The Meteoric Rise of LSD Post-ETH Shapella Upgrade

The Ethereum Shapella upgrade in April 2023 marked a significant milestone in the evolution of the Decentralized Finance (DeFi) landscape and the Ethereum Network (ETH). This Upgrade not only enabled the ETH withdrawals of funds that were stalked in ETH but also led to a surge in the growth of Liquid staking derivatives (LSD), with LSD protocols accounting for 43.7% of the total 26.4 million ETH staked by August 2023. The Total value locked (TVL) surged over $914 million, growing 5,870% since January 2023 across the top ten LSD protocols like Lido, Frax Share, and Rocket Pool. 

In this article, we will explore the journey of Ethereum, the Impact of the Shapella upgrade, and the rise of LSDs in shaping the future of Ethereum ETH and Decentralized Finance. 

Ethereum’s Evolution

Ethereum, since its humble beginnings in 2015, has grown to become the leading blockchain platform for smart contracts and decentralized applications (dApps). In the early days, Ethereum was primarily focused on smart contracts, self-executing contracts that can be used to automate transactions and agreements. It became a go-to platform for developing decentralized applications. Over the years, Ethereum has undergone several upgrades and improvements. Starting with a hard fork of the Ethereum blockchain in 2016; the reason for that was because the hackers were able to exploit a loophole in a smart contract of a DAO and steal more than $600 million of ETH. This hard fork also led to the creation of Ethereum Classic. 

In 2019, the Constantinople upgrade was implemented, which helped reduce the transaction fee and improve Ethereum’s performance. The Berlin upgrade in 2020 also helped improve the security and performance of Ethereum. However, the London upgrade in 2021 introduced several changes to Ethereum’s existing fee structure and burned ETH on every transaction. 

In 2022, The Merge transitioned Ethereum from a Proof-of-work (PoW) consensus mechanism to a Proof-of-Stake (PoS) consensus mechanism. The latest upgrade was the Shapella upgrade, which enabled users to withdraw their staked Ethereum. 

If we look statistically, Ethereum started with a market capitalization of just over $1 million in 2015 and is now standing at over $100 billion by 2023. The transaction volume has also grown significantly from just one million transactions in 2015 to processing over 1.2 million daily transactions. Ethereum currently has over 100 million active addresses; compared to 2015, the number was just over 10,000.

The Shapella Upgrade

A major milestone in the evolution was the Shapella Upgrade, which was implemented on April 12, 2023. It enabled users to withdraw their staked Ethereum. This was a significant milestone in Ethereum’s transition from a Proof-of-work (PoW) consensus mechanism to a Proof-of-Stake (PoS) consensus mechanism, giving Ethereum holders great liquidity and control over their assets. Before the Shapella upgrade, users could not withdraw their staked ETH as Ethereum had not fully transitioned into a Proof-of-Stake (PoS) consensus mechanism.

Impact on the Liquid Staking Derivatives Sector

Liquid Staking Derivatives (LSDs) are cryptocurrency derivatives representing a holder’s staked assets. LSDs were introduced to enable smaller ETH holders to participate in staking and unlocking liquidity after the Beacon chain launch in Dec 2020. LSD became more attractive to institutional investors because it also offered a predictable yield and lower risk. Some of the Prominent LSD projects include:

  • Lido($stETH)
  • Rocket pool($rETH)
  • Frax Finance ($frxETH)

According to DeFiLlama, the total value locked (TVL) in LSD protocols has grown from $15.6 million to $914 million, representing a growth of 5870% in only about eight months. LSD protocols account for 43.7% of the total 26.4 million ETH staked. 

How LSDs Got Boosted Post Ethereum’s Shapella Upgrade

The Shapella upgrade not only made a positive impact on Ethereum but also had a great impact on the Liquid Stalking Derivatives (LSDs) sector. The Shapella Upgrade made LSDs more attractive to ETH Holders as it allowed them to withdraw their staked early and earn stalking rewards while still maintaining liquidity over their assets. Before the Shapella Upgrade, the staked ETH was locked on the Ethereum beacon chain. LSDs are also well-positioned to benefit from the growing adoption of Web3 And Decentralized applications (dApps), as they allow ETH holders to earn staking rewards while still participating in the Web3 ecosystem. 

