Liquid staking protocols, particularly Lido, have experienced a meteoric rise recently, epitomizing paradoxical dynamics within the decentralized finance (DeFi) industry. Amid generalized capital withdrawal from the industry, liquid staking stands as an oasis of growth, with its total value locked (TVL) surging from $5 billion to $20 billion between June and September 2022 and a dominating $14 billion being held by Lido.
However, liquid staking’s increasing popularity elicits certain questions. What factors have contributed to this growth against the overall DeFi trend? And what might these variables indicate for the future of blockchain technology and markets?
Staking involves locking assets within a proof of stake blockchain protocol to bolster network security. Stakers lock away their coins and receive periodic returns as a reward. Nevertheless, this process often comes with a daunting technical barrier, prompting entities like Lido to assist by shouldering this burden. In lieu of a portion of the staking fees, Lido facilitates staking and provides users with 1:1 backed assets, like stETH for ETH, effectively granting users access to their assets while continuing to earn yield.
Since liquid staking became available on Ethereum’s mainnet in September 2022, Lido and Rocketpool have seen their TVL rising to a record $21 billion in April, even amid a weakened crypto market.
As Richard Galvin, co-founder of DACM, points out, the success of liquid staking can be in part attributed to the regulatory pressure on centralized staking services in the U.S. As the Securities and Exchange Commission (SEC) cracks down, suing crypto exchanges like Kraken and Coinbase for not registering their staking services as securities offerings, liquid staking evidently offers a perceived safe haven.
Meanwhile, non-staking related DeFi appears on the decline, with a current total TVL of merely $37.7 billion, lower than in the aftermath of FTX’s collapse. Furthermore, lending protocols have been hard-pressed to compete with staking’s yields. For instance, Aave offers ETH depositors a modest 2.3% APY compared to Lido’s 3.7% APR, further illustrating the attractiveness of liquid staking.
This growing penchant for liquid staking, underscored by regulatory pressures and the quest for better returns, hints at a potential shift within the DeFi ecosystem. However, whether this trend represents an episodic reaction or a sustained shift for the long haul, remains an intriguing question for observers of this volatile industry.
Source: Cryptonews
