📓 Today’s Agenda:

• 🗒️ Topic: Liquid Staking Derivatives (LSDs)

• 🔥Alpha: $LDO and $FRAX

• 🧠 The biggest event for ETH since “The Merge”

What is the Shanghai Upgrade?

The latest upgrade to Ethereum is like the mother of all upgrades since the transition to Proof-of-Stake! And let me tell you, it's a game-changer. This upgrade is going to give validators/stakers the ability to withdraw their staked ETH on the beacon chain.

Back in December 2020, a whopping 16.5 million ETH was staked, and 42% of it was locked through liquid staking protocols. But thanks to the Shanghai upgrade, stakers will finally be able to withdraw their Ether (ETH) and the rewards they've earned for the first time. (Hallelujah)

Before this upgrade, staked ETH couldn't be unstaked, yes people willingly staked their ETH knowing this. It's expected that the upgrade will happen by the end of March and allow those stakers to unstake, so hold on tight, liquidity is coming.

Liquid staking is here to save the day by solving the problem of capital inefficiency. Users can now receive a liquid staking derivative (LSD) for staking their ETH, which they can use in DeFi. Talk about convenience!

This upgrade will help the space by allowing more competition between liquid staking solutions, and will also gives them the sovereignty of their ETH.

🚨What is Liquid Staking and LSDs?

Liquid staking allows users to earn rewards for locking their crypto, while retaining the liquidity of the locked funds.

Users of liquid staking protocols receive derivative tokens such as staked ether (stETH) on a 1:1 basis. This derivative token demonstrates a user’s stake and can be used to generate additional yields among DeFi products.

In short, derivative tokens are receipts for staking your ETH.

👉🏻 The problem LSDs solve

The concern with staking has always been the predefined lock-up periods of tokens. However, through LSDs, users will now have the ability to withdraw and deposit whenever they please. Thus, allowing liquidity to flow among different DeFi protocols and other LSDs that offer potentially higher yields.

This unlock of tokens will create healthy competition among staking providers, and whoever can provide the best yield.

🤯 Fun Fact: Only 13.87% of the circulating ETH supply is staked. (The reason this number is not higher is because of the bonding of ETH that is staked until the Shanghai upgrade happens).

The sentiment is that many people will start to stake their ETH once they have the assurance that they can withdraw their funds at any time.

🏆 Golden nugget: Liquid staking has become the second-largest DeFi sector in the world.

Why is the Shanghai upgrade bullish?

With the ETH being unlocked most people assume there will be a massive sell-off. However, data shows otherwise.

According to Binance research, only 24.5% (4.1M ETH ~$6.9B) of staked Ether is profitable.

• Approximately 2M ETH were staked when prices were in the range of $400-$600.

• Only a small number of holders staking their ETH are making the money. The rest are underwater.

The purpose of this is to gauge potential selling pressure following the Shanghai upgrade. In short, those underwater will have less incentive to sell their ETH after the upgrade.

The people that bought and staked ETH early are currently in profit.

However, being the earliest participants of ETH in the market, they are likely the strongest believers and will not sell.

⚫️ Now onto the alpha:

🔴 1. Lido DAO ($LDO)

Lido was the very first liquid staking provider and continues to dominate the market share today. It is a market leader of 30.43% of all Staked ETH.

It has over 5.6M ETH staked which equals to $9.25B TVL, according to their Dune Dashboard

The majority of ETH stakers clearly believe in Lido over other staking platforms.

How does it work?

• Users will deposit ETH on Lido’s staking page and receive stETH in turn. (Which is backed 1:1 to ETH).

  • This derivative token represents the user’s stake and can be used to produce yield from other DeFi protocols.

• Lido earns revenue by taking 10% of the staking rewards and splits it between node operators and its DAO treasury.

• LDO is the native utility token that is used for:

  • Governance rights in Lido DAO.

  • Managing fee parameters and distribution.

Bullish Points:

• Lido controls 74.83% of the liquid staking market.

• Lido generates $32M in annualized revenue or $87K in average daily revenue.

• They offer a 4.6% APY on staked ETH.

  • 4.6% might not be a lot. But it is still better than any return banks will give you on your money sitting in your bank account. It also could be one of the most “conservative” plays in crypto to generate consistent yield and profit.

• Generates substantial amounts of fees and revenues:

Since October, they average north of $31M in fees per month. And averaged $3M in revenue per month. If you want to know how a protocol is doing, follow the money!

Cons:

• A single organization controlling a large quantity of ETH might pose a threat to the entire network.

• Since the majority of staked ETH is on Lido, a centralized attack on the network would be possible if Lido’s control exceeds 33%.

Which is why it's important to understand the other staking providers that are out there.

⚫️ 2. FRAX ($FXS)

The Frax protocol is building the “DeFi Trinity” which includes Fraxswap (A DEX), Fraxlend (Borrowing and lending), an algorithmic stablecoin called $FRAX, and liquid staking.

Their liquid staking service turns ETH into frxETH, an LSD.

🏆 Golden nugget: They currently offer the highest yield for ETH staking

How does Frax Liquid staking work?

• Staking ETH mints you frxETH which represents 1:1 of staked ETH. (Same principle as stETH on Lido, it's a receipt for user’s staked ETH).

• However, unlike Lido, in order to earn yield with frxETH, you need to stake frxETH with Frax to receive sfrxETH. 

• The reason the yield is higher than other ETH LSDs is because frxETH doesn’t need to be staked in the validator nodes, and all the yield from the frxETH that are not staked is given to sfrxETH.

  • In short, the less frxETH staked, means the higher the APR for sfrxETH.

Why has FXS performed well?

• This has to do with the LSDs of Frax.

• frxETH has two main sources of yield. The first one being the frxETH-ETH Curve liquidity pool (LP). This LP is used to ensure deep liquidity of frxETH to ETH swaps, which helps maintains frxETH 1:1 peg to ETH.

• Frax is the largest holder of CVX with 3.52M CVX tokens. Frax locks CVX to earn fees and vote for token emission to be directed to its stablecoin pools on curve. From farming and bribing, Frax earned $21.8M in net revenue.

• FRAX also benefits from having large quantities of CVX held in their company's treasury., which gives them higher “bribing power” to earn higher yield on Convex Finance by voting for more incentives to be directed to their frxETH tokens.

Bullish points:

Frax’s ETH LSDs offers a larger staking return than competing protocols.

Frax has seen the largest 30 day growth compared to other LSDs. Grown by 30.8%. This is largely attributed to the higher yields offered by Frax.

By the numbers:

The past month we saw an increase of 40% for staked ETH on Frax. This is likely attributed to the higher yield offered by Frax (7.67% APY).

The past 30 days Frax generated $531K in fees (Up 80.68% for the month) and earned $53.1K in revenue (up 80.68% for the month).

FRAX TLDR:

Since October 2022, we seem Frax generated exponential revenue and fee growth. It is up 80.7% from January. It has shown consistent growth and no signs of slowing down.

We anticipate more liquidity to pour into Frax as they currently have the highest yield and that participants will look to take advantage of this yield.