As the upgrade of Cancun approaches, the heat of the Ethereum liquidity staking LSD track and the derived restaking track is gradually increasing. Currently, the leading Ethereum staking project Lido and the leading restaking project EigenLayer are ranked as the first and second largest DeFi protocols, respectively.

I. Concepts related to Ethereum liquidity staking

From Ethereum 1.0 to Ethereum 2.0, the PoW consensus mechanism has transitioned to the PoS consensus mechanism, no longer relying on miners' computing power to maintain the network. This effectively addresses the high energy consumption, potential security challenges, and network congestion issues of the PoW mechanism, providing sustainability and security for supporting large-scale dApps. However, Ethereum's node validators need to stake at least 32 ETH, which has a high threshold for participation and requires some technical and hardware requirements, making it unfriendly to ordinary users.

Ethereum staking refers to locking Ether (ETH) in the Ethereum network to support network security and operation, and stakers receive rewards for doing so. Officially defined as the act of depositing 32 ETH to activate the validator software, validators are responsible for storing data, processing transactions, and adding new blocks to the blockchain, ensuring Ethereum's security for everyone and earning new Ether in the process.

LSD, short for Liquid Staking Derivatives, allows more retail investors to participate in Ethereum's network staking, enabling ordinary users to participate in staking rewards without thresholds and without the need to maintain staking infrastructure. With the increasing participation of tokens in staking, the Ethereum network becomes more secure. At the same time, staking reduces the market liquidity of ETH, which is beneficial for reducing supply and increasing the coin price. The design of the liquidity staking token LST releases the liquidity of staked ETH, quickly attracting a large number of users and assets, thus opening the curtain for LSDfi.

Restaking is a mechanism for re-staking assets already staked on the Ethereum network onto other consensus protocols. By re-staking the originally staked assets into other consensus networks, it supports these networks and earns corresponding rewards, while still enjoying the economic security of the Ethereum network, promoting interoperability between different consensus networks and the prosperity of the entire blockchain ecosystem.

II. Types and principles of Ethereum staking

Currently, there are four main ways to participate in Ethereum staking:

1. Solo Staking: Users run a full node to participate in Ethereum network validation independently. Users have full control over their nodes and staked ETH, enjoying all staking rewards. This method requires technical knowledge to maintain nodes and at least 32 ETH for staking.

2. Staking as a Service (StaaS): Platforms provide staking services for users, where users provide ETH and the platform is responsible for technical operations and maintenance. Users do not need to worry about technical issues and node maintenance, suitable for users without technical backgrounds, but service fees are required.

3. Centralized Staking Services: Staking services provided by centralized platforms such as exchanges, where users stake ETH on the platform. It is simple to operate and suitable for ordinary users, without the need to handle technical issues, but may face platform risks and may incur higher service fees.

4. Staking Pools: Multiple users pool their ETH in a shared pool to act as validators. This lowers the threshold for staking, allowing users to stake as little as 0.01 ETH. However, rewards need to be shared with other participants, and some control is transferred to the pool operator. The platform also issues tokens representing staked ETH to stakers, usually called liquidity staking tokens or LST.

The Ethereum liquidity staking track mainly refers to the fourth method, opening up new token income channels for ordinary users, unlocking the liquidity of staked assets, and giving rise to various protocols such as LSDfi and Restaking, promoting the rapid growth and widespread participation of the DeFi ecosystem. The Ethereum liquidity staking track is mainly divided into three categories:

1. LSD and LST: Liquidity staking tokens (LST) and liquid staking derivatives (LSD) form the foundation of the liquidity staking market, aiming to address the issue of insufficient liquidity in traditional staking. Protocols or projects for liquidity staking services issue liquidity staking certificates (LST) to represent users' staked assets in the protocol. These certificates can be freely traded on the market and used to participate in other DeFi projects, thereby increasing the liquidity and efficiency of originally locked assets. Examples include Lido's stETH/wstETH, Frax's sfrxETH, and Rocket's rETH. For instance, the Lido protocol entrusts the ETH collected in the pool to node operators for custody and staking. Node operators calculate earnings and dividends according to specific rules, and the platform only needs to distribute earnings to token holders regularly. Users receive stETH at a 1:1 ratio by staking ETH, and the stETH token balance is updated daily, with high liquidity for trading and redemption.

