Optimal Returns through Liquid Staking Derivatives

What are Liquid Staking Derivatives (LSDs)?

Liquid staking derivatives (LSDs) are cryptocurrency tokens that derive their value from staked tokens on proof-of-stake (PoS) blockchains. You get an equivalent number of LSD tokens when you stake your tokens. Through yield farming, LSD tokens increase yield and can be sold for liquidity or as security for DeFi loans. They have the same value as the underlying tokens and are freely transferrable. Their main goal is to get around the restrictions of standard staking.

Investing in Liquid Staking Derivatives?

By January 2023, over 16 million Ethereum had been staked, with Lido and Rocket Pool holding 42.7% of the total. The Shanghai-Cappella upgrade in April 2023 removed withdrawal restrictions, but there was no significant exodus of staked ETH from validator pools.

Thus far, Ethereum staking has yielded rewards worth one million ETH. With the removal of mandatory lock-ups and the freedom to withdraw, the number of validators will increase, but this will likely lead to a decrease in the average yield (APR). Liquid staking derivatives are an attractive option for those who cannot afford to run their validator nodes.

Best Staking Derivative Rates by Total Value Locked

These are the top Ethereum staking options based on their minimum stake, TVL, and market share.
1. Rocket Pool (rETH) has a minimum stake of 0.01 ETH and a TVL of $1.17 billion, with a 7.16% market share.

2. StakeWise (sETH2) has a minimum stake of 1 wei and a TVL of $163.94 million with a 1.00% market share.

3. Frax Ether (sfrxETH) has a minimum stake of 1 wei and a TVL of $356.03 million, with a 2.17% market share.

4. Lido (stETH) has a minimum stake of 1 wei and the highest TVL at $12.22 billion with a market share of 74.52%.

5. Coinbase Wrapped (cbETH) also requires a minimum stake of 1 wei, has a TVL of $2.14 billion, and holds a market share of 12.58%.

Conclusion

The space of liquid staking derivatives offers a range of options for investors, each with advantages and weaknesses. While Lido dominates the market share, concerns about Ethereum’s long-term decentralization arise. Frax and StakeWise provide high returns with the highest annual percentage yield (APY). Rocket Pool addresses concerns about over-centralization. For diversification and risk minimization, investing in an index token like dsETH is recommended. Lastly, Coinbase users seeking convenience and safety can consider on-chain cbETH, despite its centralized architecture.

 

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