Liquid staking leads the way on Ethereum

Following the Shapella update, which allowed Ethereum users to withdraw coins previously put into staking, liquid staking platforms such as Lido, Frax and Rocket Pool increased their market share to hold 46% of all ETH deposited on the Beacon Chain.

If there were no such entities, centralized exchanges would have dominance over this type of activity and Ethereum would likely suffer from a “point of failure” in terms of producing blocks in the chain.

Ethereum: liquid staking providers control 46% of the market

After only 42 days since the Shapella hard fork, which enabled the unstaking of all ETH previously put into staking by the Ethereum community, we can observe how liquid staking platforms (LSD) have a decisive position in the network, controlling 46% of all coins delegated to block validation and production through the proof-of-stake consensus mechanism.

Prior to the Merge on 15 September 2022, the delicate task of block production fell to the miners, who lost that privilege with the move from PoW to PoS and the Merge of the Ethereum Mainnet with the Beacon Chain.

Now, only stakers, specifically all those individuals who hold at least 32 ETH, can participate in the activity and earn block rewards (2 ETH per block) and user transaction fees.

Liquid staking platforms, increasingly important in this context, provide a solution for small crypto investors who do not hold 32 ETH but still want to participate and improve network security.

All of these providers such as Lido, Ricoket Pool, Frax, and Stakewise hold a total staking share of 9,083,663 ETH ($16.57 billion), which corresponds to almost half of all ETH locked in the Beacon Chain.

Notably, Lido controls 73.3% of all this capital, confirming itself as the undisputed leader not only in the world of liquid staking, but also in the DeFi sector in general, with a TVL of over $12 billion.

LSD platforms reduce the risk of centralization in Ethereum staking

The fact that LSD providers have a central role within the Ethereum staking mechanism is good for the community, which would otherwise risk falling victim to network centralization.

When the role of block validation was the responsibility of the miners, prior to the Merge, this risk was decidedly low, given the difficulties from a technical standpoint to concentrate a large amount of hardware within a single entity.

Now, however, as stakers have taken over, the risk of centralization has become much more concrete, especially after many exchanges such as Binance, Coinbase, and Kraken have offered their own version of staking, concentrating capital in their platforms.

In this sense, if providers such as Lido, Frax and Rocket Pool did not exist, all those who do not have a monetary base of 32 ETH or more and those who do not have the skills to operate independently would concentrate their ETH on centralized exchanges, which offer more elastic solutions.

Binance and Coinbase, for example, offer all users who decide to delegate their ETH to them a token representative of the stake, exchangeable directly on their own exchanges, for a spread.

This is compounded with the advantage of having significantly lower fees than those we find nowadays on Ethereum.

Obviously, users more savvy in the DeFi world don’t mind gas fees and prefer to participate in staking in a decentralized way, taking advantage of one of the many non-custodial wallets available on the market, such as Metamask, Trust Wallet or Ledger.

For now, the risk of a “point of failure” in the Ethereum consensus is under control, but it will be necessary to monitor the situation and the trend of capital orbiting among the various LSD providers to see if this problem will arise in the future.

ETH deposited in Beacon Chain hits new all-time high

As LSD platforms strengthen their market share in Ethereum staking, we can observe how the number of ETH deposited in the Beacon Chain, and in parallel the number of validators participating in validation in the network, have reached a new all-time high.

Notably, at the moment there are 18.6 million coins locked within Ethereum distributed among about 571,000 validators.

On average, each validator holds a total of 32.57 ETH.

The figure is very important because a high number of ETH staked and a high presence of validators strengthen the security of the chain and prevent cyber attacks.

In Bitcoin‘s network, where the consensus mechanism is the classic proof-of-work, this metric is represented by the “total hash rate,” which corresponds to the computing power that each miner devotes to the network.

In Ethereum, on the other hand, security is represented by the number of coins delegated to staking and block production.

Those who participate in this activity, which is critical to the survival of the ecosystem, are rewarded with variable annualized returns, which currently hover around 4.2%.

However, Ethereum’s staking yield curve is set to fall over time, yet those who produce a block also earn from users’ transaction tx fees, which vary depending on network congestion.

In addition, extraction maximization techniques such as MEVs, allow for more competition within the network and allow stakers to earn more than they actually deserve.