Research Summary
The report discusses the impact of liquid staking, particularly stETH, on Ethereum’s supply dynamics and demand. It highlights the rise of liquid staking and its reshaping of Ethereum’s supply composition, with Lido being a significant player. The report also explores the increasing adoption of stETH over ETH on lending platforms, the changes in ETH emission dynamics, and the potential risks associated with stETH’s growing popularity.
Key Takeaways
Liquid Staking and Its Impact on Ethereum
- Liquid staking reshapes Ethereum’s supply dynamics: The introduction of liquid staking has significantly altered the composition of Ethereum’s circulating supply. Currently, 23% of the ETH supply is staked, with 32% of that being staked via Lido, the largest liquid staking service provider.
- stETH replacing ETH: stETH, Lido’s staking derivative, is replacing ETH in the Ethereum economy. This shift is driven by the appeal of leveraged stETH positions, which offer more attractive yields compared to providing liquidity through stETH-ETH pairs on decentralized exchanges.
- Increased staking through liquid staking providers: The ability to reuse staked ETH in DeFi protocols while still receiving staking rewards has led to an increase in staking through liquid staking providers, with Lido dominating the field with an 86% market share.
stETH’s Impact on ETH Supply and Demand
- Changes in ETH emission dynamics: Lido’s reward structure and restaking strategy have altered the dynamics of newly created ETH entering the economy. Lido receives 32% of the validator’s rewards, and consequently, 32% of the newly created ETH is distributed into the ETH economy via Lido.
- Increasing demand for stETH: The demand for stETH has increased significantly, with the number of new addresses using stETH + wstETH increasing by 142% since the Terra Luna Collapse in May 2022. This contrasts with the stagnation in demand for ETH + WETH.
- stETH’s impact on DeFi: stETH has found significant adoption within Aave’s lending protocol, with approximately 14.4% of the stETH and 25.3% of the wstETH supply being utilized in Aave. However, only a small percentage of Lido’s staking derivative is being used on decentralized exchanges (DEX).
Actionable Insights
- Monitor the shift from ETH to stETH: The increasing preference for stETH over ETH, especially on lending platforms, indicates a significant shift in Ethereum’s supply dynamics and demand. Stakeholders should closely monitor this trend and its potential implications.
- Assess the risks associated with stETH’s popularity: The growing popularity of stETH carries potential risks, including the possibility of stETH losing its peg to the underlying asset and the creation of bad debt on Aave. These risks need to be thoroughly assessed and mitigated.
- Understand the impact of liquid staking on Ethereum: Liquid staking, particularly through Lido, has significantly impacted Ethereum’s supply composition and ETH emission dynamics. Understanding these changes is crucial for making informed decisions in the Ethereum ecosystem.
