LSDs and Ethereum’s Shanghai Upgrade: A Perfect Match?

Ethereum’s Shanghai upgrade unlocked over $35,000,000,000 of previously illiquid capital.

Since the network’s beacon chain launched in 2020, all staked ether has been locked to secure the blockchain’s new proof-of-stake network. With the rollout of the Shanghai upgrade on April 12, users can now withdraw their staked tokens for their initial capital and accrued rewards.

But it’s not ETH that you should be looking at. Ethereum’s latest upgrade will impact liquid staking derivatives the most.

Even More Liquidity

Liquid staking derivatives have seen increased liquidity following the unlock of staked ETH. A major risk of holding an LSD, such as stETH or rETH, was the volatility of LSDs against ether. This is no longer the case.

The volatility of LSDs against ETH was largely due to staked ether being locked, as investors discounted the risk of not being able to claim ether or accrued rewards.

Now that ether can be withdrawn from staking contracts, liquid staking derivatives achieve a closer peg to the price of ETH.

Consequently, the risk for impermanent loss in DeFi diminishes, enabling more opportunities for users to provide liquidity to AMMs using liquid staking derivatives and ether.

Take Lido Staked ETH as a case study. As the protocol gained liquidity, it dominated DeFi as the most liquid LSD, allowing for protocols to use stETH as a money lego. Having a snowball effect, Lido Staked ETH quickly gained the majority of staked ETH market share.

With Ethereum’s EIP-4895 in full effect, a similar scenario may play out more broadly for the entire asset class.

Compressed Yields, More Offerings

Delphi Digital predicts that ETH staking rates will double over the next 12 months. Naturally, staking yields will compress as more users participate to earn rewards. Staking today offers a yield of up to ~5%, which is well worth it for many holders of ETH.

However, as yields fall closer to the 3% range, stakers will seek alternatives to boost their earnings.

Enter Origin Ether.

OETH was created in response to the recent developments seen on Ethereum and liquid staking derivatives. OETH offers an alternative to LSDs, earning yield from staking rewards, trading fees, and rewards tokens.

By holding LSDs, OETH enjoys a base yield from validator rewards. Origin Ether boosts yield through DeFi liquidity provision; as the ETH in DeFi earns trading fees and token rewards, extra yield is sent to OETH holders.

Conveniently, rebasing allows holders to accrue rewards without needing to pay gas fees or stake their tokens.

The end result is significantly higher APYs on ETH without any of the hassles associated with staking. Origin Ether’s properties make it among the easiest ways to earn yield on ETH, while also beating the returns of traditional liquid staking derivatives.

To start stacking ETH faster, users can mint OETH on oeth.com or swap ETH for OETH on Curve.

Security is paramount at Origin Protocol, and it’s why OETH was thoroughly audited by leading security firm OpenZeppelin, who’s also responsible for auditing Coinbase, Aave, and The Ethereum Foundation.

EigenLayer and Shared Staking

EigenLayer is a new ecosystem for shared security that allows developers to leverage staked ether for shared security. In return, stakers can receive ancillary yields from other networks, enabling more optionality and higher yield for ETH stakers.

While still in its infancy, EigenLayer presents an intriguing opportunity for ether-denominated yield.

Origin DeFi may explore opportunities on EigenLayer, as the Origin Ether DAO is constantly looking for the best risk-adjusted yield opportunities. Before new strategies are deployed, a proposal must be passed by OGV governance.

OGV acts as a value-accrual and governance token for OETH, earning fees and deciding the future of the OETH protocol.

Final Thoughts

Ethereans have been laser-focused on ether since Ethereum’s EIP-4895 rolled out, but they should really be paying attention to liquid staking derivatives and the infrastructure around them.

New liquidity for staked ETH allows for innovative use cases to be explored around LSDs, and we’re currently at the tip of the iceberg.

One thing is clear, though. Staking rewards will inevitably decrease as participation increases, and the need for elevated ETH staking yields will soon be apparent.