As Competition for ETH Liquid Staking Grows, Can Lido Stay on Top?
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As Competition for ETH Liquid Staking Grows, Can Lido Stay on Top?

While Lido Finance is still the leader in liquid staking, rival projects are slowly eating its market share.
Neither the author, Ruholamin Haqshanas, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

With Ethereum’s Shanghai upgrade, which will include code allowing withdrawals of ETH staked in the Beacon Chain, forthcoming, user interest in ETH staking continues to grow. This has also led to an increase in interest in liquid staking protocols like Lido and Rocket Pool, which allow users to join ETH staking without running a validator node.

What is Ethereum Liquid Staking?

Liquid staking is the process of delegating ETH tokens to a project that stakes those tokens while providing access to those funds at all times. This is usually done by giving the depositor a so-called receipt in the form of tokenized assets redeemable for the staked tokens. 

There are numerous advantages to ETH liquid staking. First, users won’t have to relinquish access to their ETH tokens after they stake them. Furthermore, direct staking requires a significant investment of 32 ETH (around $40,000), whereas liquid staking can be done with even a tiny amount of ETH. 

Another notable benefit of liquid staking is that it removes the need for technical knowledge. When staking the usual way, a token holder would delegate their stake to a single validator. However, setting up a personal Ethereum node requires technical skills and knowledge.

Finally, users can multiply their liquid staking rewards using the “composability” of the yield strategies. For instance, stakers can use their liquid staking tokens, like Lido’s staked Ethereum (stETH), as collateral on centralized or decentralized exchanges or lending pools and earn additional rewards. 

Currently, Lido Finance is the largest liquid staking platform available on the market. The project gives Ethereum owners stETH tokens in return for their staked coins and distributes associated staking rewards to the users based on the amount of their staked ETH. StETH tokens are minted when ETH is deposited and burned upon redemption. 

While stETH is supposed to maintain its peg with ETH, the token is subject to fluctuations based on market conditions, even though it is backed by actual ETH. For instance, stETH distanced from its peg in June last year amid steep market volatility, with its discount reaching a record 6%.

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ETH Staking Market Grows As Shanghai Upgrade Planned for March

Ethereum’s Shanghai upgrade, which will allow withdrawals of ether staked in the Beacon Chain since December 2020, is expected to go live by March 2023, developers said in a call on January 5. To ensure they meet this date, the devs plan to release a public test network for the Shanghai upgrade by the end of February.

The excitement around the upgrade has led to an increase in staked ETH. According to a recent report by Delphi Digital, the ETH liquid staking now captures around 40% of all ETH staked. The rise in staked ETH comes in line with a rise in yields following the Merge.

Furthermore, there has been an increase in the number of liquid staking platforms. While Lido is still the leader, holding about 30% of staked ETH, other competitors are trying to catch up. Rocket Pool, StakeWise, and Frax are three protocols steadily gaining market share at Lido’s expense.

Major cryptocurrency exchange Coinbase, which started to offer liquid staking in late August 2022, has also become a strong player. The exchange currently accounts for 16% of the market, with ETH staked as the Coinbase Wrapped Staked ETH (cbETH), hitting an all-time high of around $1 million as of December 16, 2022.

All in all, while Lido’s first-mover advantage gives the platform an edge over competitors, it remains to be seen if the platform manages to maintain its lion’s share of the market. 

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Do you think Lido will remain the leader in liquid staking? Let us know in the comments below.