Structure & Progress of Liquid Staking
The liquid staking sector stands out as one of the rare segments within the crypto industry that has displayed consistent growth throughout a challenging year and a half bear market. Conventional staking procedures demand complex software and hardware configurations, often requiring users to lock up assets for extended periods. The Ethereum community had to wait 862 days for the Shanghai/Capella upgrade before they could access their locked funds. Liquid staking protocols offer a solution to these technical complexities. Consequently, this facilitates seamless trading on decentralised exchanges, efficient collateral utilisation, and yield optimisation through lending protocols.
Lido’s Ascendancy within the Ethereum Ecosystem
The introduction of Ethereum’s staking withdrawal functionality in mid-April marked a pivotal moment for the liquid staking domain. Instead of triggering a mass exodus of funds, this upgrade instigated a surge in deposits, confirming the newfound confidence in the reduced risks and enhanced flexibility associated with staking. Within the Ethereum ecosystem, Lido stands as the dominant force in liquid staking, commanding a significant share of fees (approximately 74%) and deposits (around 79%).
Lido made history as the inaugural liquid staking project, debuting its product in December 2020. In the realm of liquid staking, success is substantially influenced by network effects that drive the adoption and liquidity of such derivative tokens. Lido’s first-mover advantage has, therefore, positioned it as the frontrunner in capturing around a third of the liquid staking market.
Liquid Staking Across Different Blockchains
In contrast to Ethereum, Solana’s withdrawals were available from day one, which means stakers did not have the same long-term trade off that Ethereum stakers had — to stake or use in DeFi — so the need for liquid staking was depressed. Further, it’s DeFi ecosystem remains modest in scale and liquidity, presenting limited attractive risk-adjusted avenues for yield generation or token swapping, for example, whilst staking to secure the network.
Cosmos has recently implemented a Liquid Staking Module that seeks to enhance the role of ATOM, Cosmos Hub’s native token, for users as the primary collateral across the entire network, whilst staking.
Users on Proof of Stake networks faced a trade-off between staking their assets and foregoing their use in DeFi, or not staking and incurring a loss of purchasing power due to higher inflation rates. Removing these trade-offs has the potential to foster the growth of DeFi sub-sectors in tandem with bolstering network security.
Enterprise Adoption of Liquid Staking
Liquid staking is poised to capture the attention of traditional financial institutions, primarily due to the alluring combined prospects of Ethereum yield and DeFi utility. However, the landscape is not without its challenges, specifically relating to regulatory compliance and counterparty risk assessments. While many liquid staking protocols target crypto-native users, initiatives such as Alluvial’s Liquid Collective aspire to collaborate with established staking providers such as Coinbase, offering enterprise-level liquid staking solutions tailored to institutional demands.
The Prospective Trajectory of Liquid Staking
The successful implementation of the Shapella (withdrawals) upgrade could potentially introduce heightened competition within the liquid staking market. This evolution might lead to reduced commission rates, thereby allocating a larger share of rewards to stakers. Although, so far, this trend has not materialised as of yet. Commission fees on ETH staking rewards currently range from 10% to 25%. Smaller market share liquid staking providers may opt to adjust their commission structures to enhance user attractiveness, while larger market share entities like Lido, Rocket Pool, or Coinbase may not find it necessary, given their established brand loyalty and dominance among both retail and institutional investors.
In the case of Lido specifically, our base-case scenario anticipates nearly US$30 billion staked, representing a twofold increase from current levels, with a projected 20% compound annual growth rate (CAGR) over the next five years, while maintaining a consistent market share. Our bullish outlook envisions a 27% CAGR and an increase in market share to 40%, while our bearish projection indicates a 13% CAGR and a market share decrease to 22%.
We derived the market shares by adding or subtracting 2% per year to bull and bear case scenarios. Our thesis is that competition will continue to heat up as those who are likely to reduce their commission rates could steal market share. However, we doubt they can realistically compete with Lido’s brand loyalty and first-mover advantage. On that basis, Lido should keep a sizable slice of the pie, potentially ranging between 22–40% market share (currently 31%) by 2027. The lower bound is also a voluntary self-imposed limit for the sake of Ethereum’s decentralisation, which has already been agreed to by some ofLido’s competitors, and of which the proposition is still on the table for Lido. Yet the upper bound ignores this capped imposition of market share. As the total value of ETH staked grows (2027’s terminal staking ratio we estimate to be 45%, alongside the average of proof of stake protocols) so could the liquid staking market, and hence Lido should follow suit based on its market share.
In summary, the landscape of liquid staking, spearheaded by Ethereum and led by Lido, has successfully weathered the challenges of the most recent bear market. However, it has also encountered growth disparities on alternative blockchains such as Solana and Cosmos. The realm of corporate adoption has presented obstacles in the form of regulatory compliance but solutions such as Alluvial’s Liquid Collective aim to solve these challenges and make staking an attractive proposition for institutions. Last, our base case suggests a two-fold increase in the amount of Lido staked by 2027 given consistent market share and growing Ethereum staking rates.
