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Liquid Staking Derivatives: The Next Crypto Cash Cow?

Since the Merge, Ethereum has been a fully proof-of-stake blockchain, and staking ETH is one of the easiest ways to earn a 3–8% APR on one of the most prominent digital assets. Let’s look at the three prominent liquid staking derivatives, Lido, Coinbase, and Rocketpool, and evaluate which ones are best positioned to succeed.

Ethereum staking was launched on December 1, 2022, the day that the Beacon Chain launched. This was almost two years before the Merge, which allowed validators to stabilize and the network to be as secure as possible before making a full transition. Even though the hardware requirements for staking Ethereum are minimal and anyone can run a node on a laptop, the ETH requirement is prohibitively expensive: 32 ETH, around $40,000 at current prices. Additionally, withdrawals for staked ETH have yet to be implemented. Anyone who has deposited ETH cannot touch it or their staking rewards until withdrawals are implemented in either Q1 or Q2 of 2023. The reason for preventing withdrawals was to ensure the network was stable, but it is not in the best interests of anyone wanting their ETH to be liquid.

Liquid staking derivatives were created to remedy the problems of a high entry cost and no withdrawals. Liquid staking derivatives, or LSDs, are tokens that represent staked ETH and its fee rewards that are transferable and usable like any ERC20 token. Even though the ETH may be locked, the custodians of that ETH issue tokens representing the value of the locked ETH, and they can be redeemed 1:1 for ETH upon the implementation of withdrawals. Naturally, these immediately became popular and have captured about a third of all staked ETH, around $8 billion.

Lido is the biggest and most established LSD with a 74% LSD market share and 29% of all staked ETH. Users who want to stake with Lido deposit ETH into a staking pool smart contract. This returns the user stETH, the liquid staked version of ETH, and distributes the user’s ETH between their set of node operators. The price of stETH is updated daily to reflect earned staking rewards. The Lido DAO, which governs this entire system, receives a 10% fee for their services, and the LDO token is the governance token of the protocol. This simplicity, along with LDO token incentives on decentralized exchanges, has propelled Lido to its top spot among LSDs.

Some have raised concerns about Lido’s dominance over the market and that it could threaten decentralization. Lido has attempted to remedy this by implementing safeguards to promote decentralization. Anyone concerned with keeping Ethereum as decentralized as possible should consider running their own node or using a smaller LSD.

Interestingly, Coinbase could be one of the most profitable and popular LSDs due to its market reach. The second most popular exchange in the world runs its own liquid staking service, where users can deposit their ETH and receive cbETH. Coinbase is the most beginner-friendly as it can be done directly from the Coinbase app with a few clicks, but it is also the most expensive with its 25% fee. They currently boast around one million ETH staked, representing about 16% of the liquid staking market share. Given their low barrier to entry and high fee, Coinbase’s revenues from staking could outpace any other LSD, making the COIN stock an exciting bet on liquid staking. Additionally, cbETH is currently trading at a discount to what it should be worth, so it is an enticing buy option compared to the other staked ETH versions.

Rocketpool is the second biggest decentralized staking pool, with a little over 300,000 ETH staked, giving them 5% of the liquid staking market share. Their main feature is permissionless node running, which allows anyone to run their own node and earn ETH staking rewards alongside the RPL token. Node operators must stake 16 ETH, soon to be changed to 8 ETH, alongside the RPL token. These requirements ensure an alignment of incentives between operators and stakers and prevent malicious actors. Rocketpool started in 2016 making it one of the oldest and most well-established LSDs, which shows its commitment to decentralization and sound protocol economics.

Though there are other LSDs, such as Stakewise, Frax, and Stafi, they have yet to achieve 1% of the LSD market share and may be covered in a future article. The three liquid staking derivatives covered today are leading the market and show no signs of slowing down. For beginners in the space who want a simple and safe experience at the cost of slightly higher fees, Coinbase’s cbETH is the best choice. Lido and stETH are ideal for investors wanting the most battle-tested protocol. And for those prioritizing decentralization or who want to run their own node, Rocketpool and rETH seem to be the protocol of choice.