The Surge of Liquid Staking
In the midst of widespread disinterest in the crypto market, decentralized finance (DeFi) activity has declined in most areas. However, one sub-sector stands out with remarkable growth.
Liquid staking protocols have experienced a significant increase in total value locked (TVL), soaring by nearly 293% since hitting their lowest point in June 2022.
The Emergence of Liquid Staking
According to DeFiLlama, liquid staking protocols currently hold a whopping $20.5 billion in assets, a substantial rise from slightly over $5 billion just 15 months ago. Among them, Lido alone accounts for $14.1 billion in staked assets, with the majority being Ether (ETH) at $14.05 billion.
Staking refers to the act of temporarily locking away crypto coins within a blockchain to secure the network while receiving periodic rewards in return. From an investor’s standpoint, it resembles lending assets to borrowers for a variable interest rate, although it is generally considered less risky.
Liquid staking providers make staking more accessible for non-experts by offering their services for a reasonable fee. They also provide stakers with assets that are directly linked to their staked coins, allowing them to sell or trade their assets as desired.
Liquid staking reached its peak with a TVL of $21 billion in April 2022. However, the collapse of Terra caused a significant loss in DeFi value. Lido initially dominated the liquid staking market, but it now faces competition from RocketPool, Coinbase, and Binance.
Ethereum plays a crucial role in this growth. Since transitioning to proof of stake in September 2022, the assets deposited in its staking contract have more than doubled to 29.4 million ETH, equivalent to $48 billion.
According to blockchain analytics provider Nansen, the amount of staked ETH now surpasses the amount circulating on exchanges.
According to a data journalist at Nansen, “Now that the merge has occurred, staking has become much more attractive. The risk of depegging is no longer a major concern if users can withdraw their staked ETH.”
What About the Rest of DeFi?
After Lido, the next most valuable DeFi protocol is MakerDao, a stablecoin provider that holds $5 billion in assets. This is lower than the $6.5 billion it held shortly after the collapse of FTX, which caused a decline in asset values locked within the protocol.
Similar declines can be observed in lending and DEX protocols, with Aave and Uniswap experiencing drops of approximately 80% and 66% respectively from their all-time highs.
According to Aave’s website, its current APY for ETH lenders is 2.1%, while Lido offers an APY of 3.6% for ETH stakers.
Hot Take
The rise of liquid staking in the DeFi sector showcases the growing appeal of staking as a way to earn rewards while securing the network. With the merge and increased accessibility through liquid staking providers, staking has become an attractive option for crypto holders. However, it’s essential to keep an eye on potential risks and changes in the market to make informed decisions.
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