Lido Rides Liquid Staking Wave To Become Largest DeFi Protocol

LDO, RPL, FXS and SWISE Outperform Broader Markets

Lido Rides Liquid Staking Wave To Become Largest DeFi Protocol

Lido Finance briefly topped Maker as the largest DeFi protocol this week amid surging interest in liquid staking protocols.

Ether is up about 5% over the past week, according to The Defiant Terminal. Of the DeFi protocols with at least $500M in total value locked, five have grown faster in that time span. Three — Lido, Rocket Pool and Coinbase’s staked Ether — are in the liquid staking category.

On Tuesday, Lido surpassed Maker in TVL, something it has seldom done over the past year, according to data from The Defiant Terminal. On Wednesday, both topped $6B in TVL, though they remain a far cry from the nearly $8B they held before the implosion of FTX in early November.

Lido Finance TVL
Maker TVL

Lido Finance TVL + Maker TVL, Source: The Defiant Terminal

Tokens Rally

Meanwhile, governance tokens for liquid staking protocols have rallied over the past week.

Lido’s LDO token is up 40% in the past seven days. Rocket Pool’s RPL is up 14%, as is Frax’s FXS. StakeWise’s SWISE token is up almost 70%, with its core development team working on an upgrade expected to launch this quarter.

“To be honest, I was surprised to see, out of nowhere, [liquid staking derivatives] being the talk of the town the first week of the new year,” Frax founder Sam Kazemian told The Defiant. “[I was] expecting this year, but not really this quick.”

In crypto’s liquid staking business, companies or protocols give their customers tradeable tokens in exchange for staking Ether and other Layer 1 tokens through their platforms. Those derivative tokens can, in turn, be put to work in the decentralized finance ecosystem to earn yield.

Staked ETH Withdrawals

Unlike other proof-of-stake protocols, however, Ethereum does not yet allow users to withdraw their staked tokens. Core developers are working on a software upgrade dubbed “Shanghai,” scheduled for March, that will enable withdrawals.

Although the amount of ETH being staked has dropped in recent weeks, according to data collected by pseudonymous Dragonfly data analyst Hildobby, the prospect of withdrawals has brightened the prospects of protocols and companies that facilitate staking, according to analysts. 

“Withdrawals being enabled in 2023 will de-risk staking derivatives more broadly by allowing tighter [arbitrage] loops,” crypto data platform Parsec said in its year-in-review, “which will boost liquidity and participation.”

The lack of such an arbitrage opportunity between ETH and its derivatives, like Lido’s stETH, has weighed on liquid staking providers, according to Dan Smith, a researcher at Blockworks.

“One of the issues for staking derivatives throughout this year, primarily stETH, has been the ability to keep price parity with ETH due to the inability to directly arbitrage via withdrawals,” Smith wrote in Blockworks’ year-in-review. “This should therefore help alleviate price concerns while also giving users the ability to obtain their ETH if they so choose.”

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