In the latest bullish signal for the burgeoning staking sector, Aave has just cleared the way for Lido to distribute rewards across three liquidity pools on its system — Ethereum, Arbitrum, and Optimism.
In a vote that closed last week, the Aave community approved a proposal to permit Lido DAO to distribute token rewards across Aave v3 liquidity pools on the networks. Aave is one of the top lenders in DeFi, with a TVL of $4.7B.
The move may bolster more trading in liquidity staking derivatives, or LSDs. The instruments are playing an increasingly important role in helping maintain the Ethereum network, which switched to a Proof of Stake method of recording and processing transactions last September. Investors may provide, or stake, their tokens to tend the Ethereum blockchain, and other networks, in exchange for returns.
Lido, the native governance token of Lido Finance, has raced to the top of this business — it accounts for almost three-quarters of the TVL in the $11B liquidity staking derivatives market, according to DeFi Llama. Last month, Lido briefly surpassed MakerDAO in TVL.
Even so, the mechanics of Lido and LSDs are complicated, fraught with restrictions, and bound to intimidate ordinary investors. Last October, Lido Finance announced that it will reward wstETH liquidity providers on Arbitrum, and Optimism with LDO tokens, Lido’s governance token, and 150,000 of the coins were set aside for each network.
This was largely due to the upcoming Ethereum hard fork named Shanghai, which is slated to go live sometime in March.
Investors who have staked their Ethereum cannot withdraw their coins. After the Shanghai hard fork, users will be able to do so. Ethereum staking went live in December 2020.
Once withdrawals are live, stETH can be easily converted to ETH. Currently, stETH holders have to swap their tokens on exchanges that support the stETH/ETH pair if they want to convert their holdings back to ETH.
Ethereum withdrawals will lead to revenue generation for the LSD protocols, and help with stabilizing the price of stETH by creating arbitrage opportunities.
The latter is of paramount importance, as stETH briefly de-pegged during the Three Arrows Capital incident, due to massive sell pressure from the firm.
The key difference is that with Lido Finance users can deposit any amount of ETH, while self staking requires 32 ETH, worth almost $51,840 at the time of writing. In addition, Lido Finance charges users 10% on their staking reward.
Despite all this complexity, the LSD market is picking up momentum. On Monday, the Aave community approved deployment of Coinbase’s cbETH on the Aave V3 ETH market. Two days earlier, the community had approved Rocket Pool’s rETH on the same market.
During an Ethereum developers conference held in October 2022, Lido co-founder Vasiliy Shapovalov warned people regarding the centralization issues posed by cbETH.
LDO price has skyrocketed 58% in the past 30 days, compared to 54% jump in ETH.
As for Aave, the DeFi lender with $4.7B in TVL, this is just the latest in a flurry of strategic moves. It’s pushing hard to grow revenues from tokenization of real-world assets and is preparing to roll out a stablecoin called GHO. Its native token AAVE has jumped 54% in the last 30 days.