Ethereum's Shanghai upgrade in March could boost liquidity for $ETH and drive competition between staking protocols. But there are also concerns about centralization in the staking industry.
Protocols such as Lido, Rocketpool and StakeWise have begun offering “liquid staking” minted tokens to fill the gap. These tokens represent staked ETH but fluctuate in price, and can be used across the decentralized finance ecosystem. It remains to be seen how the upcoming Shanghai upgrade – which may precede a flood of ETH tokens into the market, by enabling new and existing stakers to withdraw – will affect these protocols that dominate liquid staking today.
Overall, this upcoming upgrade has the ability to increase the popularity of ETH staking. It will drive competition between staking protocols to users’ benefit, while also improving the security of Ethereum’s new PoS chain.It’s easy to think that launching Shanghai in the middle of a bear market could hurt the staking ecosystem. Stakers, skittish about the macro outlook of crypto in 2023, may choose to withdraw their ETH, keeping their assets liquid in case of more market turmoil.
In the long run, however, Shanghai is bullish for Ethereum. Specifically, Shanghai will increase incentives for ETH liquidity providers in three main ways.First, Shanghai will spur more innovation in direct staking and liquid staking solutions. The ability to stake, withdraw and restake ETH rewards with more frequency will engender more nuanced financial applications as people explore opportunities to maximize yield while minimizing risk.
Shanghai also will be a boon for individual liquidity providers on liquid staking platforms. The ability for people to redeem their wrapped staked ETH for underlying staked ETH will force liquid staking platforms to become even more user friendly. We will see more features and incentives emerge as these liquid staking protocols fight for liquidity providers in a world where staked ETH is suddenly liquid.Second, Shanghai will strengthen ETH’s position as the blueprint for staking protocols.
With this consideration in mind, what we hope to see is enough innovation in the staking industry that decentralization increases in the long run. More competition means more choice, which could drive protocols to differentiate themselves with better products and consumer offerings. Moreover, organizations such as the Ethereum Foundation should focus on the UX [user experience] of single stakers to incentivize a more resilient staking network.
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