Ethereum is about to get crushed by liquid staking tokens

The Benefits of Liquid Staking Tokens (LSTs)

Liquid staking tokens (LSTs) are quickly gaining traction as a viable replacement to Ethereum’s native cryptocurrency, Ether (ETH). With a market cap of approximately $17 billion and steadily increasing, it’s clear that LSTs are here to stay.

The Merge has made it possible for ETH holders to stake their coins and earn a yield of around 4% each year, depending on a variety of network activity metrics. This development is especially noteworthy due to the relative stability of ETH compared to other, more volatile cryptocurrencies. Now, ETH holders can benefit from both a steady yield and the potential for price appreciation.

The decision for ETH holders is clear: should they provide liquidity with their ETH in hopes of earning fees, or should they stake their ETH and guarantee a yield?

The Benefits of Liquid Staked Tokens (LSTs) for DeFi

LSTs offer a unique solution for Liquidity Providers (LPs) who want to capitalize on the Ethereum staking contract. Unlike regular staked ETH, which is illiquid, LSTs provide a liquid “receipt” token that can be traded freely and used as collateral within decentralized finance (DeFi) protocols. This makes staked assets liquid, allowing tokenholders to engage in other activities while still earning ETH staking rewards.

The advantages of LSTs over ETH in DeFi are clear: LPs who choose to supply ETH to an automated market maker (AMM) instead of an LST are missing out on around 4% APR. This makes LSTs an appealing option for those looking to maximize their yield.

The argument that LSTs will replace ETH in DeFi is strong. Web 3.0 investments are always looking for technical developments that make earning yield easier and more efficient, and LSTs offer a more effective way to earn yield.

The Growing Popularity of Liquid Staking Tokens (LSTs)

The recent Ethereum upgrade, which allowed for ETH to be unstaked, has paved the way for the swift transition to Liquid Staking Tokens (LSTs). However, it is still in its early stages. Despite this, LSTs have a much greater market potential than their current market share indicates. As people become more comfortable with staking ETH, the adoption of liquid staking platforms is likely to grow rapidly.

This shift in the post-Shanghai world is already evident in the staking trends. For example, the amount of ETH deposited with the Lido protocol has increased from 4.9 million to 8 million in 2023, representing more than 30% of all staked ETH. Similarly, the Swell Network, which launched in mid-April, has already attracted more than 43,000 ETH staked on its platform.

The increasing popularity of LSTs could result in them taking over decentralized exchanges and eventually replacing ETH as the go-to token in crypto. This shift to “LSTFi” could mean that all ETH will eventually be staked through liquid staking protocols and users will conduct all trading and other activities using LSTs.

Though ETH is a more familiar asset, it may not necessarily be the best option. Before committing to purchasing ETH and deciding whether to provide liquidity or stake it, users should explore the LST ecosystem. This may be the last opportunity to get in on the ground floor and make the most of their investments.

The crypto industry has been facing a decline in users since the “crypto winter”, but the introduction of Liquidity-backed Security Tokens (LSTs) could be the much-needed breath of fresh air. These tokens are more accessible and could attract new users, ultimately leading to a positive transformation in the industry.

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