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HashKey Capital Research Director Jupiter Zheng Discusses Liquid Staking Narratives

Last Updated April 20, 2024 11:12 AM
Valdrin Tahiri
Last Updated April 20, 2024 11:12 AM

Key Takeaways

  • In March, HashKey Capital published a report on the Liquid Staking ecosystem.
  • A basket of liquid staking tokens has heavily underperformed in 2024.
  • Can Liquid Staking become one of the dominant narratives the rest of the year?
  • HashKey’s Jupiter Zheng explains all.

HashKey Capital is an investment firm for digital assets and blockchain technologies, known for being the first institutional investor in Ethereum. It manages over $1 billion in client assets.

On March 26, it published a report  on the Liquid Staking Tokenized Finance (LSTfi) space, which it believes will become one of the top narratives of 2024.

In an exclusive interview with CCN, Jupiter Zheng, the Research Director of HashKey Capital  outlined the main risks and rewards of liquid staking, some of the most interesting projects right now, and ecosystem’s potential for growth in the future.

What is Liquid Staking?

Liquid staking gives users the ability to use their staked assets while still receiving staking rewards. For example, a user that stakes in Lido DAO receives stETH, which they can use in various DeFi applications while still receiving the rewards for their staked ETH. A similar liquid staking protocol on Solana is the Jito Protocol (JTO).

In Ethereum, liquid staking became popular after the Shanghai upgrade, which allowed users to finally unstake ETH from the Beacon chain.

According to Zheng, the main benefit offered by LSTs is the ability to provide liquidity while maintaining the security of the original staking protocols. By issuing derivative tokens, LSTs offer investors dual layers of yield and security. However, this added complexity also invites more risk parameters into the process, potentially leading to higher price volatility.

The added risk parameters are especially worrisome in Liquid Restaking Protocols (LRT). While Liquid Staking protocols increase the security of the main blockchain, LRTs do the same for external systems, such as rollups, bridges or oracles.

One such protocol that has been in the spotlight is EigenLayer, a Liquid Restaking protocol for Ethereum. It already has a Total Value Locked (TVL)  of $12.60 billion, a 12-fold increase from the $1 billion on January 1.

With EigenLayer, users can benefit from the double yield, the first from securing Ethereum and the second from securing the additional protocol. However, its main proposition is to secure decentralized applications (dApps) across the Ethereum blockchain. Zheng iterated this by stating:

“The purpose of Eigenlayer is to enhance the security of dApps, rather than providing additional rewards for users staking their assets.”

EigenLayer and EigenDA  launched on the mainnet on April 9.

Interesting Protocols and Narratives

When considering the potential of LSTs, it’s essential to understand their interoperability with other platforms and protocols. For example, there’s a growing interest in using LSTs such as stETH from Lido (LDO) to stake in other protocols like RPL.

However, limitations exist, as not all protocols accept LSTs. For example. even other LSTs accept stETH, but they do not accept lesser-known derivatives such as Rocket Pool’s rETH or Marinades MSOL. This imposes constraints on the accessible number of layers of yield.

Another protocol that has received fanfare and gives significant yield is Pendle. Zheng explained how Pendle achieves the higher APY:

“Pendle offers more than 10 kinds of staking derivatives on its platform, each with different yields based on the collateral used. By splitting the tokens, Pendle introduces more volatility, which can result in higher yields. However, investors should be aware of the associated risks with staking derivatives.”

When assessing the growth potential of LSTs, comparisons between Ethereum and other protocols like Solana are inevitable. While Ethereum prioritizes security despite high gas fees, Solana attracts users with its innovative solutions and potentially higher yields. The expansion of LSTs beyond Ethereum to protocols like Cosmos highlights the evolving landscape of liquid staking.

Looking ahead, the staking ratio of Ethereum is likely to rise in the coming years. The belief is driven by factors such as the increasing accessibility of staking and the potential for a larger pool of stakers. The staking ratio of Ethereum is relatively low compared to other chains like Cosmos, Zheng noted.

Currently, only 31.4 million, or 24% of ETH’s total supply is staked . In the final question of what the most compelling developments in the LST space are, Zheng stated:

“The mainnet launch of Eigenlayer and the growing interest in data availability layers are significant developments. In the first half of the year, focus will be on Eigenlayer instead of Layer-2 solutions. This signals a dynamic and evolving ecosystem with a shifting focus towards restaking layers.”

Data availability layers are designed to ensure that data is reliable and available for users and dApps alike. The most well-known project in the sphere is Celestia, which enjoyed a meteoric end to 2023.

Ethereum Community Concerned

Despite their advantages, not everyone is happy with the rise of LSTs. Researchers within the Ethereum Foundation raised concerns about ETH’s eroding function as a currency. In turn, they put forth a proposal about reducing the issuance rate to make staking less attractive.

The amount of ETH staked increased significantly after the launch of Lido Dao in 2021. It then spiked again in June 2023 after restaking deposits opened on Eigenlayer. By reducing the staking pool’s growth, the aim is to reduce LSTs and LRTs dominance.

Ethereum Ratio
ETH Staked Balance: | Credit: Glassnode

Ethereum’s PoS protocol is designed so that the marginal revenue for a staker declines as more ETH is staked. This has been the case so far, with the annual ROI  standing at 3.2% and consistently down trending since the start of 2022.

However, this has changed with the rise of Liquid Staking, which provides more opportunities and higher yield. This is visible by the fact that the staking pool composition is made up of 49% staked ETH and 51% LSTs and LRTs.

Staking vs Liquid Staking
Staking & Liquid Staking Data | Credit: Glassnode

The concern now is that as more ETH gets staked, inflation impacts fewer non-stakers, leading to a wealth shift towards staked ETH holders.

This trend may make holding ETH less attractive over time, potentially shifting the role of ‘money’ towards Liquid Staking Tokens like stETH, which could give projects issuing these tokens significant influence over Ethereum’s governance and stability.

How Have Liquid Staking Tokens Performed?

LDO, RPL, FXS , MNT, MNDE and JTO create a basket of liquid staking protocols. Excluding Binance, these are the sixth largest protocols with the highest TVL in the liquid staking category .

LDO leads the way at $30.73 billion, more than seven times as much as the second highest, RPL. This fact is the underlying reason for the widespread acceptance of stETH over rETH.

BNB is excluded even though it has its own liquid staking token called Wrapped Beacon ETH (WBETH). This is because Liquid Staking is not its main value proposition.

Liquid Staking Basket Performance
Custom Daily Trading Chart | Credit: TradingView

The basket of Liquid Staking tokens has not performed will in 2024. To the contrary, it has fallen by 30%. This is in stark contrast to the memecoins and gaming categories, which have led the current bull run.

So, the price movement has not reflected the narrative’s potential.

Individual Liquid Staking Performance
Custom Daily Chart | Credit: TradingView

However, not all the cryptocurrencies in the basket have underperformed. To the contrary, MNT has increased by 70% while JTO increased 46% in 2024.

On the side of the worst performers, MNDE and FXS have fallen nearly 50%, while LDO and RPL suffered decreases between 25% and 35%.

Innovative Technologies are Inherently Risky

In conclusion, LSTs present a promising yet complex landscape for investors. Despite their potential, a basket of liquid staking tokens has severely underperformed in 2024.

As the ecosystem continues to evolve, more opportunities and innovative technologies can present itself. Simultaneously, flawed protocols might fail and disappear, causing significant losses for investors.

Liquid Staking and especially Liquid Restaking protocols come with consequential risks. Even so, the technology could well make staking more attractive by allowing users to retain control of their funds.

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