Top cryptocurrencies like Ethereum, Solana, and Bitcoin have racked up massive gains in the first two weeks of 2023. However, the biggest winners are the liquid-staking derivatives (LSDs). In simple terms, LSDs are tokens provided by liquid staking providers like Rocket Pool and Lido Finance.
According to data from CoinGecko, stETH, the token behind Lido Finance, has increased by nearly 50%, while Rocket Pool’s rETH has surged by about 24% in the past few days. Many have associated these upward price movements with the Shanghai upgrade on the Ethereum network set to happen soon.
Why Liquid-Staking Derivatives are Gaining Popularity
Ethereum moved to a Proof-of-Stake consensus mechanism in September 2022. That means there is no need for power-consuming mining machines but only validators. These validators verify transactions and prevent any on-chain mischief from occurring, just like the miners.
Furthermore, validators do the job effectively without acquiring a multi-million-dollar mining firm and hiring an engineering team to keep machines running. That said, all one needs to become a validator is 33 ETH and the knowledge to keep the node connected to the Ethereum network throughout.
Also read:However, 33 ETH is approximately $46,000 today, which is relatively expensive. So that’s where LSD projects become effective. These projects allow you to stake any ETH amount you can afford in exchange for another token which you can use on other projects.
For example, after staking ETH on Lido, the staker gets stETH. According to Defi Llama, a website that tracks DeFi projects, holders of stETH can earn up to 300% when they stake this token to some DeFi protocols. Its broad adoption in DeFi could be the reason Lido commands 80% of the LSD market.
What Shanghai Upgrade Means for Stakers
Shanghai upgrade is a major milestone for Ethereum as stakers can finally unstake their holdings from the network. Currently, the “unstake” functionality does not exist, and for a long time, crypto enthusiasts have wondered whether the Ethereum developer considered adding it.
It also means that stakers who staked their 33 ETH on Beacon Chain or a liquid-staking provider with any amount of ETH they could afford were depositing their money with a mere promise that they would be able to unstake their ETH in the future.
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