Post-merger ETH has become obsolete
For years, various blockchain projects have been rumored to be future “Ethereum killers,” projects that would topple Ether from its throne and usurp its title as the primary digital asset. That day seems to have come, although it seems to be an inside job. Lido-staked Ethereum (stETH) and other liquid staking derivatives are set to render Ether (ETH), as an asset, obsolete.
The transition from proof-of-work (PoW) to proof-of-stake (PoW) allows everyday decentralized finance (DeFi) users to enjoy rewards previously only available to miners simply by holding stETH or any other ETH liquid stake derivative. This has given way to a surge of interest across the industry, from individuals to institutions across centralized finance (CeFi) and DeFi. Over the past month, ETH liquid staking derivatives have received a ton of attention, and industry titans – including Coinbase and Frax – have released ETH liquid staking derivatives.
Liquid staking derivatives offer all the benefits of regular ETH while being a yield-generating asset. This means that holders can gain exposure to ETH price movements and maintain liquidity while exploiting the benefits of staking. Wallets holding stETH will see their holdings gradually increase as staking returns are steadily added to the initial sum.
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While most staking strategies require locking funds in a validator, liquid staking derivatives allow users to maintain liquidity while benefiting from the staking yield. ETH locked in staking validators is not available for withdrawal until some ambiguous time in the future, likely with the Shanghai update. While stETH is still trading at a slight discount to ETH, this gap should definitely close once withdrawals are enabled. Simply put, ETH liquid staking tokens are just more capital efficient than standard or more traditional ETH staking practices.
From the user’s perspective, there is no reason to hold regular ETH, where the only potential benefit would be an increase in price when they could hold a liquid staking derivative that would increase their potential profits via yield. of staking. The founders of the project adopted a similar mentality. From DeFi projects to non-fungible token (NFT) projects, Web3 teams have integrated stETH into their protocols, with behemoths such as Curve and Aave making it even easier for DeFi users to incorporate stETH into their investment strategies.
For lending protocols, stETH provides the ability to increase collateral yield without having to make risky investment decisions to satisfy users. NFT projects are able to establish a revenue stream through their mint product rather than being left with a finite lump sum. By making it easier for Web3 projects to stay afloat and keep their community happy, ETH liquid staking derivatives allow project managers to go beyond money worries and guide real innovation.
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In addition to being much more capital efficient, ETH liquid staking derivatives help maintain the Ethereum network. stETH and other derivatives represent Ether, which was deposited into an Ethereum validator to help ensure network security.
The centralization of staked ETH has been a major criticism of the PoS consensus model, with Lido accounting for over 80% of the liquid staking derivatives market share while controlling over 30% of staked ETH. However, the recent proliferation of alternatives is poised to allay these concerns as market share spreads among various organizations. Exchanging ETH for liquid staking derivatives is a way for users to support decentralization while stuffing their bags.
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As the benefits of staking continue to be covered in the press, liquid staking derivatives are sure to become a central part of even the simplest DeFi strategies. Coinbase providing “cbETH” means that even retail investors will be familiar with the strategy. We will likely see a surge in protocols accepting liquid staking derivatives as users begin to flock to the essentially free return. Soon, many DeFi users will only be able to hold ETH to cover their gas costs.
The proliferation of liquid staking derivatives will help increase the amount of ETH deposited in various validating systems, improving network security while offering yield to provide financial benefits to supporters. ETH’s days seem numbered. Beyond a nominal gas allocation, any ETH not converted into a liquid staking derivative will just be money left on the table. The long-heralded ETH killer finally seems to have emerged, though it looks like it will only bolster Ethereum’s security and the bags of its supporters.
Sam Forman is the founder of Sturdy, a DeFi lending protocol. He became passionate about cryptography in high school before studying math and computer science at Stanford. When he’s not working on Sturdy, Sam practices Brazilian Jiu-Jitsu and cheers on the New York Giants.
This article is for general informational purposes and is not intended to be and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.