Now that the merge has finally come, it seems everyone is looking to get into ETH staking. Coinbase recently announced the launch of their liquid staking derivative. The move would allow users to deposit their ETH in exchange for cbETH, their version of stETH, an erc20 token representing their staked ether and its accrued interest, which can be sold, transferred, or sent off the centralized platform like any other token.
While Coinbase has long offered users the ability to stake their ETH, the deposited ETH has been unusable as it accrues staking yield. The decision to provide liquid staking signals Coinbase’s belief in the benefits of transitioning to Proof-of-Stake. It will likely attract a new market segment of investors as the previous staking option provided by Coinbase didn’t allow depositors to redeem their staked ETH until after the hard fork following the merge, which until recently was an indeterminate and ambiguous amount of time.
Liquid staking is a great way for DeFi users to maximize their yields by benefiting from the return on staked ETH while maintaining their liquidity. Protocols and users alike are looking for ways to make the most of the transition to Proof of Stake by investigating liquid staking opportunities. Coinbase is just part of a larger market interest in liquid staking. Frax, one of the largest stablecoin providers with a market cap of roughly $1.5 billion, is currently looking to join the gold rush with their liquid staking derivative, frxETH. Frax is currently running two validator nodes on the beacon chain, with another three uninitialized. The protocol is hoping to use their algorithmic pegging mechanics, which have proven uncanny, Frax is the only major stablecoin provider to have never been depegged by more than a cent, to provide a 1:1 derivative of staked ETH. This sort of innovation is crucial considering Lido’s stETH depegged from ETH in June following market volatility.
Liquid Staking Dominance
Currently, Lido dominates the liquid staking market, accounting for roughly 90% of the market share of liquid staking derivatives while controlling over 30% of staked Ether.
Lido is a distinguished protocol whose values seem very well aligned with the ethos of web3; they work alongside various teams within the ecosystem and even use a DAO to ensure the protocol’s future is in line with the community’s interests. That being said, such market dominance and consolidated power are pretty antithetical to the ethos of web3, which the protocol otherwise seems to support.
Experts fear Lido’s market dominance could give the protocol undue governance power over the beacon chain if they maintain control of over 30% of staked ETH. The introduction of more competition, especially by battle-tested organizations such as Coinbase and Frax, is healthy for the ecosystem and helps ensure Ethereum remains decentralized.
The Effect on Sturdy
Sturdy users are uniquely positioned to benefit from the increased interest in and competition between liquid staking derivatives. As more ETH liquid staking derivatives come to market, they’ll have to compete to convince users to use their respective product. If history is any indicator, liquid staking providers will likely use liquidity incentives on automated market makers such as Curve and Balancer to attract prospective liquid stakers. While it isn’t possible to outdo the competition by boosting the yield provided by staking, liquid staking providers can attract users to use their particular derivative via liquidity incentives to gain a larger market share.
The increase in liquid staking derivatives will allow Sturdy to expand the number of assets accepted as collateral (e.g., the new derivatives and LP tokens) while benefiting from the increased yield offered on the liquidity pools. Sturdy users will be able to reap the rewards of increased competition in the liquid staking derivative sector of the market without even touching volatile assets such as ETH, thanks to Sturdy’s unique incorporation of staking into stablecoin lending. Sturdy stakes deposited collateral to generate yield to incentivize stablecoin lending. Since the protocol offers real yield to lenders and doesn’t rely on the interest from borrowers, we’re able to offer borrowers interest-free loans on top of some of the highest yields on stablecoin lending. With the transition to proof-of-stake, Sturdy is positioned to reach true product-market-fit shortly as more eyes turn to the power of staking yield and how to best take advantage of the new consensus model.
In sum, the market push towards liquid staking derivatives is set to disproportionately benefit sturdy users, by allowing stablecoin lenders to derive increased yield from market competition without requiring them to take on exposure to ETH’s price action. As others attempt to rotate between the new derivatives to maximize their profit, Sturdy users will be able to sit back and soak in the benefit of increased competition without altering their investment strategy.
For users looking to take on more risk and potentially increase their gains, Sturdy is also looking to enable borrowing and lending of ETH to enable leveraged looping strategies beyond stablecoins. Whether you want to keep on the same course or take on more risk to take advantage of the merge, Sturdy has you covered.
About Sturdy
Sturdy is a first-of-its-kind DeFi protocol for interest-free borrowing and high-yield lending. Rather than charging borrowers interest, Sturdy stakes their collateral and passes the yield to lenders. This model changes the relationship between borrowers and lenders to make Sturdy the first positive-sum lending protocol. Sturdy is live on Ethereum Mainnet and Fantom Opera.
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