Liquid Staking Derivatives On Ethereum: Top LSD Protocols 2023

DeFi has seen a surge in the creation and adoption of new financial products, and one of the latest trends is the rise of liquid staking derivatives (LSDs). LSDs are a novel kind of token that allows users with staked coins to open liquidity and earn additional returns. This has resulted in a noteworthy increase in monetary returns for DeFi and has made staking more accessible to a wider range of users who can now benefit from both staking rewards and liquidity. As the DeFi ecosystem continues to evolve, we can expect to see more innovative products like LSDs emerge, driving even more growth and adoption.

Liquid staking derivatives (LSDs) have recently gained immense rage in the Ethereum network and their usage is expected to grow in other ecosystems as well, including the likes of Avalanche and Polygon.

As of May 23, 2023, there is a total of $14.3 billion locked in liquid staking derivatives, making it the second-largest decentralized finance (DeFi) service, behind liquidity in decentralized exchange protocols. Lido dominates the liquid staking space, making up almost 93% of the total liquid staking market share.

In this article, we will cover Liquid Staking in a little detail and also discuss the top protocols in this category.

Brief Overview

Before we delve deep, let’s first understand the basics of LSDs correctly.

What is Liquid Staking?

Liquid staking offers a new and innovative way of staking that provides users with enhanced adaptability and an efficient working mechanism. Unlike traditional staking, liquid staking enables token holders to use their staked assets but at the same time also still benefit from the rewards of staking.

What are Derivatives?

Derivatives are financial instruments that are commonly utilized in various economic areas. They are essentially types of contracts that are made between two parties. These derivatives enable investors to speculate on the future price movements of the underlying asset, such as commodities, stocks, bonds, and currencies.

Best Protocols under Liquid Staking Derivatives

In the past, the idea of staking your tokens has been associated with significant opportunity costs for users. Staking often requires token holders to close up their assets for extended periods, during which they are unable to leverage their tokens for other profitable activities. This has acted as a barrier for some users to partake in any kind of staking. However, with liquid staking in play, token holders can enjoy the advantages of staking while also retaining access to their assets for other activities. This increased flexibility not only makes staking more accessible for token holders but also helps to increase the overall security and soundness of networks. This has made liquid staking an increasingly popular option in the DeFi space.

Liquid staking derivatives (LSDs) are a new class of derivatives that allow stakers to unlock liquidity while still participating in the staking process. What an LSD basically does is that it establishes the participation of the user who is staking the tokens in the pool. These tokens can then be utilised in a variety of DeFi applications, including trading and collateralizing loans.

Some of the top protocols of Liquid staking derivatives include:

• Lido
• Coinbase
• Rocket Pool
• Frax
• Ankr
• Stakewise

Lido

Lido DAO has emerged as a leading player in the liquid staking sector with its native token, LDO. This token is the backbone of the ETH liquid staking system that Lido operates. Users can stake ETH on Lido and in return earn some stETH. This sETH can then be utilized through the entire DeFi network to generate even higher incentives. The current TVL on Lido stands at around 12.6 billion dollars.

Lido DAO is a well-funded and ambitious protocol that is constantly striving for evolution and innovation. It charges a fee of 10% which is then distributed equally amongst both the node operators and the DAO. Despite the fee, the popularity of Lido and the potential for higher returns continue to attract investors to the platform.

Coinbase

In August 2022, Coinbase finally unveiled its liquid staking derivative (LSD) after careful consideration of the current market trends. This decision was partly influenced by Lido’s massive popularity and supremacy, which threatened to undermine the decentralization ideals of the cryptocurrency world.

Coinbase’s LSD comes at a premium cost, with a steep 25% charge that exceeds that of other LSD firms. Additionally, they also retain control over these derivatives, which some may view as a disadvantage. However, it’s important to acknowledge that their approach aligns with the stringent regulations imposed by U.S. authorities, making them one of the most highly regulated exchanges in the industry. Remarkably, in a brief period, Coinbase captured a 7% share of the market, equivalent to 1.1 million ETH, in addition to establishing their unique liquid token, cbETH. Current TVL is $2.17b.

