Ethereum's Ecosystem is Staking Up

Key Insights

• Ethereum’s latest protocol upgrade has boosted the rate of new ETH staked from 600,000 ETH per month to 3+ million ETH per month. This growth has had downstream economic effects on Ethereum’s sizable DeFi ecosystem.
• The first-order effect is the growth of liquid staking protocols. These protocols have the largest market share of 37% among ETH staking options. With consistent innovation, and their competitors facing headwinds, their share is expected to grow.
• Liquid staking protocols have so far generated Liquid Staking tokens worth $15+ billion. With their sustainable real yields, LSTs are a superior store of wealth to ETH and are gradually replacing it as prime collateral across DeFi.
• Existing and new protocols are innovating to address the growing opportunity created by LSTs, so much so that an entire category has come up called LST-Fi. These LST-Fi protocols are unlocking further value in LSTs by integrating them into lending and stablecoin protocols, decentralized exchanges, interest rate swaps, and other innovative platforms.

Ethereum underwent two major upgrades in the last year. The Merge in September 2022 changed Ethereum’s consensus mechanism from Proof-of-Work (PoW) based to Proof-of-Stake (PoS) based. This change shifted the responsibility of securing the network from miners to validators, who now exclusively earn inflationary rewards and transaction fees. And then, in April 2023, the Shanghai and Capella (Shapella) upgrade enabled staking withdrawals allowing validators to freely unstake, reducing the risk of staking.

Given Ethereum’s developed DeFi ecosystem, these technical upgrades also have downstream economic effects on its applications. The first-order effect is the growth in ETH staked through decentralized liquid staking protocols (referred to as liquid staking protocols). Liquid staking protocols have emerged as a popular low-cost capital-efficient way to stake without the large capital commitment and technical requirements of direct staking. The yield-bearing liquid staking tokens (LSTs) generated by these protocols have had a second-order effect on the DeFi ecosystem. There has been a Cambrian explosion of new applications experimenting and building on LSTs. For the first time in DeFi short history, applications are building on predictable, low-risk real yield.