Liquid Staking Narrative Gains Momentum Ahead of Ethereum’s Shapella Upgrades
Lido, the leading DeFi protocol by total value locked, launched on the Polygon network on Thursday.
Users can now bridge Lido’s Wrapped Staked Ether (wstETH) onto the Polygon network. The popular DeFi protocols Kyber, Balancer, and Beefy Finance will offer liquidity incentives for wstETH markets on Polygon.
Lido said it chose to launch on Polygon due to the volume of its native DeFi activity, track record for security, and the presence of existing Lido partners on the network. Polygon is the fifth-largest smart contract network with a total value locked (TVL) of $1B, according to DeFi Llama.
The news marks Lido’s third deployment on an Ethereum scaling solution, following its launch on Optimism and Arbitrum in October 2020. Lido is also live on the Solana, Moonbeam, Moonriver, and Terra Classic blockchains.
Lido’s Ethereum-based stETH token is a liquid staking derivative (LSD), meaning the token represents a share of staked Ether and accrues corresponding staking rewards. Wrapped stETH allows the token to easily be bridged between networks.
Users deposit ETH with Lido. Lido then divides the Ether among its 29 node operators, who stake the ETH on behalf of the protocol’s users. Users are issued stETH tokens corresponding to the value of the Ether they stake. The stETH can then be utilized across the DeFi ecosystem.
The token then accrues staking rewards for its holder, who receive 90% of the staking rewards generated. The remaining 10% is evenly split between Lido’s node operators and the Lido DAO.
Lido is the largest LSD provider, comprising 80% of the sector’s market cap, according to CoinGecko. It is also the largest DeFi protocol, with $8.8B in TVL, according to The Defiant Terminal.
🎙 Hasu: Lido's Staked ETH Poses No Systemic Risk to DeFi
This week on The Defiant Podcast we speak with Hasu, strategic advisor at Lido, strategy lead at Flashbots, MakerDAO delegate, researcher at Paradigm and host of the Uncommon Core Podcast. That’s a lot of titles and it goes to show just how deeply plugged into DeFi and crypto this anon researcher is. In this episode, we’ll focus on Lido, as it’s become a crucial piece of infrastructure for Ethereum.
The native tokens of Lido and other liquid staking providers have outshone other crypto tokens as crypto markets rebounded this year.
Staked ETH Withdrawals
The LSD sector is riding a wave of anticipation for Ethereum’s imminent Shapella upgrades, which will activate staked Ether withdrawals for the first time. The fork’s final testnet deployment is scheduled to launch on March 14.
Users have been able to stake their ETH since Ethereum’s Proof of Stake Beacon Chain went live in December 2020. However, the inability of users to withdraw their assets spurred criticism from Ethereum detractors, who highlighted that many in the crypto community expected the function to activate last year.
Over 16M Ether worth more than $26B is currently staked on the Beacon Chain.
The Shapella upgrades are expected to precipitate a boom in LSD volumes as the activation of withdrawals incentivizes arbitrageurs to step in and minimize the spread between LSD tokens and Ether.
The increasing integration of LSDs into DeFi protocols also offers opportunities for users to combine staking rewards with other sources of yield. However, some critics argue that the integration of LSDs into DeFi protocols poses a centralization risk to Ethereum’s staking ecosystem.