2. LSDFi: LSDFi is an advanced play based on liquidity staking derivatives, combining LSD and DeFi elements to provide users with more flexible income and risk management strategies. Users can deposit liquidity staking tokens into specific DeFi protocols, such as Pendle, to obtain principal tokens (PT) and yield tokens (YT). This mechanism allows users to formulate personalized investment strategies based on their risk preferences and market expectations to maximize returns.

3. Restaking and LRT

The concept of liquidity restaking (Restaking) was first proposed by the founder of Eigenlayer. This mechanism not only increases stakers' returns and capital efficiency, further releases liquidity, but also enhances network security by enhancing the value of shared validation nodes to strengthen the security of each blockchain, achieving the so-called "security sharing." At the same time, liquidity restaking tokens (LRT) as a product of restaking provide additional leverage, releasing more liquidity and bringing higher returns to users.

Taking Eigenlayer as an example, there are four modes of restaking:

Native restaking: Directly staking ETH.

LST restaking: Restaking using liquidity staking tokens (such as stETH).

ETH LP restaking: Restaking using tokens from the ETH liquidity pool.

LSTLP restaking: Restaking using tokens from the liquidity staking token liquidity pool.

III. Overview of the current status of the Ethereum liquidity staking track

According to recent data from DeFiLlama and Dune Analytics, as of March 7, 2024, the total amount of staked ETH on the Ethereum beacon chain reached 31.65 million ETH, accounting for 26.37% of the total ETH supply. Compared to the staking rates of other PoS chains, Ethereum's staking rate is relatively low. One reason for this low staking rate is that Ethereum staking still has withdrawal restrictions, and the other reason is the imperfect staking process, with many potential stakers still in a wait-and-see state. With the improvement of the Ethereum ecosystem and technology, it is expected that the staking rate of Ethereum will significantly increase in the future.

The LSD market accounts for approximately 44% of the overall staking market, with a total of 13.87 million ETH staked in Ethereum, equivalent to a market size of approximately $490 billion, and the staking share of the liquidity staking protocol Lido accounts for 71%, followed by Rocket at approximately 8%.

Additionally, according to recent data from CoinGecko, as of March 7, 2024, the market value of the Ethereum liquidity staking LSD track has exceeded $6.1 billion, and the market value of the Ethereum liquidity restaking Restaking track has exceeded $35.21 million. Below are the top ten projects in the Ethereum liquidity staking track based on token market value.

IV. Potential Projects in the Ethereum Liquidity Staking Track

In the Ethereum liquidity staking track, there are several potential projects and investment opportunities worth paying attention to. These projects provide innovative solutions for staking, restaking, and secure sharing.

1. EigenLayer: As a leading project in the liquidity staking track, EigenLayer promotes the concept of Restaking through its restaking protocol, allowing users to restake already staked Ethereum or liquidity staking tokens (LST). Its support for multiple staking assets and restaking point mechanisms provides users with flexible and diverse participation methods. The project has attracted significant attention. According to the roadmap, EigenLayer will launch the Active Validation Service (AVS) mainnet in the first quarter of 2024. Currently, EigenLayer AVS is in the testing phase. In February, EigenLayer opened its fifth 4-day LST restaking window and removed all LST deposit limits. The team is introducing a new method for distributing restaking points, setting the restaking point allocation limit for any LST, LRT, or individual deposit at 33% of the total future issuance.

