New Battle On The Horizon And Ethereum May Be To Blame

  • The upcoming Ethereum Shanghai fork, set for April 12th, will unlock more than 18 million staked Ether, leading to an upcoming battle between liquid staking protocols.
  • This competition between protocols offering yield-bearing liquid staking tokens will be known as the “Liquid Staking Wars,” with the winner being the protocol that captures the most Total Value Locked (TVL) and volume.
  • The Liquid Staking Wars will encourage innovation and yield maximization, benefitting the DeFi ecosystem by injecting more liquidity and promoting co-incentive liquidity pool structures pairing utility and yield tokens.

The DeFi industry is on the brink of a new battle known as the “Liquid Staking Wars”. This battle will be fought over the future of liquid staking tokens and is set to begin after the Ethereum Shanghai fork on April 12, when over 18 million in staked ether (~$34.2 billion) will become unlocked. The Liquid Staking Wars will be won by the protocol that can capture the most total value locked (TVL) and volume for their liquid staking token (LST).

Similar to the Curve Wars, the Liquid Staking Wars will involve intense competition among protocols offering liquid staking tokens. These tokens offer yield-bearing options that allow holders to stay liquid while enjoying the yield from staked ETH. The similarities between these two battles include a DEX Automated Market Maker (AMM) specifically designed for trading, incentive contracts to incentivize liquidity providers to move from LPing one stablecoin to another, and a cascade of emerging protocols vying for market share.

The upcoming Liquid Staking Wars have an additional ingredient, the imminent Shanghai upgrade that will enable LPs to easily and cheaply unstake ETH from one LST and move it to another. After all staked Ethereum becomes unlocked in mid-April, unstaked ETH holders will be incentivized to move their ETH from one liquidity staking token solution to another, always seeking the highest potential returns in liquidity pools.

The tactics used in the Liquid Staking Wars will mirror those of the Curve Wars. The most obvious mechanism will be yield, with LST protocols seeking to maximize incentives for LPs to fund liquidity pools using their LST over any other LST. The competition should benefit other participants across the DeFi ecosystem, with LSTs having a place not just paired with each other or with ETH in pools, but also with other utility tokens.

To win the Liquid Staking Wars, protocols will need a set of tools to incentivize the liquidity of their liquid staking tokens using minimal incentives and maximum efficiency. Protocols that can boost LP incentives through surgical incentivization and provide greater capital efficiency will ease the capital requirement burden from LSTs, enable the LSTs to maximize their return on incentives, and capture a greater market share.

It is essential for stakers and LPs to understand the financials before they stake or provide liquidity on a particular platform. Due to the unique return structure of LSTs, some existing AMMs are not capital efficient for LST liquidity. Infinite-range AMMs like Sushi, Balancer, and Uniswap v2 are known to have low efficiency for almost any pair. Range AMMs like Uniswap v3 and related forks can have a low efficiency for an ETH-LST pair, because the price in the AMM will continuously exceed the LP’s range unless the LP actively manages their position or stakes a very wide price range.

Overall, the Liquid Staking Wars will result in more liquidity being injected into the ecosystem. Greater capital efficiency in liquidity pools will usher in an era of more active capital, and these volumes will be more consistently utilized to the benefit of the entire industry.

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