Can Liquid staking tokens become the next big thing in DeFi?

• LSTs beat ETH to become the largest collateral asset on Aave lending protocol.
• Lido’s domination remained unrivalled, but other players enhanced their game.

Ethereum’s [ETH] Shapella upgrade, apart from providing a fillip to staking, has unlocked new doors of opportunities for Liquid staking tokens (LST).

Realistic or not, here’s LDO’s market cap in BTC’s terms

The new buzzword in DeFi

According to a researcher from on-chain analytics firm Messari, LSTs have gradually begun to replace native tokens as the primary decentralized finance (DeFi) collateral on various networks.

In fact, these receipt tokens surpassed ETH to become the largest collateral asset on top leading protocol Aave [AAVE], accounting for nearly 78% of the protocol’s total value locked (TVL). On similar lines, LST’s share on Solana’s [SOL] lending platform Solend, was found to be 89%.

Source: Messari

Staking, which was once considered a risky proposition due to ambiguity over withdrawals, got a boost after the Shapella Upgrade enabled users to unstake their ETH. The resultant effect was the growth of derivatives of these locked assets, such as Lido Staked ETH [stETH], Rocket Pool’s rETH, and more.

These tokens allow users to directly participate in staking while also maintaining the ability to use them elsewhere in DeFi for higher yield opportunities.

Liquid staking protocols overtake DEXes

According to Binance’s 2023 Half-Year report, liquid staking outpaced decentralized exchanges (DEXs) to become the largest sub-sector in the DeFi landscape, accounting for a 24% market share.

Source: Binance

The report went on to highlight Lido Finance [LDO]’s supremacy, which held a 75% market share and retained its status as the largest liquid staking protocol. But while Lido’s domination remained unrivalled, other players have steadily enhanced their game.

Rocket Pool and Frax Ether emerged experienced a 55.8% and 228.6% surge in their market share on a year-to-date (YTD) basis, respectively.

Source: Binance

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CEX dominance drops

As a category, liquid staking protocols have extended their dominance, outperforming other staking options like centralized exchanges (CEX) and staking pools. Data from Dune showed that the contribution of CEXes to ETH staking declined from 34% to 20% since Shapella.

As shown in the above graphic as well, Coinbase’s Wrapped Staked ETH has lost a whopping 23.5% of its market share since the beginning of 2023. Much of the gains by Lido’s rivals have come at the expense of Coinbase.