After the Shapella update, which allowed Ethereum (ETH) users to withdraw coins previously put into staking, liquid staking platforms such as Lido, Frax and Rocket Pool increased their market share to hold 46 percent of all Ethereum (ETH) deposited on the Beacon Chain.
If there were no such entities, centralized exchanges would have dominance over this type of activity and Ethereum (ETH) would likely suffer from a “point of failure” in terms of producing blocks in the chain.
Ethereum: liquid staking providers control 46 percent of the market
After only 42 days since the Shapella hard fork, which enabled the unstaking of all ETH previously put into staking by the Ethereum (ETH) community, we can observe how liquid staking platforms (LSD) have a decisive position in the network, controlling 46 percent of all coins delegated to block validation and production through the proof-of-stake consensus mechanism.
Prior to the Merge on 15 September 2022, the delicate task of block production dropped to the miners, who lost that privilege with the move from PoW to PoS and the Merge of the Ethereum (ETH) Mainnet with the Beacon Chain.
Now, only stakers, in particular all those individuals who hold at least 32 ETH, can take part in the activity and earn block bonus (2 Ethereum (ETH) per block) and user transaction fees.
Liquid staking platforms, increasingly important in this context, provide a solution for small cryptocurrency investors who do not hold 32 Ethereum (ETH) but still want to engage and make better network security.
All of these providers such as Lido, Ricoket Pool, Frax, and Stakewise hold a total staking share of 9,083,663 ETH ($16.57 billion), which corresponds to almost half of all Ethereum (ETH) locked in the Beacon Chain.
Notably, Lido controls 73.3% of all this financial resources, confirming itself as the undisputed leader not only in the world of liquid staking, but likewise in the Decentralized Finance sector more generally, with a TVL of over $12 billion.
LSD platforms reduce the danger of centralization in Ethereum (ETH) staking
The fact that LSD providers have a central role within the Ethereum (ETH) staking mechanism is good for the community, which would otherwise danger sliding victim to network centralization.
And once the role of block validation was the responsibility of the miners, prior to the Merge, this danger was decidedly low, given the difficulties from a technical standpoint to concentrate a large amount of hardware during a single entity.
Now, on the other hand, as stakers have taken over, the danger of centralization has evolved much more concrete, especially after numerous exchanges such as Binance Crypto exchange, Coinbase Crypto exchange, and Kraken have offered their own version of staking, concentrating financial resources in their platforms.
In this sense, if providers such as Lido, Frax and Rocket Pool did not exist, all those who do not have a monetary base of 32 Ethereum (ETH) or more and those who do not have the expertise to operate independently would concentrate their Ethereum (ETH) on centralized exchanges, which offer more elastic solutions.
Binance Crypto exchange and Coinbase Crypto exchange, for instance, offer all users who decide to delegate their Ethereum (ETH) to them a crypto token representative of the stake, exchangeable directly on their own exchanges, for a spread.
This is compounded with the advantage of having significantly lower charges than those we find nowadays on Ethereum.
Of course, users more savvy in the Decentralized Finance world don’t mind gas charges and prefer to engage in staking in a decentralized way, taking advantage of one of the numerous non-custodial wallets available on the market, such as Metamask, Trust Wallet or Ledger.
For now, the danger of a “point of failure” in the Ethereum (ETH) consensus is under control, but it will be necessary to monitor the situation and the tendency of financial resources orbiting among the numerous LSD providers to see if this challenge will arise in the future.
Ethereum (ETH) deposited in Beacon Chain hits new all-time high
As LSD platforms strengthen their market share in Ethereum (ETH) staking, we can observe how the number of Ethereum (ETH) deposited in the Beacon Chain, and in parallel the number of validators taking part in validation in the network, have reached a new all-time high.
It’s worth noting that, as of now there are 18.6 Million coins locked within Ethereum (ETH) distributed between about 571,000 validators.
On average, each validator holds a total of 32.57 ETH.
The figure is quite important because a high number of Ethereum (ETH) staked and a high presence of validators strengthen the security of the chain and prevent cyber attacks.
In Bitcoin‘s network, where the consensus mechanism is the classic proof-of-work, this metric is represented by the “total hash rate,” which corresponds to the computing power that each miner devotes to the network.
In Ethereum (ETH), on the other hand, security is represented by the number of coins delegated to staking and block production.
Those who take part in this activity, which is important to the survival of the ecological system, are rewarded with variable annualized returns, which as of now hover around 4.2%.
Nonetheless, Ethereum’s staking yield curve is set to fall over time, is still those who produce a block likewise earn from users’ transaction tx fees, which vary depending on network congestion.
Additionally, extraction maximization techniques such as MEVs, allow for more competition within the network and allow stakers to earn greater than they essentially deserve.