido DAO’s native token, LDO, has witnessed a massive surge of 90 percent this year, jumping from $0.95 on Jan 1 to $2.07 at the time of writing. However, other tokens have managed to catch up and outperform LDO. For instance, FXS, the DAO token of Frax Share, another liquid staking protocol, is up 130 percent YTD, jumping from $4.14 on January 1 to $10.24 at the time of writing.

Speaking with Forbes, senior analyst at Blockworks Research, Sam Marten, offered some insights into Frax Share’s recent upswing. "Frax’s staked-ETH derivative, sfrxETH, is the fastest growing decentralised alternative to Lido’s stETH in terms of percentage market share," Marten said.

"The attractiveness of a staked-ETH derivative comes down to two primary factors: yield and liquidity. Frax currently offers the highest yielding derivative and has a war chest to incentivise liquidity, which puts it in a prime position to continue capturing market share throughout 2023" Marten added.

Coming in third is Rocket Pool’s DAO token, RPL, which has recorded an 88 percent growth YTD. There are also plenty of smaller liquid staking platforms, such as Stader and Bifrost, which have registered gains of 422 percent and 275 percent YTD, respectively.

However, these are much smaller protocols. Their combined market capitalisation (roughly $90 million) pales in comparison to that of Lido, Rocket Pool, ANKR and Frax Share, which have a combined market capitalisation of nearly $3.3 billion. However, the growth of these smaller platforms is a testament to the growth of the sector and the competition within it.

Moreover, Ethereum currently has a 14 percent ratio of staked tokens to circulating supply. That pales in comparison to other proof-of-stake networks, such as BNB Chain (92 percent), Cardano (72 percent) and Solana (71 percent). For this reason, experts believe that ETH staking could increase after the Shanghai Update.

Users will be more comfortable staking their ETH knowing that it is freely redeemable, as opposed to being indefinitely locked on the platform. In this case, the adoption of liquid staking solutions could skyrocket and the competition between platforms will heat up once the Shanghai Update is complete. This makes the liquid staking industry an interesting space to watch going forward.