Blockchain Newsletter: Liquid Staking Protocol & Finance Derivatives & Future by@glaze

Blockchain Newsletter: Liquid Staking Protocol & Finance Derivatives & Future

Liquid staking pool has two functions: Lower the staking requirement for users and increase the liquidity of staked assets. Users need to lock assets in staking node but only yield 10% annually. The opportunity cost of locking assets in the pool is huge. Users can exchange stETH with ETH with ETH on DEX. Staking Rewards is an index containing the top 20 PoS assets weighted by total staked value. The index also accrues staking rewards on a continuous basis. Marinade dominates the Solana liquid staking market.
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Glaze

I am the cofounder of un.block and tech associate of Fundamental Labs

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Liquid Staking Pool

After choosing the best staking node providers, the next problem is capital efficiency. Users need to lock assets in the staking node but only yield 10% annually. In the crypto world, there are opportunities everywhere. The opportunity cost of locking assets in the staking pool is huge. Thus users are trying to increase capital efficiency. A liquid staking pool helps users get their liquidity almost instantly.


The liquid staking pool has two functions:

  • Lower the staking requirement for users
  • Greatly increase the liquidity of staked assets


To increase the liquidity of staked assets, the staking pool mint a new token for users. For example, after staking ETH in Lido, Lido mints stETH for users. Users can exchange stETH with ETH on DEX. Below is the pricing chart for stETH.


Source: Dex Screener

Source: Dex Screener

stETH is like a bond. 1 stETH can redeem 1 ETH in the unpredictable future. We are not sure when Ethereum will release staked assets in the staking node because releasing the staked assets needs a hard fork update after the ETH2.0 merge.


The next few charts show that Lido dominates the ETH staking market and secures a large portion of the market share.


Source: Delphi Digital

Source: Delphi Digital


Source: Delphi Digital

Source: Delphi Digital

However, Marinade dominates the Solana liquid staking market instead of Lido.


Source: Delphi Digital

Source: Delphi Digital

Here is a fee breakup for liquid staking on Solana.

Source: Delphi Digital

Source: Delphi Digital

Besides fee and reputation, utility is another major point. More partnerships mean deeper liquidity for liquid assets in DEXs and lending platforms. Marinade has the most partnership with DeFi projects.

Source: Delphi Digital

Source: Delphi Digital

Source: Delphi Digital

Source: Delphi Digital

Finance

Most DeFi users are APY addicted. Is there any way to push our staking yields, but still enjoy a low risk? Yes. Leverage farming can do this.


Most leveraged yield farms use 2x — 3x leverages and offer around 7% APY. They do have liquidation risks.


Basically, they deposit stETH on Aave and borrow WETH through Aave. Then they swap WETH for more stETH and repeat the steps above.


Another interesting project is SR20 by Staking Rewards. SR20 is an index containing the top 20 PoS assets weighted by total staked value. The index also accrues staking rewards on a continuous basis. The following charts demonstrate the allocation:

Source: Staking Rewards

Source: Staking Rewards

The current index price is $304.41 and the reward rate is 6.54%. The staking returns YOY is 9.44%. Below is the price chart of SR20.

Source: Staking Rewards

Source: Staking Rewards


To avoid slashing risk, there are also insurance products for validators. Lido partnered with Unslashed Finance to cover approximately $200M worth of staked ether from slashing in Feb 2021.

Source: Lido Medium

Source: Lido Medium

What’s Next

The ecosystem of staking is established. Big players have already gained a strong position in the market. The total staking market will continue to grow because the ETH staking ratio is still low compared to other PoS assets. We are optimistic about the future of the staking market.

Staking assets is similar to buying treasury. Institutions and big whales are willing to buy these assets. One big difference between treasury and staking is that staking reward is not fixed. Staking rewards vary upon network conditions. To make the APR more stable, we anticipate fixed APR and long-term staking assets.

Source: Staking Rewards

Source: Staking Rewards

Current tokenomic for liquid staking protocols cannot catch the true value. With rising revenue and TVL, the token price drops. We need a better tokenomic design to support the staking protocol. Currently, the protocol revenue does not share with the token holder. This makes the token a pure governance token.


Two opportunities for new players are better UX and long-tail assets support. Spinning up a node is easy with the help of an official document. The hard part is operation and customer management. To better support these new players, some toolkits are necessary. This is similar to the VPN market. Lost of small players entering the market with lower fees and better UX.


A specific data analysis tool is also necessary. For stakers, they care about the liveness history, staked ratio history, slashing history, etc. These data are different from the common dataset we use. The common dataset we use focuses on transactions. To better support stakers, a new data analysis tool is necessary.


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