The world of cryptocurrency is constantly evolving with new trends and technologies emerging year on year. One of the most exciting trends predicted to dominate the crypto space in 2023 is Liquid Staking Derivatives (LSDs). In this article, we’ll discuss what LSDs are and why they’re set to be the biggest crypto trend in the coming years.
First, let’s define what staking and derivatives are in the context of cryptocurrency. Staking refers to the process of holding and locking up coins on a blockchain network to support its operations and earn rewards in return. This process is known as Proof of Stake (PoS), which is an alternative to the traditional Proof of Work (PoW) method used by Bitcoin. In the PoS system, stakeholders can participate in the network’s decision-making process and earn staking rewards by holding and staking cryptocurrencies.
On the other hand, derivatives are financial contracts whose value is derived from an underlying asset, such as stocks, currencies, or commodities. Crypto derivatives act in the same way, allowing users to profit from the price movements of digital assets without owning the underlying asset.
So, what are Liquid Staking Derivatives, and why are they a big deal? In simple terms, LSDs are a type of crypto derivative that allows investors to stake their cryptocurrencies and earn both staking rewards and liquid tokens that can be traded on exchanges or used for other purposes. LSDs unlock the value of staked cryptocurrencies that were previously locked up and illiquid.
Currently, staked coins like Ethereum, Cardano, and Polkadot are locked up, and users can’t access them until they’re unstaked, meaning that staking is a long-term commitment. This presents a problem for investors who might need liquidity at some point in the future or want to trade their staked assets without waiting for the staking period to end. The introduction of LSDs solves this problem by allowing investors to earn liquid tokens that can be traded on exchanges without compromising the underlying staked asset.
LSDs open up a new market of trading opportunities, bringing together the benefits of staking and derivatives. Staking rewards are known to be higher than the return from traditional investment methods like savings accounts and bonds. By combining staking and derivatives, investors now have access to even more earning opportunities and can benefit from two revenue streams. With LSDs, investors can hold their staked assets while earning extra income through liquid tokens.
Moreover, LSDs enable users to vote on governance issues while still retaining control of their assets. This is because LSDs convert staked assets into liquid tokens, which retain their governance rights but can also be used for trades or other purposes.
Liquid Staking Derivatives are set to bring several benefits to the cryptocurrency market. First, they offer stakers more flexibility with their investments. By creating liquid tokens, stakers can access the value of their investments without waiting for their staking period to end. This can be a big advantage for investors who need liquidity at some point in the future or want to take advantage of market conditions quickly.
Second, LSDs create a new class of tradeable assets in the cryptocurrency world. Liquid tokens enable investors to access new markets and strategies that were previously unavailable. With the introduction of LSDs, investors now have the ability to earn rewards from staking while trading the liquid tokens.
Third, liquid tokens can be used as collateral for loans, further increasing the utility and value of staked cryptocurrencies. This can open up new investment opportunities, allowing investors to fund other projects or investments by using their staked assets as collateral.
Finally, LSDs can increase the adoption and usage of Proof of Stake networks. By giving stakers more options and flexibility, LSDs will encourage more users to participate in PoS networks and support their growth.
In conclusion, Liquid Staking Derivatives are set to be the biggest crypto trend of 2023. By combining staking and derivatives, LSDs create a new market of tradeable assets that offer investors more flexibility, earning opportunities, and utility for their staked cryptocurrencies. With the benefits of increased liquidity, access to new markets and strategies, and the ability to use staked assets as collateral, we can expect LSDs to be a game-changer in the cryptocurrency world. As we move towards a more staking-centered approach to crypto, LSDs are poised to redefine the way we stake and trade cryptocurrencies.
One of the top providers of LSDs is Lido, which is currently the largest DeFi application on the Ethereum network. With around $12 billion of capital deposited on its platform, Lido offers a liquid staking solution that allows investors to earn yield on their staked ETH without losing the liquidity of their assets.
Staking on Ethereum requires validators to lock up their own ETH coins and earn an annual yield of about 5%. However, this requires a minimum of 32 ETH, which is approximately $60,000 at current prices. This means that investors have to lock away a significant amount of capital, making liquidity an issue.
LSDs solve this liquidity problem by providing an IOU that maintains a 1:1 value with the staked ETH. These IOUs can be traded, sold or used in DeFi applications like regular ETH, allowing investors to earn yield without losing liquidity.
LSDs have become so popular that they are now being issued as DAO or treasury tokens by several providers. Investing in these tokens could lead to increased demand for the associated platform if they are successful.
Lido, Coinbase, and Rocket Pool are some of the top providers of LSDs, with stETH being the most popular. This token, issued by Lido, is extremely liquid and accounts for over 70% of the LSD market.
The recent Shapella upgrade to the Ethereum network has made LSDs even more attractive. Previously, staked ETH could not be withdrawn, but with the new upgrade, users can unstake their ETH as they please. This means that approximately 10 million previously unavailable ETH can now be redirected into the LSD market.
On-chain data shows that many stakers are withdrawing their ETH to restake it with a liquid staking service to receive LSDs. The popularity of LSDs is likely to rise even further with the recent crackdown by US authorities on cryptocurrency exchange Kraken, which led to 440,000 withdrawals and the potential need for new staking services.
Investors interested in getting exposure to LSDs can participate in liquid staking by staking their ETH and receiving an LSD in return. Alternatively, they can purchase an LSD like stETH or cbETH directly via an exchange.
However, before investing in LSDs, investors should be aware of the risks involved and consider whether they have a bright future ahead. DAO tokens do not represent ownership or entitle investors to profit-sharing, and they should be seen as a proxy investment that could theoretically benefit from the underlying platform’s success.
In conclusion, LSDs are becoming increasingly popular in the world of cryptocurrency due to their ability to provide liquidity while earning yield on staked ETH. With the recent Shapella upgrade, LSDs are likely to become even more attractive, creating opportunities for investors to gain exposure to this emerging asset class.