Ethereum’s upcoming Shanghai upgrade will allow users to withdraw Ether staking ETH, increasing the network’s liquidity and competitiveness while increasing its staking odds closer to its competitors.
The Shanghai upgrade is an Ethereum hard fork scheduled for March. It implements five Ethereum Improvement Proposals, titled EIP-4895, allowing users to withdraw their locked tokens representing staked Ether from the Beacon Chain.
The ability to withdraw staked Ether can increase market liquidity and make it easier for users to access their funds. Ethereum liquidity staking platforms, which have emerged mainly to ease the blockchain’s strict staking and locking requirements, could also benefit from the upgrade.
Liquid Staking is a staking mechanism that allows users to passively earn a profit from staking a coin in a smaller amount than risking directly at the platform of that coin and receive in return a representative token equivalent to the coin they are interested in bringing staking. Users can then get this expected token to trade, withdraw their stake as needed, or participate in another protocol to earn additional passive profits.
According to DefiLlama data, the recent spike makes liquidity staking the second-largest offering among decentralized finance (DeFi) protocols. The total value of crypto assets locked in liquid staking services has increased to $17.31 billion to bypass lending protocols ahead of Ethereum’s Shanghai update.
Currently, most TVL in liquid staking projects (also known as liquid staking derivatives – LSD) is ETH. This shows that, for now, liquid staking is still the primary beneficiary of the development of the Ethereum ecosystem and related Layer-2 solutions.
In general, users still tend to deposit their ETH into liquid staking platforms. In the context of the upcoming Shanghai event, the growth rate of ETH deposited on Lido has also witnessed an increasing trend around February-March 2023. Besides, the peg of the current liquid-staked ETH tokens has been maintained stable since the beginning of the year.
Since the Ethereum network switched to proof of stake (PoS) in September 2022, increasing the percentage of Ether staking has become essential to help secure the protocol. But only some people were hesitant to stake their ETH due to the inability to withdraw. As a result, only around 15% of ETH is currently staked, while all other major layer 1 networks have a staking rate above 40%.
But according to experts’ analysis, many investors will choose the liquidity staking option after the Shanghai upgrade, as they can use liquid staking derivatives on decentralized financial networks and other medium without losing bet profits.
The DeFi investor went on to say that once the staked ETH is available for withdrawal, the revenue of liquidity staking providers is likely to increase significantly, which could positively impact the token price of their announcement. According to a forecast from Delphi Digital, in the long term, the total amount of ETH participating in staking will reach 33.5 million ETH.
Furthermore, the increasing competition between these platforms will likely benefit their users through lower fees and additional perks in exchange for their loyalty.
Lido is the largest liquid ETH provider and the market leader in its segment. Other notable liquidity staking providers include Rocket Pool, Ankr, Coinbase, and Frax Finance, all of which are predicted to increase in usage after Shanghai.
Upgrading ETH Shanghai to make withdrawals means that user commits will be more secure, thus increasing the speed of commits. At the same time, in the Ethereum ecosystem, Liquidity Staking Derivatives (LSDs) can not only fulfill the committed interests of users but also serve as new assets for users to redeploy and are often popular.
The ETH Shanghai upgrade will drive more live and liquid staking solutions innovation. The ability to stake, withdraw, and reset ETH rewards more frequently will create more nuanced financial applications as people explore opportunities to maximize returns while reducing risk. We will see dramatic innovation in staking derivatives and more sophisticated lending solutions to give everyone access to ETH staking.
ETH Shanghai will also be a boon for individual liquidity providers on liquidity staking platforms. The ability for people to exchange their staked ETH for the underlying staked ETH will force liquid staking platforms to become more user-friendly. We will see more features and incentives emerge as these liquidity staking protocols battle for liquidity providers in a world where ETH staking is suddenly highly liquid.
Shanghai will give ETH liquidity providers more security and kick off another innovation cycle focused on staking ETH. Contracts that require the locking of funds always create a sense of ownership insecurity, even for those who sincerely believe in Ethereum will be eliminated. Liquidity providers will be the tangible benefactors of this innovation, accessing the growing ecosystem of features, tools, and service providers. The result is a more decentralized ecosystem of contributors and a more secure network.
In general, the demand for staking ETH tends to increase again when the Shanghai update approaches (because when the redemption process is smooth, liquid-staked ETH tokens like stETH will ensure more accessible pegs, minimizing risks for stakers).
During the previous period (around June 2022), the pegs of these tokens were all volatile due to the effects of events related to Three Arrows Capital, Alameda Research, or Celsius. However, up to now, the recovery has shown the market’s resilience and demand for LSD products.
Therefore, even with the upcoming Shanghai update, we have yet to see a move from investors wanting to sell stETH or other liquid-staked ETH tokens. The metrics on TVL, growth, or liquidity pool status of liquid staking projects are generally in good shape.
The upcoming Ethereum upgrade in Shanghai will mark a significant milestone in the network’s roadmap and a necessary reset for the staking industry. With the withdrawal, market participants will be able to switch staking products freely, and this reduction of friction will change the staking market landscape. The withdrawal will also significantly reduce the risks associated with staking Ethereum, facilitating the next wave of investors and institutions.
Eliminating Ethereum’s overall risk will increase participation rates on the network, as staking becomes the risk-free rate for the crypto market allowing everyone to participate in the security of the public blockchain network actively declare.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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