Liquid staking is revolutionising the world of staking in the blockchain, offering substantial advantages over traditional staking. This innovation solves a major problem of traditional staking: the immobilisation of assets. Usually, when staking cryptocurrencies, funds are tied up for several days or weeks, limiting access to liquidity. Liquid staking, on the other hand, allows users to retain some form of liquidity.
When a user participates in liquid staking, they receive tokens representative of their stake. These tokens can be exchanged or used in other decentralised finance (DeFi) applications, while continuing to accumulate staking rewards. This means that users do not have to choose between earning rewards and having access to their funds for other investments or spending.
This flexibility is a major asset. It allows users to react quickly to market fluctuations or seize new investment opportunities without sacrificing their staking rewards.
Finally, liquid staking makes staking more accessible, especially for smaller investors. High minimum amounts and long lock-in periods are no longer barriers, paving the way for wider, democratised participation.
This is a significant step forward in the cryptocurrency ecosystem, but it is crucial to remain aware of the risks, particularly in terms of security and reliance on third-party protocols, including Lido, the industry behemoth.
👉 Lido Finance, the forerunner
Launched at the end of 2020, Lido Finance quickly conquered the market with an attractive offering: the ability to stake ethers with no minimum requirement, as opposed to the 32 ETH needed to form a validation node, equivalent to around €66,000 currently. In exchange, users receive a synthetic token, the stETH, whose value is equal to that of the ETH immobilised in Lido (1 stETH = 1 ETH).
To recover their ETH, all they have to do is return the stETH to the protocol, which then destroys them. This method is both simple and effective.
Lido groups the ETH collected into pools of 32 ETH, entrusted to professional operators such as Blockdaemon, Figment, Kiln , etc. Currently, there are 35 pools, and Lido represents 31.75% of Ethereum's staking . Pool allocation is decided by Lido's DAO, via holders of the LDO governance token. The protocol takes 10% of staking rewards as remuneration.
"stETH" currently makes up nearly 70% of total liquid staking tokens in circulation, amounting to more than $28 billion.
Ernest Oppetit, Chief Product Officer and co-founder of Kiln, points out, "By positioning itself very early on, Lido Finance benefited from a significant network effect and continues to be the benchmark protocol for liquid staking thanks to an efficient and fairly easy-to-use solution."
Lido's stETH is compatible with the main DeFi protocols, such as Aave, MakerDAO or Curve, and the majority of wallets, including Metamask, Coinbase or Ledger.
Lido also offers a "wrapped" version of its stETH, which incorporates future staking rewards while retaining a fixed number of tokens, making it easier to integrate as collateral in DeFi protocols.
However, Lido's dominance poses a systemic risk for Ethereum, as a third of staked ethers are in its smart contracts. A hack could threaten the security of the blockchain and, by extension, the entire ecosystem.
Ernest Oppetit adds, "Lido's DAO is also among the most scrutinised governance bodies in the ecosystem since it potentially has the power to modify smart contracts."
👉 Rocketpool, the challenger
Faced with the threat of centralisation posed by Lido in the field of ether staking, other entities are seeking to offer alternatives. One of these is Rocketpool, a decentralised platform offering Ethereum node services. Currently, around 3% of ethers staked in the network use its services.
Rocketpool is divided into two main segments. The first is aimed at investors unable to manage a complete node. Like Lido, Rocketpool makes it possible to acquire "rETH", its own liquid staking token, in exchange for ethers staked in its pools, with no minimum amount requirement, thus making it possible to receive staking rewards similar to those of Lido's system.
The rETH, comparable to Lido's wstETH, incorporates staking returns directly into its value. Although it has less of a presence in DeFi than Lido's stETH, it is nevertheless supported by major protocols such as Convex, Curve or Aave.
In contrast to Lido, which entrusts node management to professional operators (such as Figment or Kiln), Rocketpool allows users to manage their own nodes using its technical infrastructure. This option is available with a contribution of 8 or 16 ethers.
The platform combines the ethers of users in its staking pools with those of the node operator to form a complete node of 32 ethers.
With a contribution of 8 ethers, the operator receives 35.5% of the rewards generated by the node, 10.5% more than a solo node. For 16 ethers, this share increases to 57.5%, i.e. 7.5% more. This increase is explained by an additional reward in RPL, Rocketpool's governance token.
The total rewards received by a Rocketpool node operator can thus be double those of a staker managing a solo node of 32 ethers.