2. Ankr: Through its globally distributed node network supporting over 40 blockchains, Ankr provides one-click node deployment and management services, as well as real-time API access to major blockchains and DeFi protocols for developers. Recently, in collaboration with Restake Finance DAO, Ankr has provided an opportunity for liquidity stakers of ankrETH to restake, allowing users to earn higher returns without locking their assets. Additionally, Ankr's collaboration with Babylon to launch a BTC staking protocol aims to extend Bitcoin's security to all participating PoS chains, providing a new staking income channel for Bitcoin holders.

3. ether.fi: As a liquidity staking platform, ether.fi offers the liquidity restaking token eETH, allowing users to earn staking rewards by staking ETH and automatically restaking it in EigenLayer without manual intervention. Etherfi has a double points activity to help users receive more airdropped tokens. Ether.fi recently announced that approximately 40% of the tokens will be distributed to the community, primarily through community distribution, grants, and emissions.

4. AltLayer: An open and decentralized protocol designed for rollups, AltLayer provides enhanced security, decentralization, interoperability, and fast finality through restaking rollups using technology from various rollup stacks. Its core products include VITAL, MACH, and SQUAD, responsible for active validation services, providing faster rollup finality, and decentralized ordering. AltLayer has successfully attracted heavyweight investors such as Jump Crypto and Gavin Wood. AltLayer's announced airdrop standards and token economics show that 13.05% will be allocated to EigenLayer restaking users.

5. Pendle: By tokenizing future yields, Pendle has created a new market, integrating with top DeFi protocols such as Aave and Compound to provide users with a cross-protocol yield tokenization platform. It allows users to manage and customize their risk exposure by separating future yield and principal tokens.

V. Risk Analysis of the Ethereum Liquidity Staking Track

1. Smart Contract Vulnerabilities: Since most liquidity staking protocols rely on smart contracts, vulnerabilities in smart contracts may lead to fund losses. Even rigorously audited protocols cannot completely avoid this risk. For example, Ankr has been hacked, resulting in a loss of $7 million.

2. Node Operator Security Issues: While there may not be much difference in the technical aspects of node operators, the security and efficiency of their operations may still affect staking rewards and network stability. Malicious behavior by nodes may also lead to asset losses.

3. Asset Bubble: The rapid increase in the value of new packaged tokens or their value may lead to a disconnect between market valuation and their true value, increasing the risk of market bubbles.

4. Nesting Risk: Token mapping and equity locking create speculative leverage, leading to multiple derivative certificates of assets. Protocols are interdependent through liquidity, and any issues in one protocol may trigger a chain reaction.

5. Complexity of Restaking: While the introduction of the LRT system solves liquidity issues, it increases system complexity and operational risks, potentially introducing additional security risks.

VI. Prospects of the Ethereum Liquidity Staking Track

1. Room for Staking Rate Growth: Although the staking rate of Ethereum is relatively low at present, with technological advancements and increased user awareness, staking participation is expected to significantly increase.

2. Integration with DeFi Ecosystem: As an important part of the DeFi ecosystem, LSD's integration with other tracks such as lending, DEX, and others will drive the development of the entire DeFi ecosystem, providing investors with more income opportunities and innovative products.

3. Expansion of Collateral Asset Types: With the development of Restaking projects, more asset types such as BTC, USDT, etc., may be introduced, increasing network stability and security, and promoting efficient capital utilization.

4. Cross-Chain Integration: Restaking projects may integrate with other blockchain networks, further advancing the development of the DeFi ecosystem.

5. Rise of Modular Blockchains: With the development of modular blockchains, LSD projects have the opportunity to improve the operational efficiency and security consensus of Ethereum assets through innovative solutions and collaboration models, opening up broader market space.

In conclusion, with the upcoming Cancun upgrade, the expected approval of the Ethereum ETF, and the Bitcoin halving, the Ethereum liquidity staking track will see new growth momentum and investment opportunities. Especially, LSDFi and Restaking projects provide participants with more flexibility and potential returns, making their development prospects optimistic. Investors should carefully assess risks and closely monitor industry dynamics to seize future investment opportunities.

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