From Niche to Mainstream: The Rise of $48 Billion in Liquid Staking Within DeFi
The concept of Restaking or Liquid staking derivatives has become quite popular in the decentralized finance (DeFi) landscape. Their ascent is largely attributed to how effectively they address a major shortcoming of conventional staking models: the absence of liquidity. The total value locked (TVL) in liquid staking derivatives has exceeded $48 billion according to DefiLama as of 23rd April, reflecting robust adoption and widespread popularity. Platforms such as dYdX have launched liquid staking options, enabling token holders to gain extra yields while contributing to the security and operations of the blockchain. According to Blockworks, more than a quarter of the circulating supply is staked for Ethereum.
What is Liquid Staking?
Liquid staking revolutionizes blockchain by allowing participants to stake their cryptocurrency while retaining liquidity. Unlike traditional staking, where assets are locked and inaccessible, liquid staking issues derivative tokens (such as stETH) in exchange for staked assets. These tokens remain usable across the DeFi ecosystem, functioning like regular cryptocurrencies but representing the staked assets and any accrued rewards. This approach enhances the utility and flexibility of staked funds, making them available for various DeFi activities.
Use Cases of Liquid Staking
Enhanced Yield Farming: Users can leverage liquid staking in yield farming to earn additional returns while still collecting staking rewards from the original assets
Collateral for Loans: stETH serves as collateral in DeFi lending, unlocking further utility for assets that would otherwise remain inaccessible during staking
Liquidity and Trading: The liquidity and tradability of stETH on decentralized exchanges provide flexibility and immediate access to funds without needing to unstake
Governance Participation: stETH often includes governance rights, allowing holders to influence decisions in related DeFi projects without unstaking
Risk Diversification: Holding stETH allows users to participate in various DeFi activities, spreading their investment risk across multiple platforms
The image shows a liquid staking system where users can stake tokens to support a network and get a tradeable staking token in return. The staking pool gathers user tokens, issues staking tokens, and may charge a fee. A governing DAO could collect fees for community projects. Node operators run the technical side and get fees for their work. Validators manage blockchain transactions, help secure the network, and distribute rewards back through the staking pool. Users can then use their staking tokens in other DeFi projects to earn extra, all while contributing to the blockchain’s health and security.
Uncovering Lido Finance
Lido Finance has firmly established itself as the dominant force in the liquid staking arena, holding a commanding 32% of all staked Ether and boasting a 71% market share in Liquid Staking Derivatives, with a Total Value Locked (TVL) of $32.75 billion as of April 12th.
Lido’s stETH token can be easily used across various DeFi platforms, enhancing its utility. It can be utilized for providing liquidity in swap pools or as collateral for lending, increasing its appeal to users looking for versatile financial tools. Users can stake any amount of ETH, not just the 32 ETH required for running a full validator node on the Ethereum network. This opens up staking to more users. Lido has established a reputation for stable and reliable operations over the years, gaining user trust as a secure platform for staking assets. Moreover, Lido also functions as a DAO, supporting decentralization and community-led decision-making, in tune with the wider crypto community’s values.
Uncovering Eigenlayer
Ethereum’s transition from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) model marked a significant milestone in its development trajectory. However, the inherent limitations of PoS, particularly concerning locked staked assets and limited participation options, necessitated the emergence of innovative solutions like EigenLayer. This article elucidates EigenLayer’s role in addressing these challenges and fostering a more inclusive and adaptable staking ecosystem within Ethereum.
EigenLayer operates as a protocol layer atop the Ethereum blockchain, introducing the concept of the “restaking collective.” This framework enables ETH stakers to support specific applications or functionalities within the Ethereum network through modular security mechanisms. By dividing staking contributions into discrete modules, EigenLayer allows stakers to tailor their participation based on their preferences and capabilities.
The core functionalities of EigenLayer revolve around modular security and smart contract integration. Stakers can allocate their ETH holdings to secure designated modules, ranging from decentralized storage solutions to DeFi platforms. EigenLayer smart contracts facilitate the restaking process, granting stakers greater flexibility and control over their contributions. Moreover, EigenLayer introduces two distinct modes of restaking: solo staking and delegation, catering to both experienced users and those seeking a more streamlined approach.
Analyzing EigenLayer: Pros and Cons: EigenLayer presents several advantages over traditional staking mechanisms. Its modular architecture promotes flexibility and specialization, allowing stakers to support projects aligned with their interests. Moreover, EigenLayer fosters a diverse ecosystem by accommodating various participation preferences and risk profiles. However, EigenLayer’s reliance on smart contracts introduces complexities and potential security risks, necessitating robust auditing and monitoring mechanisms.
Compared to conventional staking models, EigenLayer offers unique features that enhance Ethereum’s staking infrastructure. Traditional staking typically involves passive validation of transactions, whereas EigenLayer encourages active participation through module-specific contributions. Additionally, EigenLayer’s emphasis on staker diversity and adaptability distinguishes it from rigid, one-size-fits-all staking protocols.
Conclusion
Liquid staking represents a paradigm shift from traditional staking models by enabling participants to stake their assets while retaining liquidity and usability. This innovation unlocks a myriad of use cases, including enhanced yield farming, collateralization for loans, liquidity provision, governance participation, and risk diversification. Moreover, liquid staking platforms like Lido Finance and EigenLayer highlight the merge of technological innovation and community-driven governance, fostering a more inclusive and adaptable staking ecosystem within Ethereum and beyond.
While liquid staking presents compelling advantages over conventional staking mechanisms, including increased flexibility and participation options, it also introduces new complexities and considerations, particularly regarding smart contract security and operational reliability. Nonetheless, the continued evolution and refinement of liquid staking protocols promise to further enhance the efficiency, accessibility, and resilience of decentralized finance infrastructure.
As liquid staking continues to gain traction and reshape the landscape of blockchain-based finance, ongoing research, innovation, and collaboration will be crucial in realizing its full potential and ensuring the integrity and sustainability of the broader DeFi ecosystem. Ultimately, the ascent of liquid staking signifies a transition from niche experimentation to mainstream adoption, heralding a new era of democratized finance built on principles of accessibility, inclusivity, and decentralization.
Written By: Arpit Jain
Edited By: Sarah Abuagela
Additional Sources: Sentiment, DefiLama, DelphiDigital CoinMarketCap & Chainlink