This model offers the possibility for more individuals to manage nodes, reinforcing the decentralisation of the network. Rocketpool currently has more than 3,400 validators, almost a hundred times more than Lido.
According to Rated Network, a platform for analysing staking data, Rocketpool has some of the lowest node performance rates of the top 10 staking players. This is attributed to the fact that some of Rocketpool's validators are not professionals, offering fewer management guarantees than a specialist institutional operator.
👉 Diva Staking, the missing link between Lido and Rocketpool
Although the protocol is still in the testing phase (launch on the mainnet is scheduled for the end of the first quarter of 2024), users have been able to deposit their ethers there since September and earn returns from staking. In just a few months, Diva has already managed to attract more than 120,000 ethers. It is the protocol that has recorded the most deposits over the last month.
"Diva is arriving a little late on the market but offers a solution that is more in line with the spirit of Ethereum," explains Guillaume B., an active member of the Diva Staking community. "The problem with Lido is that the operators of the partner nodes don't contribute any ethers and rely solely on the liquidity of users," he insists. "A bit like Rocketpool, Diva wants to better distribute the deposits of ethers between operators and users but also aims to provide more guarantees of proper operation," he continues.
Like Rocketpool or Lido, Diva allows its users to stage ethers with no minimum and in exchange receive a liquid staking token, the divETH. Diva also allows users to have a wdivETH.
It is also possible to become a node operator from a single ether deposited. As with Rocketpool, Diva will combine the ethers deposited by liquid stakers with those contributed by node operators so as to form a node of 32 ethers.
Node operators will thus receive the rewards linked to validation on Ethereum as well as a commission of 10% on the rewards received by liquid stakers.
Unlike its competitors, Diva directly integrates Distributed Validator Technology (DVT) into its protocol. This allows the key to a validator to be split into 16 pieces, thereby decentralising the management of nodes and minimising risks such as malicious acts. From the point of view of decentralisation, this is probably a good thing.
Note that at the end of October, Lido voted in favour of a testnet deployment of a validation module based on DVT technology. It should be accessible to both "individual and community stakers as well as professional node operators", the protocol explains in a note.
👉 Centralised operators, essential for corporates
Although they are criticised because of their centralised aspect, node operators such as Kiln, Figment or Blockdaemon are favoured by institutional players because of a structure better suited to their customers' needs. The latter come to store their ETHs with companies that are well established, unlike protocols such as Lido or Rocketpool, which can put off more than one.
"Initially, we had a wave of customers mainly made up of wallets such as Trust Wallet or Ledger , but Coinbase clearly showed that staking and liquid staking could be a significant source of revenue," explains Ernest Oppetit. Kiln also offers the possibility of issuing a white-label liquid staking token on behalf of its clients.
ith the likely arrival of the first ETFs containing ethers, many asset managers are likely to take an interest in staking in order to grow their huge reserves. CoinShares , for example, offers an ETH fund with reduced management fees thanks to staking. "
👉 Centralised trading platforms on the lookout
The success of Lido whetted appetites. Since then, centralised exchange platforms such as Coinbase and Binance have enabled their users to earn returns from staking with no minimum, by setting up Lido-style pools in partnership with node operators. This is particularly true of Kiln with Coinbase Cloud. Today, 15% of staked ethers go through the US platform.
On the other hand, commissions can be quite high. Coinbase, for example, takes 25% of the rewards received by the user, while Binance remains within the market standard of 10%.
Coinbase was the first major exchange to launch its "wrapped" token, the cbETH, in 2022, essentially usable in the ecosystem of its layer 2, Base. For its part, Binance also has its liquid staking token, the BETH, which can be exchanged for its wrapped token, the WBETH.
👉 Frax and its ecosystem logic
With 0.8% of ethers staked, Frax Finance is one of the top 10 stakers on Ethereum . This DeFi protocol promises to optimise validation returns via liquid staking and a stablecoin system.
To do this, users must first deposit ethers as collateral, which are placed in pools to form nodes and thus generate returns. The user obtains frxETH proportionally from his staked ethers, which act like a stablecoin pegged to the ether price, but which do not generate a return from staking.
To obtain a return from validation, it is necessary to deposit his frxETH again as collateral to generate sfrxETH (ETH = frxETH = sfrxETH). This "wrapped" token is intended to simplify integration into the DeFi protocols, the latter having been launched at a time when Lido did not have its own.
The advantage of having Frax's liquid staking token is that it can be easily integrated into the entire protocol universe, which has a wide range of DeFi products for generating returns.
