There is a chance that the enhancement could drive these tokens to the levels they reached during the Merge of the previous year. Additionally, Ethereum’s staking arena is still in its initial stages, presenting a market opening for the expansion of these protocols.
In the summer of 2020, the crypto market experienced a boom in decentralized finance applications like Compound and Uniswap, which allowed Ethereum and Bitcoin to be converted into yield-bearing assets through yield farming and liquidity mining rewards. This caused Ether’s price to nearly double to $490, and the total liquidity across all DeFi protocols quickly increased to $10 billion. Near the end of 2020 and the beginning of 2021, the quantitative easing implemented in global markets due to the COVID-19 pandemic caused Ether’s price to skyrocket to a peak of $4,800, a tenfold increase from its initial value. The UST-LUNA crash in early 2022 brought the price down to $800. The Ethereum Merge narrative in the third quarter of 2021 gave the market a sense of hope, and the switch to a proof-of-stake consensus mechanism with lowered Ether inflation caused the price to reach a peak of $2,000 just before the Merge date of September 15, 2021. Although the bullish momentum faded quickly, a similar opportunity may come with the Shanghai upgrade in March 2023, which will allow Ethereum staking contracts to be withdrawn, reducing the risk of staking ETH. This could cause the tokens of some liquidity staking protocols to rise to last year’s Merge highs, as the Ethereum staking space is still in its infancy, creating a market opportunity for these protocols to grow.
The quantity of Ether that has been locked up is not very high.
Presently, just 13.18% of Ether’s total supply is held to the Beacon Chain, which is lower than other proof-of-stake (PoS) chains such as Cosmos Hub (with a staking ratio of 62.5%), Cardano (71.8%), and Solana (71.4%). The cause of Ethereum’s low staking ratio is that the staked Ether is blocked in its existing state, however, this will change in March. The upcoming Shanghai update will bring in a code named EIP 4895 which will permit Beacon Chain staked Ether withdrawals, allowing a 1:1 exchange of staked Ether for Ether. Ethereum’s staking ratio should match with other major PoS networks after this update, a substantial portion of which will likely move to liquid staking protocols.
Decreasing the amount of risk associated with liquid staking derivatives
Systems such as Lido and Rocket Pool enable Ether holders to take part in staking without having to run a validator node. The threshold for taking part is much lower as the Ether is pooled, so a single user would not need the 32 ETH (valued around $40,000) which is normally required. It also allows for liquidity of the staked assets which would otherwise be locked in the staking contracts. DeFi contracts work by supplying a derivative token (for example, Lido’s stETH) in exchange for Ether staked on the proof-of-stake network. The user can then trade the stETH while still gaining yields from the staking contract. It is expected that with the Ethereum’s staking ratio increasing after the March update, the use of liquid staking protocols will rise too. At the moment these protocols are responsible for 32.65% of the total staked Ether and it is expected that the benefits will keep this number near or above the current level once Shanghai is upgraded. Furthermore, the governance tokens of liquid staking protocols may also gain from their increased locked value, in a similar way to DeFi tokens which enjoyed an increase in total locked value (TVL) during the last bull run.
What is the current status of LSD governance tokens before the Shanghai event?
Lido Decentralized Autonomous Organization (LDO) is a self-governed entity that is operated by a set of rules and protocols which are automatically executed through digital code.
Lido DAO is the leading force in the liquid staking industry, offering higher yields and a bigger market share than other protocols. An impressive 88.55% of the total staked Ether falls under Lido’s command. Taking the amount of staked Ether as a gauge for assessing the protocol, Lido has the most competitive market capitalization to staked Ether ratio. The downside of the project’s token economics is that LDO is a governance token and does not entitle holders to a portion of the gained yield or fees. Furthermore, the token is facing inflation from investor token unlocking until May. Technically speaking, the LDO token jumped above the short-term resistance at around $1.17 with considerable buying volume. Bulls are likely to aim for $1.80, taking advantage of the hype surrounding the Shanghai upgrade. The token is heavily shorted after the 26% increase in its price since the start of the year. The funding rate for the LDO perpetual swap has gone negative in a large magnitude, providing an opportunity for a short-squeeze rally. The support levels for LDO are currently at $1.17 and $1.
Rocket Pool (RPL) is a platform that provides users with access to a decentralized pool for staking Ethereum 2.0.
Rocket Pool is notably smaller than Lido, but its market capitalization to the staked Ether ratio is 5 times bigger, which could mean it is overvalued. In addition to being a governance token, the RPL token serves as security for users, with node operators staking the RPL as assurance; if there are losses caused by the operator’s mistake, the users will be compensated with the RPL tokens that were staked. The highest the RPL token has been since September 2021 was $34.30, and since the start of 2023, the cost has grown by 10%, now trading at $22.40. If buyers can create support over the $20 level, it is likely that RPL can reach its peak from last year of $30, which happened at the same time as Ethereum Merge.
Ankr is a digital asset that can be used for trading and investment purposes.
Ankr is a business that furnishes a blockchain platform, providing API endpoints, RPC nodes, and staking services. Analogous to LDO, ANKR is just used for regulatory reasons. The token’s worth has been more or less steady over the last few days. The market capitalization ratio to the Ether staked on Ankr is quite high, which is similar to Rocket Pool; an indication of a pessimistic outlook. Nonetheless, if the buzz about the Shanghai advancement intensifies, ANKR can reach the peak of $0.05 from August 2021. The most recent support level of $0.03 will provide a barrier for potential buyers. Currently, the token is valued at around $0.015.
SWISE is a platform that offers users the ability to invest and track their portfolios.
Stakewise guarantees the highest staking yield of 4.43%. Its governance token has a lower market capitalization to staked Ether rate compared to RPL and ANKR, making it more affordable than the other two. Nevertheless, the token distribution is not balanced as 46.9% of the total supply belongs to private investors and the founding team. Data from Nansen shows that wallets classified as “smart money” have been incrementally gathering SWISE since April 2021. The Ethereum Merge peak for SWISE was $0.23, which is expected to be the focus of buyers. The support level is close to the 2022 lows of around $0.07. Shared Stake is marked red because there were suspicions of an insider exploit that led to a 95% decrease in the token’s price in June 2021. The high staking return of Shared Stake compared to the others is also an issue to be noted. On the contrary, Cream Finance has ceased its Ether staking service. The upcoming Ethereum Shanghai upgrade provides an opportunity for the liquid staking sector to expand. Lido DAO is the clear leader in this field with an ideal market price. The de-risking of ETH staking and the excitement surrounding the event could lead to a series of rallies that could push the cost of LDO and other liquid staking protocols back to their Merge highs from last year.