What are liquid staking derivatives?
If you’re interested in staking ETH on the Ethereum network, you may have heard of liquid staking derivatives (LSDs). These tokens enable users to participate in staking without having to lock up their funds for a long period of time. In this post, we’ll discuss what LSDs are and how they work, as well as explore the different types of liquid staking derivatives available on the Ethereum mainnet, including some that can be traded on ETH DEXs.
LSDs allow users to deposit their ETH into a smart contract, which then locks the ETH on the beacon chain with pre-selected validators. In return, the user receives a token, the liquid staking derivative, which represents the underlying staked ETH and accrues value based on rewards in the network. When withdrawals are enabled, LSDs will be redeemable for the underlying ETH along with any additional ETH from staking yield.
LSDs also provide a way to participate in DeFi by allowing users to lend, trade, and borrow using these tokens. This provides users with more ways to generate yield and participate in the broader DeFi ecosystem.
Different types of liquid staking derivatives
There are several main LSDs available on the Ethereum mainnet, including Lido’s stETH, RocketPool’s rETH, Stakewise’s SETH2, Coinbase’s cbETH, and FRAX’s sfrxETH. Let’s take a closer look at each of these.
- stETH: stETH by Lido is the largest staked ETH token and has the most liquidity. It is a rebasing token, meaning that users continually receive more stETH in their wallet over time, representing the growing quantity of underlying ETH represented by staking rewards. However, there are some concerns about centralization and censorship with Lido. stETH can be traded on several ETH DEXs, such as Uniswap and SushiSwap.
- rETH: rETH is considered the most decentralized liquid staking derivative. It also allows stakers to source outside capital to run validator nodes with as little as 16 ETH instead of the usual 32. rETH is similar to stETH, but instead of rebasing, rETH is worth consistently more ETH over time. It is currently trading at a premium compared to other liquid staking derivatives due to its constrained supply. rETH can be traded on ETH DEXs like Balancer and Bancor.
- SETH2: Stakewise’s SETH2 is a smaller competitor in the liquid staking derivative market. They use a unique mechanism to pay out rewards in a separate token, which has kept the SETH2 peg close to 1:1 compared to the other tokens. Their next version will allow all validators access to mint a liquid staking derivative, improving the decentralization of the network. SETH2 is meant to be 1:1 with ETH, while rewards from validators are paid out in a second token RETH.
- cbETH: Coinbase’s cbETH is a centralized liquid staking derivative run by Coinbase. While one of the larger managers of staked ETH, cbETH is a newer entrant to the market and looks to take advantage of DeFi’s composability to add utility for cbETH holders. cbETH works like an interest-bearing token from Aave or Compound and is worth more ETH over time at an increasing exchange rate.
- sfrxETH: FRAX’s sfrxETH is one of the newest liquid staking derivatives available on the market. Building on FRAX’s reputation for stablecoin assets, frxETH looks to be a stable asset pegged to ETH. In the background, FRAX deposits all ETH in the system to validator nodes and passes the yield back to holders of sfrxETH. The growth of frxETH has been admirable, as FRAX is using a good portion of their voting power in Curve and Convex to direct rewards onto the frxETH pools. sfrxETH is written as a vault contract and constantly grows in ETH over time.
What’s next for liquid staked derivatives?
As more and more investors turn to DeFi and cryptocurrencies for their investment needs, LSDs offer a promising avenue for those looking to participate in staking and earn rewards in a more flexible and accessible way. By staying informed and keeping an eye on the latest developments in this rapidly evolving space, investors can position themselves to take advantage of the opportunities presented by this exciting new technology. Traders can now trade the stETH/WETH pair on SIZE with 30 minute TWAP executions.
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