Rocket Pool

Rocket Pool is one of the most well-known providers of liquid staking services currently. In September 2021, Rocket Pool conducted the launch of its LSD, which was a significant milestone for the company. Notably, their commitment to their ethos makes them one of the most decentralized options among the providers we have in this industry. Node operatives on the Rocket Pool network receive a delegation of 15 per cent, which covers their operational costs and incentivizes them to provide top-notch services to their customers.

In addition to this, Rocket Pool also implements a staking mechanism that requires validators to collateralize at least around 10 per cent of their 16 ETH stake. By using RPL (the company’s native coin) as security, Rocket Pool encourages the token’s adoption, thereby driving its value up and increasing the company’s revenue potential. Current TVL is 1.69Billion USD.

Frax

Frax Finance is a trailblazing platform that has disrupted the crypto world with its innovative ideas. It has pioneered the creation of the first-ever “fractional stablecoin and crypto native consumer price index”, an industry game-changer. At the core of Frax’s approach is its unique dual token structure. This allows them to offer an unprecedented yield of approximately 8%, making them an ideal choice for investors seeking high returns. Additionally, Frax provides a liquidity pool on the platform Curve. It’s important to mention that the pool incentives are represented in either FXS, CVX or CRV. Even though these rewards are not in ETH, this does not diminish the platform’s appeal.

Remember that with Frax, you’ll have an opportunity to receive staking bonuses only by staking some sfrxETH. The Frax Protocol is a true leader in the crypto space, having familiarised the groundbreaking concept of a cryptocurrency that is partly subsidised via collateral and partly receives algorithmic stabilisation.

Ankr

Ankr is a popularly growing decentralized web3 protocol, empowering developers to build and deploy DApps with ease. This platform functions through its great infrastructure and is powered by its very own utility token called ANKR. The ANKR token serves a variety of purposes within the Ankr ecosystem, including governance, payment for the functionalities provided by the platform, as well as for staking purposes.

However, one of the most exciting features of ANKR is its capability to generate farming incentives through staking assets on the platform, in return for some ankrETH.These farming rewards can be compounded if you decide to further stake them in liquid staking derivatives, creating a powerful effect that can boost returns significantly. With Ankr, users have the opportunity to earn attractive rewards while also playing an active role in the governance and development of the platform.

StakeWise

StakeWise is an innovative platform that was established in March 2021. It is a true game-changer in the world of Ethereum staking platforms, as it uncovers the full profit possibility of ETH2 for those who use DeFi regularly. The StakeWise DAO is responsible for managing the platform, which employs the SWISE token for multiple governance functionalities. It aids users to utilize the coin for various voting purposes and as a result, encourages them to embrace the platform.

At its core, StakeWise is designed to be non-custodial, giving users full control over their assets at all times. What Stakewise does is that it tokenizes the incentives stakers receive individually and independently of what they deposit as funds. Through this, it includes the chance to involve the ETH reserves that have been staked in other decentralised finance services. Stakewise also enables users to reinvest what they yield, and efficiently handle their investments and staking funds.

Risks Associated with Liquid Staking Derivatives

Here are some of the potential drawbacks associated with the utilization of liquid staking derivatives:

1. Counterparty Risk: Liquid staking derivatives are issued by third-party protocols, which introduces the possibility of default or non-performance.
2. Illiquidity: Liquid staking derivatives may lack liquidity, posing challenges in selling them swiftly if the need arises.
3. Smart Contract Risk: Liquid staking derivatives rely on smart contracts, making them susceptible to potential bugs or hacks.

While you may earn interest on ETH deposits, you should also consider the potential risks. If you have more questions related to LSDs, feel free to share your doubts in the comment section.

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Last updated: May 23, 2023