Here are some statistical highlights of the impact of the Shapella upgrade on the LSD sector: 

  • The Total value locked (TVL) grew 5870% (58.7x) from $15.6 million on January 1, 2023, to $919 million as of August 31, 2023.
  • The market share of LSD also had a significant growth, accounting for 43.7% of the total 26.4 million ETH staked. This is a significant increase from the 2.5% of the market share that LSD protocols had on January 1, 2023.
  • There was also a surge in LSD staking post-Shapella Upgrade, causing long entry queues while the exit queues remained minimally affected.
  • LSDs have distributed over 100,000 ETH in quarterly staking rewards, over half of all Ethereum emissions since late 2022.

LSDFI’s Growth Trajectory

Liquid Staking Derivatives Finance (LSDFi) is an emerging sector that provides financial services to LSD holders. Liquid Staking Derivatives Finance (LSDFi) has seen explosive growth since its introduction in December 2020 and is taking the spotlight of the hottest narratives of 2023. Liquid Staking Derivatives Finance (LSDFi) allows users to earn staking rewards while maintaining liquidity over their assets. Following the successful Shapella upgrade, the confidence in Ethereum Staking has gone from strength to strength. The Shapella upgrade allowed investors to stake and unstake their Ethereum at their leisure. Significant factors have driven the growth of the Liquid Staking Derivatives Finance (LSDFi) sector.

  • The increasing popularity of LSDs in recent months, as they offer ETH holders a way to earn staking rewards
  • The increasing demand for financial services from LSD Holders
  • The emergence of new and innovative LSDFi platforms in recent months. These platforms offer various services, including lending, borrowing, and asset management.

This year alone, the combined Total Value locked (TVL) of all the Liquid Staking tokens has reached the market capitalization of over $18 billion, surpassing the combined TVL of DEXs and crowning LSDs the top-ranked category in DeFi. The top three names in the Liquid Staking space are Lido($stETH), Rocket Pool ($rETH) and Frax Finance ($frxETH). Lido($stETH) has dominated the LSD market since its launch, receiving only an inflow of $2.4 billion this year. They command the 74% market share of all the LSD tokens and have a TVL of $13.9 billion. Rocket pool($rETH) is the second largest in the market, which also had significant growth this year, rising in TVL to $1.85 billion. Frax Finance ($frxETH) has also seen healthy growth and is currently at $432 million in TVL. 

The Future of Ethereum 

Liquid Staking Derivatives Finance (LSDFI) and future upgrades to Ethereum have the potential to shape Ethereum’s path forward by enhancing its scalability, security, and sustainability and by providing new opportunities for new generations in the DeFi space as they look very promising. 

Future upgrades to Ethereum ETH, such as EIP-4844 (danksharding) and EIP-4865 (statelessness), could improve the scalability, security, and sustainability of the Ethereum network. These upgrades can make Ethereum more attractive to users and developers, which will, in return, help in the growth of the Ethereum ecosystem. Liquid Staking Derivatives Finance (LSDFI) can make Ethereum more accessible and attractive to users by providing a variety of financial services to LSD holders, which can help to increase the adoption of Ethereum ETH. Danksharding will significantly reduce the cost of Ethereum transactions, making it more affordable for the developers. Statelessness will reduce the space required to run a node on Ethereum, making it more accessible. These upgrades could make Ethereum the leading blockchain platform for smart contracts, Decentralized Applications, and Web3 Ecosystem. 

Imagine a future where Ethereum is the backbone of a global decentralized financial system. A world where everyone has access to affordable and secure financial services, regardless of their location or socioeconomic status. A world where the internet is truly open and accessible to all and where the collective wisdom of the people drives innovation. This is the future that Ethereum can create. For that, Liquid Staking Derivatives Finance (LSDFi) and future upgrades are essential to making this vision a reality.

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