2023-01-20 23:55:38
How Shanghai's Ethereum network update will affect liquid-stacking platforms?
The second-capitalised cryptocurrency's network is expecting a major upgrade this March, with #ETH added to the stack on Beacon Chain in late 2020 finally available for withdrawal (source). However, this will not happen at the same time due to network security concerns.
In order to become a validator of the Beacon Chain network, each member had to deposit 32 #ETH to get started, deposits started being accepted in December 2020, and they were blocked indefinitely. Now, thanks to the forthcoming Shanghai update and the "EIP-4895: Beacon Chain Push Withdrawals as Operations" initiative, node owners will have the opportunity to withdraw their assets. The order of #ETH withdrawal will be determined by several different factors, including the full number of validators and churn restrictions designed to ensure network stability and security.
Once a validator has passed through the exit queue, it will enter the withdrawal period. This period is currently estimated to be 27 hours. However, it could take up to 3 months if a third of the validators want to exit the stack completely. Thus, with an estimated number of validators of half a million users it could take months to withdraw blocked Ethereum.
However, even before #ETH developers announced plans to upgrade Shanghai's network, there were providers that allowed users to send Ethereum stacking through their platform, receiving synthetic assets in return in proportion to the funds they contributed. These are liquid-stacking services, with Lido Finance (#LDO), Rocket Pool (#RPL) and Frax Finance (#FRAX) being the best known among them.
For example, a user decides to use the services of Lido Finance, by locking their #ETH on the platform, they get a tokenized version of their asset in the form of #stETH token in a 1:1 ratio. The latter can be used in parallel to generate additional income in DeFi-protocols, without losing earnings from the stacking of their funds. At the same time, liquid-stacking services could be used to pass the entry barrier of 32 #ETH to launch their own node in the Beacon Chain, which also contributed to the demand for these platforms.
Incidentally, the management tokens of DeFi-protocols that provide a liquid-stacking service have grown by tens of per cent since the beginning of the year. Thus, according to TradingView, #LDO increased in value by 96%, Rocket Pool (#RPL) coin increased in value by 60% and #FRAX asset increased in value by 105%. According to DefiLlama, the average increase in the total amount of blocked funds in liquid stacking protocols over the last month was around 30% (source). This means that capital is being actively channelled to these platforms.
The question arises, what impact will the Shanghai update have on liquid-stacking protocols in relation to the possibility of #ETH withdrawing from the Ethereum 2.0 smart contract? Firstly, it should be understood that validators have accumulated Ethereum that is not involved in any way in staking, i.e. the staking interest accrues on the blocked 32 #ETH, and all the ether received as rewards is not used effectively.
Therefore, it is very likely that the surplus #ETH to be withdrawn from the Beacon Chain will go to liquid staking services. Secondly, the entry threshold of 32 #ETH, which is about $48,600 at the time of writing, is still a barrier for many users, yet they can take advantage of the alternative provided by DeFi-protocols.
Thirdly, the strength of the platforms in question remains the issuance of a synthetic asset to the user for the cryptocurrency directed to the stack, which in turn creates an opportunity for additional income. Thus, for the combination of the reasons mentioned, the upcoming Ethereum network upgrade will lead to an increase in demand for liquid-stacking platforms, which will positively impact the price dynamics of their management tokens.
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