Before we know it, Liquid Staking Tokens (LSTs) will replace Ethereum’s native cryptocurrency, Ether (ETH). The LST market is already worth around $17 billion and it has grown steadily since the Ethereum merger.
While LSTs are just beginning to take off, their advantages over traditional ETH will soon become apparent to liquidity providers (LPs), knocking ETH off its throne and ushering in a new era of LST dominance.
Since the merger, ETH can now be staked to produce an annual return of approximately 4%, depending on network activity factors, total number of ETH staked, number of validators and value captured by the maximum extractable value. This development is significant due to the nature of ETH as a generally stable asset. Many cryptocurrencies are more volatile, so owners need to consider both the yield and the price appreciation or depreciation of this asset. Alternatively, ETH now offers both staking yields And gradual price stability and appreciation.
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The new ability to stake ETH and earn yield means those who hold ETH today must decide: should they provide liquidity with their ETH and hope to earn a fee, or would they be better off staking that ETH and to obtain an infallible return?
LSTs solve this dilemma for LPs. Unlike regular staked ETH, which is illiquid in the Ethereum staking contract, LSTs unlock the inherent value of staked tokens, giving LPs a liquid “receipt” token that can be freely traded and used as collateral in funding protocols. decentralized (DeFi). Because LSTs make staked assets liquid, they offer token holders the opportunity to engage in other activities on different networks while still earning ETH staking rewards.
This means that LPs can now earn the yield of staked ETH while simultaneously using LSTs to provide liquidity to Automated Market Makers (AMMs). Importantly, LSTs also offer a much lower cost of entry than regular ETH staking, which is attractive for reaching new audiences and small dollar investors.
The argument that LSTs will replace ETH in DeFi is obvious: any LP that chooses to supply ETH to an AMM instead of an LST sacrifices around 4% APR. What kind of meaning would that have for people looking to maximize their returns?
There are undoubtedly some in this space who will say that ETH is ETH – that it is the second largest token in the cryptocurrency landscape and that it is not going anywhere. But crypto is moving fast. This community is always on the lookout for the next technical development that makes yielding easier and more efficient, and ultimately, LSTs offer a more efficient way to earn yield.
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The transition to LSTs will come quickly, but for now, it’s still very early. The Ethereum upgrade in Shanghai, which allowed ETH to be released for the first time, did not take place until April. But LSTs have a much larger market potential than their current market share represents. As people become more comfortable with staking ETH now that it can be easily withdrawn, I think we will see increasing adoption of liquid staking platforms.
The beginning of this transition can already be seen in staking trends in the post-Shanghai world. In 2023 alone, ETH deposited with the Lido Protocol has grown from 4.9 million to 8 million, representing over 30% of all ETH staked. The Swell Network, which launched in mid-April, already has over 43,000 ETH staked on its platform.
This change could mean that LSTs will take over as the dominant asset in decentralized exchanges and eventually replace ETH entirely as the go-to token in crypto. The rapid growth of “LSTFi” could usher in an era in which all ETH will be staked via liquid staking protocols and users will conduct all trading and other activities using LST.
Yes, ETH is the most familiar asset. But familiar doesn’t necessarily mean “better”. Before settling into buying ETH and then having to make decisions on whether to forgo financially by providing liquidity versus staking, DeFi folks should take a tour of the LST ecosystem in full boom. Right now, this may be the last real chance to step into the ground floor and maximize the impact of their investments.
Ultimately, a takeover of LST would be a positive thing for the industry. Many crypto users left during our “crypto winter,” and there was a noticeable slowdown in interest from new users. LSTs are a more accessible option to attract new users and could be the breath of fresh air this industry needs.
Bob Baxley is a base builder for the Maverick protocol. He previously worked for Apple as senior director of design and product management and as director of design for Yahoo. He holds an undergraduate degree from the University of Texas at Austin and a master’s degree from Stanford University.
The opinions expressed are those of the author alone and do not necessarily reflect the views of Cointelegraph. This article is for general informational purposes and is not intended to be and should not be considered legal or investment advice.