Ethereum’s Shapella unlocks new opportunities for…

• Liquid staking protocols extended their dominance after Shapella and outperformed other staking options.
• LSD beat ETH to become the largest collateral asset on Aave lending protocol.

Users in the crypto space have shown significant interest in Ethereum [ETH] staking over the last ten months, driven by two critical upgrades – The Merge and Shapella.

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Staking, which was once considered a risky proposition due to ambiguity over withdrawals, got a boost after the Shapella Upgrade enabled users to unstake their ETH. This confidence led them to restake their ETH after an initial burst of withdrawals.

As a result, May recorded the highest monthly net inflow of ETH, as per blockchain research firm Messari.

1/ #Ethereum underwent transformative upgrades (The Merge, Shapella) in the past year.

This led to remarkable economic developments and a skyrocketing growth of new liquid staking protocols and liquid staking tokens (LSTs).@kunalgoel dives in. 🧵 pic.twitter.com/9pqdEEtqpU

— Messari (@MessariCrypto) June 15, 2023

Rise of liquid staking derivatives

Messari’s analysis revealed an intriguing trend occurring because of Shapella: the growth of liquid staking derivatives/tokens (LSD).

As a category, Liquid staking protocols like Lido Finance [LDO] extended their dominance after Shapella and outperformed other staking options like centralized exchanges (CEX) and staking pools.

Data from Dune lent credence to this observation. Notably, the contribution of CEXs to ETH staking declined from 27% to 20% since Shapella.

Source: Dune

This growth has unlocked new doors of opportunities for LSDs. As widely known, these receipt tokens allow users to directly participate in staking while also maintaining the ability to use them elsewhere in decentralized finance (DeFi) for higher yield opportunities.

The most popular LSD in use is Lido Staked Ether [stETH].

Ethereum in trouble?

Messari highlighted that LSDs have replaced ETH as the prime collateral in several DeFi protocols. In fact, these derivative tokens beat ETH to become the largest collateral asset on leading protocol Aave [AAVE].

Source: Messari

Moreover, the largest lending protocol, MakerDAO [MKR], which enables users to borrow the DAI stablecoin, recorded a considerable increase in its LSD deposits since the Shapella Upgrade went live.

Source: Messari

Additionally, interest rate protocols, which involve converting ETH’s floating staking rate to a fixed rate, have gained popularity due to the surge in LSDs. Although still at a very nascent stage, the prospects for these projects look encouraging.

Read Ethereum’s [ETH] Price Prediction 2023-24

At the time of publication, the aggregated market capitalization of all liquid staking tokens was $14 billion, with stETH accounting for a massive 86% share, as per CoinGecko.

Trading volume worth more than $70 million was recorded due to the sale and purchase of these tokens in the last 24 hours.