coindesk.com
One of the hottest new ways to invest in ethereum is to lock money into a future, upgraded version of the Ethereum blockchain that’s already running in parallel, known as the Beacon Chain. The process is called “staking.” Investors put ether (ETH) into the Beacon Chain and can reap annualized yields in excess of 5%.
While that’s significantly higher than returns offered by most traditional bank accounts and U.S. Treasury bonds, the problem is that in some cases investors may not be able to “unstake” their tokens – get them back – for a year or more. For instance, the Beacon Chain won’t allow withdrawals until after Ethereum’s transition to a proof-of-stake blockchain from the more energy-intensive proof-of-work is complete.
To address the issue, cryptocurrency entrepreneurs have created a new market known as “Ethereum 2.0 staking derivatives,” essentially special derivative tokens representing staked ETH. These tokens can be used in decentralized finance (DeFi) applications as collateral to earn additional yield. The whole point is to provide ether stakers with liquidity even while their tokens are tied up in the Beacon Chain, waiting for the upgrade that’s expected to go live next year. Have your cake and eat it too, as it were.
And one firm, in particular, Lido, has leaped to a dominant 80% market share in this fast-growing realm. Recently, the number of ether – the native token of Ethereum’s blockchain – staked via Lido crossed the 1 million milestone (worth $3.7 billion), marking a 45-fold year-to-date increase and accounting for 15% of all ETH staked on Ethereum’s Beacon Chain, according to Dune Analytics.
“With the progress being made toward Eth 2.0, there has been increased interest in staking ETH, and Lido is one of the best decentralized venues to do this through,” Jeff Dorman, chief investment officer at Arca Funds, told CoinDesk in a Telegram chat.
“Eth 2.0” is shorthand for Ethereum 2.0, which refers to Ethereum’s ongoing transition from a proof-of-work blockchain (similar to Bitcoin’s) to proof-of-stake, which is supposed to be faster and far less energy-intensive. Ethereum staking began last December with the launch of the Beacon Chain, though the proof-of-work version still serves as the primary network until the upgrade takes effect.
While Lido’s unique depositors and cumulative deposits have been trending up since the beginning of the year, the growth curve has been particularly steep in recent weeks.
Shapovalov, the Lido CTO, attributed the recent pickup in growth to several factors, including Lido’s staking referral program, its recent debut on the Terra blockchain-based Anchor protocol and a partnership with the decentralized finance protocol Curve Finance.
Referral program
Launched July 19, Lido’s referral program lets existing users earn lido token (LDO) rewards by encouraging other people to stake ether on the platform. LDOs are the Lido protocol’s governance tokens, offering potential value for holders through protocol fees.
According to the official website, the referring user receives 15 LDO tokens worth $87 for every ether staked due to a referral. So if a new user stakes 10 ETH (worth about $34,000 at current prices), the referring user receives a reward of 150 LDO or $870. The minimum stake to generate a reward is one ETH.
Users can claim referral rewards on the Ethereum-based decentralized exchange DiversiFi without having to pay gas fees.
The referral program has brought in about 300,000 ETH, Shapovalov told CoinDesk; that’s worth more than $1 billion at current ether prices. That accounts for most, but not all, of the 360,00 ETH increase on the platform since the referral program was launched, according to Dune Analytics.
“It’s important to also note the powerful Lindy effects at play,” Spartan Capital’s Choi said. The Lindy effect is the idea that the older something is, the longer it’s likely to be around in the future.
stETH’s DeFi foray
Some analysts said the recent move by Anchor protocol to adopt bETH – a version of the stETH tokens retrofitted to work on the Terra blockchain – as collateral has bolstered Lido’s growth.
“As it stands, Eth 2.0 staking is one-directional, i.e. you can deposit and stake your ETH, but you can’t withdraw it yet,” Denis Vinokourov, head of research at Synergia Capital, said. In contrast, “bETH lets you lend and borrow your staked ETH on the Terra network, a dynamic which in turn has literally opened up flood gates.”
According to Messari research analyst Jack Anderson, bETH has opened up a cross-chain opportunity for stETH holders to earn a yield on their staked ETH.
“Before, they could take their stETH and deposit in the Curve pool to earn additional yield (on top of the ETH 2 staking rewards), and now they can use bETH to borrow Terra USD or UST by converting their stETH into bETH,” Anderson said. UST is the algorithmic stablecoin of the Terra blockchain. Anderson added that Lido’s efforts to decentralize and maintain transparency have given people a lot of confidence.
According to Bankless, the stETH-ETH pool on Curve Finance launched earlier this year is the most prominent stETH integration to date. The pool allows the stETH token holders to swap between the staking derivative and “regular” ETH. Anyone can provide liquidity to the stETH pool in return for staking rewards paid out in LDO and trading fees. At press time, the pool holds $4.8 billion in deposits and more than 700,000 stETH. That’s more than 50% of the derivative token’s total circulating supply.
Therefore, holders of stETH can simply stop staking by selling the derivative token for ether through Curve Finance. However, in that case the stETH seller loses staking rewards to the buyer.
While Lido and decentralized staking, in general, holds an edge over centralized exchanges, it is not devoid of risk, at least in theory. As Terra Money noted last year, liquid staking appears analogous to asset-backed securities in a sense that “both create a new layer of abstraction that tends to make people care less about the health of the underlying assets, something that we’ve also seen before during the transition from physical delivery to paper delivery in the futures market.”
Further, a validator can short the staking derivative token when found malicious, thereby profiting from the decline in the price of the token. “Theoretically that’s possible,” Lido said, adding that its validator set includes only validators who have good reputations.