Ethereum-Based Liquid Staking Ecosystem | 2023

Written By
David
First Published
April 16, 2023
Last Updated
September 5, 2024
Estimated Reading Time
6 minutes
Liquid Staking
In this article...

“What’s the point of having cake if you can’t eat it.”
– Martin Hart, True Detective, Season 1. 

At the time of this writing, Ethereum’s Shanghai – Capella upgrade is only hours away. Meaning, the 14% of ETH that’s been locked up for the last two years under Ethereum 2.0 will soon be free as birds.

Enter liquidity staking, which hit Cryptoville in 2020 and 2021. The free market invented liquid staking in direct response to ETH 2.0’s indefinite lockup period. A lot of economic value was getting locked away, and the free market wasn’t cool with it staying illiquid.

Liquid staking is an interesting crypto sub-industry, and one I believe will only continue to grow. This article explores the Ethereum-based liquid staking ecosystem, specifically:

  • The key players;
  • What is liquid staking, where the value comes from, what are the benefits and risks;
  • the three prominent Ethereum liquid staking protocols: Lido, Rocket Pool, and Frax Finance.

 Let’s dive in.

Overview of the DeFi Liquid Staking Ecosystem

Looking down at the DeFi liquid staking ecosystem at an altitude of 50,000 feet, the main components are the following:

  • Liquid Staking Protocols: dApps that receive and stake users’ assets to proof-of-stake networks. These dApps issue back to users liquid staking derivatives, in proportion to the amount of assets received. These dApps ensure users’ staking rewards are accounted for and release the staked assets back to users when the derivatives are returned.
  • Liquid Staking Derivatives: Tokenized receipts of the staked assets. These receipts represent users’ shares of the staked assets and accrued rewards. The free market typically values these derivatives equal to that of the underlying assets. Thus, these derivatives are “liquid”. Users can deploy them across DeFi for trading, lending, collateral, staking, and in liquidity pools.
  • Protocol DAOs and Tokens: Most of these protocols are governed by decentralized autonomous organizations (DAOs). DAOs typically use direct-democracy voting via governance tokens. The free market determines the value of these tokens.
  • Related Third-Party dApps: Any other third-party DeFi dApp that offers a product or service associated with the liquid staking derivative. Typical examples would be DEXs, lending and borrowing protocols, and staking or aggregator protocols.

What is Liquid Staking

Liquid staking is the process of:

  1. Staking ones crypto-assets through a liquid staking protocol.
  2. Receiving liquid staking derivatives in return
  3. Using those derivatives in other DeFi applications
  4. All while still capturing the staking rewards of the underlying asset.

Let’s look at why these derivatives have economic value, and the benefits and risks of liquid staking.

Why Liquid Staking Derivatives = Economic Value

Liquid staking derivatives have economic value because the free market says so. But why would the free market say so? It’s actually very simple:

Why liquid staking derivatives have value.

Note: Protocols only mint and distribute these derivatives in direct proportion to the amount of underlying crypto that they receive.

Benefits

Easy. You get your cake and can eat it too.

Liquid staking derivatives allow users to receive the staking rewards from their crypto assets, while simultaneously giving users the ability to use their…

You're missing out on the goods!
Become a Premium Wealth Mastery Subscriber to read the whole article + get weekly investment strategies on crypto, altcoins, NFTs and more

David learned about bitcoin in 2015 and has closely followed the crypto industry since then.

His professional interests center around bitcoin, layer-one blockchain protocols, decentralized finance, and clean energy.

An attorney by trade, David has held licenses to practice law in the State of Hawaii and in US federal courts.

Discussion on "Ethereum-Based Liquid Staking Ecosystem | 2023"
You must Subscribe or Login to post a comment.
Additional Resources
Wealth Mastery
Subscribe Today!
Join the Wealth Mastery Investor Report

Join the Wealth Mastery Investor Report

By Lark Davis
Privacy Policy

Who we are

Our website address is: https://thewealthmastery.io.

Comments

When visitors leave comments on the site we collect the data shown in the comments form, and also the visitor’s IP address and browser user agent string to help spam detection.

An anonymized string created from your email address (also called a hash) may be provided to the Gravatar service to see if you are using it. The Gravatar service privacy policy is available here: https://automattic.com/privacy/. After approval of your comment, your profile picture is visible to the public in the context of your comment.

Media

If you upload images to the website, you should avoid uploading images with embedded location data (EXIF GPS) included. Visitors to the website can download and extract any location data from images on the website.

Cookies

If you leave a comment on our site you may opt-in to saving your name, email address and website in cookies. These are for your convenience so that you do not have to fill in your details again when you leave another comment. These cookies will last for one year.

If you visit our login page, we will set a temporary cookie to determine if your browser accepts cookies. This cookie contains no personal data and is discarded when you close your browser.

When you log in, we will also set up several cookies to save your login information and your screen display choices. Login cookies last for two days, and screen options cookies last for a year. If you select “Remember Me”, your login will persist for two weeks. If you log out of your account, the login cookies will be removed.

If you edit or publish an article, an additional cookie will be saved in your browser. This cookie includes no personal data and simply indicates the post ID of the article you just edited. It expires after 1 day.

Embedded content from other websites

Articles on this site may include embedded content (e.g. videos, images, articles, etc.). Embedded content from other websites behaves in the exact same way as if the visitor has visited the other website.

These websites may collect data about you, use cookies, embed additional third-party tracking, and monitor your interaction with that embedded content, including tracking your interaction with the embedded content if you have an account and are logged in to that website.

Who we share your data with

If you request a password reset, your IP address will be included in the reset email.

How long we retain your data

If you leave a comment, the comment and its metadata are retained indefinitely. This is so we can recognize and approve any follow-up comments automatically instead of holding them in a moderation queue.

For users that register on our website (if any), we also store the personal information they provide in their user profile. All users can see, edit, or delete their personal information at any time (except they cannot change their username). Website administrators can also see and edit that information.

What rights you have over your data

If you have an account on this site, or have left comments, you can request to receive an exported file of the personal data we hold about you, including any data you have provided to us. You can also request that we erase any personal data we hold about you. This does not include any data we are obliged to keep for administrative, legal, or security purposes.

Where we send your data

Visitor comments may be checked through an automated spam detection service.

Join the Wealth Mastery Investor Report

By Lark Davis