Marketing Communication

Why Ethereum Bulls Are Turning to LSD

19 May 2023

Menno Martens

Crypto Specialist and Product Manager

Why Ethereum Bulls are Turning to LSD

Before any further confusion commences, LSD stands for Liquid Staking Derivative. LSDs are derivatives based on staked tokens (such as ETH) but are liquid, unlike staked tokens. In exchange, LSDs yield only partial staking rewards to compensate for the increased risk of the LSD issuer. The tokens behind projects like Lido Finance and Rocket Pool have soared over the last few months. The reason? Ethereum developers have rolled up their sleeves for a key upgrade to the network that happened back in March 2023: Shapella (Shanghai + Capella) .

But first, what are LSDs and why are they so hyped? Liquid staking derivatives (LSDs) like Lido Finance, Ankr and Rocket Pool have emerged as one of the hottest new trends in the DeFi world. They enable investors to maximize their earnings potential by validating transactions on the Ethereum network without giving up liquidity. LSDs are the tokens produced by centralized services or DeFi protocols. The LSDs pool investor funds until they're big enough to meet the 32 ETH requirement for the pool to run a node by itself. The earnings generated from the validator node is then shared between participants and the LSD platform.

What does that have to do with Ethereum’s Shanghai update?

Until recently, many investors have been reluctant to contribute to Ethereum's security or participate in staking ventures due to the uncertainty about when and how funds can be un-staked. When funds are staked, it usually means that funds are locked for a defined amount of time. Since the deployment of the Beacon Chain (the Proof-of-stake chain), no one could tell you exactly when you could get your funds back. Ethereum’s Shanghai upgrade is a hard fork that happened in March 2023. One of the biggest developments associated with the Shanghai Upgrade is that it enabled stakers and validators to withdraw assets from the Beacon Chain.

Shanghai Aftermath

According to an industry report by Coingecko: “As of April 30, 2023, an all-time high of 19.2 million ether (ETH) has been staked. This represented a 24.2% increase from the end of 2022, which had 15.9 million ether staked.”. As of May 2023, more than 15% of all ETH is staked of which. Over 35.5% of the staked ETH is staked through LSD protocols, an increase of 19% compared to the staking ratio of the end of 2022. This historic performance is not an indicator of future results. The aftermath of the Shanghai Upgrade confirms that despite the fears of massive withdrawals, most Ethereum stakers continue staking and keep depositing more ETH into the Proof-of-Stake based blockchain. This is beneficial to the security of Ethereum’s network and its monetary policy.

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