How Liquid Staking Resists a Downturn in the Crypto Market
Date: 2023-09-05 Author: Karina Ziganova Categories: BLOCKCHAIN
Since the middle of last year, when cryptocurrencies were in decline, the total amount of funds (TVL) locked in liquid staking protocols has increased by 292%. The number of coins in liquid staking protocols like Rocket Pool and Lido on Ethereum has surged to $20 billion, slightly short of the previous April 2022 peak of $21 billion.
The increase in TVL came after the developers changed the consensus mechanism in the Ethereum blockchain from proof-of-work to proof-of-stake. Now, instead of the usual miners, validators have appeared - special node operators who receive about 4% of the annual ETH emission for confirming transaction blocks.
Decentralized staking on Ethereum is valued at $15 billion
In April, Ethereum developers successfully upgraded Shapella, which led to a further increase in TVL. Further upgrades, including cheaper transaction blocks, will help Ethereum scale and process more transactions per second.
Staking protocols give clients the ability to lock ETH in order to receive rewards. In addition, they can store this value in a derivative token that can be used to generate profits in decentralized finance (DeFI) protocols.
Without staking protocols, ETH investors would have to purchase expensive hardware to confirm transactions on Ethereum. Most of the hard work on behalf of investors is done by staking pools.
Lido accounts for a third, or eight million, of all staking ETH worth about $14 billion, while Rocket Pool accounts for about $1.3 billion.
Concentration concerns may be unnecessary, says Chainalysis
The significant concentration of ETH in Lido is worrisome as it creates a single point of failure. Last month, Curve Finance, one of the most trusted decentralized protocols, was hacked for about $50 million.
The Chainalysis report shows that concerns about overconcentration may be exaggerated. Source: Chainalysis
Chainalysis, an analytics firm, said last month that on closer inspection, the problem may not be as serious. While liquid staking wallets hold large ETH balances, they can be withdrawn by stakers at any time, reducing concentration risk.
