Liquid staking tokens (LSTs) are quickly gaining momentum in the cryptocurrency world and are poised to replace Ethereum’s native cryptocurrency, Ether (ETH). With a market worth around $17 billion and growing steadily since Ethereum’s Merge, LSTs offer significant advantages over traditional ETH.
Since the Merge, ETH can now be staked to generate an annual yield of approximately 4%. This yield depends on factors such as network activity, total ETH staked, number of validators, and the value captured by maximum extractable value. This development is crucial because ETH is considered a relatively stable asset. Unlike many other cryptocurrencies, ETH offers both yield and price stability and appreciation.
However, the introduction of LSTs solves a dilemma for liquidity providers (LPs) holding ETH. While staked ETH is illiquid in the Ethereum staking contract, LSTs unlock the underlying value of staked tokens. LPs receive a liquid “receipt” token that can be freely traded and used as collateral within decentralized finance (DeFi) protocols. This liquidity provided by LSTs allows tokenholders to engage in various activities across different networks while still earning ETH staking rewards.
The Power of Simultaneous Yield and Liquidity Provision
LPs can now earn yield from staked ETH and utilize LSTs to provide liquidity in automated market makers (AMMs). Moreover, LSTs offer a lower cost of entry compared to regular ETH staking, making them attractive to new audiences and smaller investors. If LPs choose to supply ETH to an AMM instead of LSTs, they sacrifice an approximate 4% annual percentage rate (APR) of yield, which is unwise for those seeking to maximize their earnings.
The Inevitable Transition and Growing Market Potential
While some argue that ETH’s position as the second-largest token in the cryptocurrency landscape guarantees its permanence, the crypto industry is quick to evolve. LSTs offer a more effective way to earn yield, and as users become more comfortable with unstaking ETH, the adoption of liquid staking platforms will rapidly grow.
The already visible shift in staking trends post-Shanghai is indicative of the potential for LSTs. The Lido protocol has seen an increase in ETH deposits from 4.9 million to 8 million in 2023 alone, representing over 30% of all staked ETH. Additionally, the Swell Network, launched in mid-April, has already attracted over 43,000 ETH staked.
The Potential Takeover and Impact on the Crypto Industry
This transition towards LSTs could lead to their dominance in decentralized exchanges, ultimately replacing ETH as the go-to token in the crypto space. The growth of “LSTFi” can usher in an era where all ETH will be staked through liquid staking protocols, and users will conduct trading and other activities using LSTs.
While ETH may be the more familiar asset, familiarity does not necessarily equate to the best option. Those in DeFi should explore the emerging LST ecosystem to fully understand the potential and maximize their investments. The rise of LSTs would have a positive impact on the industry by attracting new users and breathing new life into the cryptocurrency space.
As the market for LSTs continues to expand and gain momentum, it is clear that these tokens offer significant advantages over traditional ETH. LPs have the opportunity to simultaneously earn yield from staked ETH and provide liquidity using LSTs, which presents a compelling proposition. The transition towards LSTs may disrupt the dominance of ETH and redefine the landscape of decentralized finance. With LSTs on the rise, investors should seize the opportunity to explore this promising ecosystem and maximize their impact on the ever-evolving world of cryptocurrency.