Liquid Staking Overtakes DeFi Lending as Top Crypto Sector

  • Liquid staking emerges as the second-largest crypto market sector, surpassing DeFi lending and borrowing.
  • Ethereum’s upcoming Shanghai software upgrade for liquid staking has created a buzz among investors, with total value locked approaching 60%.

The world of cryptocurrency is constantly evolving, and a new sector is now emerging as a major player in the industry. Liquid staking, a process that allows users to earn rewards for locking their cryptocurrency in a blockchain network while retaining the liquidity of their locked funds, has overtaken decentralized lending and borrowing to become the second-largest crypto market sector.

As of Monday’s European trading hours, the total value of crypto assets deposited in liquid staking protocols was $14.1 billion, according to data source DefiLlama. In comparison, the total value locked in DeFi lending and borrowing protocols was $13.7 billion, placing it third in terms of size. Meanwhile, decentralized exchanges led the way with $19.4 billion in deposits.

Liquid staking has been gaining popularity due to its high annualized percentage return rates. For example, Lido, which controls over 75% of the liquid staking market, offers a 4.8% annualized percentage return on staked ether, 6% on staked Solana, and 6.3% on Polygon’s MATIC token. This is higher than the rates available for lending top stablecoins USDT, USDC, and DAI on the DeFi giant Aave.

Liquid staking’s increased popularity could also be attributed to the yield differential between the two sectors. Users of liquid staking protocols receive derivative tokens on a 1:1 basis, which can be used to generate additional yield across DeFi protocols. The governance tokens of Lido’s rivals, Rocket Pool and Frax, have also surged, according to CoinDesk data.

Liquid staking is expected to grow further, as the ETH staking ratio, which measures the percentage of the cryptocurrency’s supply staked, is significantly lower than another layer 1 cryptocurrency. Only 14% of ETH is currently being staked, while the average for layer 1 coins is 58%, according to Markus Thielen, head of research and strategy at digital-assets platform Matrixport. This indicates that interest in staking will continue to swell.

The upcoming Shanghai software upgrade on the Ethereum blockchain is expected to further boost the growth of liquid staking. The upgrade will allow stakers to withdraw the ether they have staked and the accumulated rewards for the first time, which is expected to improve overall liquidity. Since December 2020, more than 16.5 million ETH has been staked in Ethereum’s Beacon Chain, of which 42% has been locked through liquid staking protocols, mainly Lido.

The Shanghai upgrade is also expected to innovate the current space by allowing for healthy competition between liquid staking solutions, bolstering ETH’s position by providing yield from staking/unstacking, and providing users with the security of retaining sovereignty over their assets. The upgrade, according to Ryan Selkis, CEO of crypto research firm and data provider Messari, will have a significant impact on the industry.

The market performance of its governance tokens reflects the growth of liquid staking. This year, Lido’s governance token LDO has increased by 220%, outperforming industry leaders such as bitcoin and ether by a wide margin. Lido’s competitors, Rocket Pool and Frax, have also seen their governance tokens rise, indicating a positive outlook for the sector.

In conclusion, liquid staking has emerged as a major player in the cryptocurrency industry, surpassing decentralized lending and borrowing to become the second-largest crypto market sector. Its popularity can be attributed to high annualized percentage return rates, the yield differential between the two sectors, and the upcoming Shanghai software upgrade on the Ethereum blockchain. As interest in staking continues to grow, liquid staking is expected to further cement its position in the industry.