Binance Report Highlights Liquid Staking as Top DeFi Option

Liquid Staking: the Biggest DeFi Sector

According to Binance’s Half-Year Report 2023, liquid staking has become the biggest DeFi sector in terms of total value locked (TVL). On April 13, the Ethereum Shanghai upgrade went live on the mainnet, allowing users to withdraw their staked ETH. However, the crypto exchange reported that liquid staking still continued to grow.

Liquid staking is a decentralized finance (DeFi) subsector that lets users earn yield by staking their tokens without losing their liquidity. It had dethroned decentralized exchanges (DEXs) as the top-ranking DeFi category by TVL as of April 2023.

The staking mechanism was a crucial part of staking Ether (ETH) before the Ethereum Shanghai upgrade when users were unable to freely unstake their ETH. Liquid staking tokens (LSTs) provided users with liquidity while they earned yield with their ETH. Binance said that “liquid staking is the most common way for users to stake ETH” even after the update.

Liquid Staking and DeFi

The term “LSTfi”, also known as “LSDfi”, has recently emerged, combining liquid staking and DeFi. This includes yield-trading protocols, indexing services, and projects allowing users to mint stablecoins using LSTs as collateral. According to the Binance report, the market for these protocols is currently concentrated on the top projects, but this is likely to change soon.

Risks Associated with Liquid Staking

A spokesperson from Binance cautioned users of liquid staking about the potential risks involved, such as smart contract vulnerabilities, slashing risks, and price risks. If validators fail to perform their duties, they may be penalized by having some of their staked assets “slashed”, resulting in losses for users. To avoid this, it is important for users to choose protocols that diversify their staked assets across reputable node operators.

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Crypto Market Performance and Price Risks

The liquid staking subsector has seen positive growth, but the DeFi sector overall lagged behind the global crypto market, with a 0.5% decline in its dominance, according to a report. Users must also be aware of price risks, as Binance has warned of potential mismatches between the LST and the underlying token due to market fluctuations or smart contract issues.

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