A Dive into the Developments in the Ethereum LST Space

Despite the ongoing bear market, the recent ETHDenver event reaffirmed the long-term bullish sentiment for the cryptocurrency industry. One topic that garnered particular interest was the rise in popularity of liquid staking derivative protocols (LSTs). In this article, we’ll explore the evolving LST landscape, discuss some innovative projects in the space, and consider the implications of a universal, stablecoin-centric structure for these protocols.

Changing Landscape of the LST Space

Over the past year, the LST landscape has undergone significant changes. Lido, which once dominated the market, has seen its market share decrease by 8% YoY. Meanwhile, competitors like Coinbase, Rocketpool, Stakewise, and Frax have been making headway. As users increasingly seek out higher-yielding LSTs, we can expect the market distribution to change even more, especially post-Shanghai.

Innovative LST Projects

At ETH Denver, several LST protocol teams showcased their new and innovative products. Among them were:

1. Rocket Pool: The Atlas upgrade lowered the bond requirement from 16 ETH to 8 ETH, increasing scalability and enabling smaller ETH holders to participate. This upgrade is expected to result in a 300% increase in rETH capacity and contribute to further decentralization through more node operators.
2. Stakewise: Their upcoming v3 release will allow users to create permissionless staking vaults (public or private), join an existing vault, and engage in overcollateralized borrowing without needing native token collateral. Users will be able to mint osETH (liquid token) against staked ETH.
3. Frax Finance: In less than six months since its launch, frxETH has become one of the top LST protocols by total value locked (TVL).
4. Stader Labs: ETHx aims to have the lowest capital requirement to operate a node at 4.4 ETH (4 ETH bonded plus 0.4 ETH in native token SD as collateral). The release of ETHx is expected within the next few months.

It’s important to note that this list is far from exhaustive. DefiLlama has listed over 20 ETH liquid staking protocols, and many teams are currently working on new LST products.

Gravita Vessel

The Universal, Stablecoin-Centric Structure

Sam Kazemian, during his keynote presentation at the conference, made an interesting observation: “Almost every DeFi primitive converges on becoming stablecoin-like, and every stablecoin at scale converges on the same universal structure.” He pointed to two main characteristics of DeFi primitives like LSTs that support this claim:

1. A Swap Facility (a mechanism allowing the asset to be swapped for another)
2. A “risk-free” yield

For stablecoins, the swap facility equates to cash on hand available for withdrawals, and the “risk-free” yield is represented by US treasuries. For LSTs, the swap facility can be an LST-ETH Curve pool, while the “risk-free” yield comes from ETH staking yield.

Why is this important? As we expect to see even larger capital inflows into ETH LSTs after Shanghai, it’s crucial for LST protocols to consider Sam’s insights when scaling their products to the billion-dollar range. Additionally, stakers should choose their LSTs wisely, with these factors in mind.

Conclusion

The growing interest in and developments within the liquid staking derivative space indicate a promising future for these protocols. As the market continues to evolve, it’s essential for both projects and investors to keep close attention to the progresses made in the space.