Ethereum liquid staking braces for April 12 withdrawals

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With Ethereum’s Shanghai update scheduled for April 12, holders of liquid staking tokens are likely keen to find out how the event will affect their holdings. ETH liquid staking tokens belonging to just two services — Lido (stETH) and Coinbase (cbETH) — are worth over $10 billion. Other services include RocketPool, StakeHound, Frax, StakeWise, Bitcoin Suisse, and Liquid Collective.

Prior to Shanghai, any ETH deposits into these protocols were not able to be withdrawn from Ethereum’s (deposit-only) Proof-of-Stake (PoS) system. After Shanghai, albeit subject to lengthy withdrawal queues, users will be able to unstake their ETH and sell or migrate to a new liquid staking service.

Specifically, holders of a liquid staking token like stETH will be able to request a redemption for actual ETH from Lido, redeeming their stETH for official ETH. In the case of stETH, a token holder will soon be able to request a redemption from Lido DAO’s smart contracts, the issuer of stETH.

Ethereum limits full Shanghai withdrawals for 18 months

As a result, all liquid staking administrators will have to compete against other staking services just to retain their current depositors.

Prior to Shanghai, liquid staking services have only been competing for inflows. Next month, they’ll also compete to retain their investors.

Of course, each service issues a different token and advertises slightly different reward mechanisms to pass along the yield earned from Ethereum’s PoS validation. Below is a review of Ethereum’s major liquid staking services.

Coinbase holds 11% of staked ether

Coinbase has the advantage of being one of the world’s oldest and largest digital asset exchanges. It also operates one of Ethereum’s largest liquid staking services.

Coinbase customers send ETH directly to the Coinbase Earn product where Coinbase will stake it on the customer’s behalf. This simplicity has allowed it to accumulate an 11% share of staked ETH.

In August 2022, Coinbase launched its native ‘staked Ethereum’ token, cbETH. Unlike Lido DAO’s 1:1 peg of its liquid staking token (stETH) to ETH, Coinbase recalculates cbETH’s value on the original amount of staked ETH plus the rewards it’s earned over time.

This feature means cbETH holders may redeem one cbETH for more than one ETH after the Shanghai upgrade.

One risk factor is that Coinbase operates only one validator. Although its validator is enterprise-grade and properly maintained, if it goes offline, none of the stakers using Coinbase’s staking platform can earn rewards. In addition, Ethereum’s protocol would slash Coinbase’s stake as a penalty for downtime.

As a trade-off for convenience and simplicity, Coinbase offers lower rewards than most ETH staking pools. It currently offers customers a 3.89% APY on Ethereum staked into Coinbase Earn.

Lido validators are less likely to get bored

By far the largest liquid staking platform with 31% share of all staked ETH, Lido has more than 5.8 million ETH in its staking pool.

Unlike self-administered, so-called ‘solo staking,’ Lido offers compounded yields on staked holdings. This essentially allows Lido Staked Ethereum (stETH) token holders to earn interest on previously earned interest. It has a 10% fee on staking rewards that it splits between node operators and the treasury of Lido DAO.

Lido gives staking rewards daily by rebasing its liquid staking token, stETH. Rebasing is a technique whereby a protocol adds and/or subtracts tokens directly within wallets that have approved rebasing actions. Rebasing increases the quantity of stETH by a small percentage each day.

Because staked ETH is obviously yield-bearing, this feature ensures that holders can redeem stETH tokens for ETH at a 1:1 ratio when Shanghai goes live.

Lido claims to be highly selective in choosing its third-party validators. It says it chooses committed, professional validators less likely to get bored and turn off their machines after a few months. A deactivated validator is subject to slashing and cannot earn rewards while offline or out of consensus.

One downside is that Lido reserves the option of socializing the risk of slashing, reducing the earnings of all stakers on its platform to avoid a major hit on any single staker.

As a smart contract-based protocol, Lido is exposed to risks of hacks and exploits. Like all other smart contracts, the price of its liquid staking token could collapse if hackers are successful.

RocketPool says it will socialize slashing penalties

RocketPool has more than 430,000 ETH in its staking pool. Unlike Coinbase, it has 2,199 validators, making it one of the most distributed liquid staking services by number of validators. Like Coinbase, RocketPool calculates the value of its rETH token on the amount of initially staked ETH plus earned rewards over time.

RocketPool offers two options for staking.

Users can simply stake any amount of ETH and earn interest.
If they are willing to stake at least 16 ETH, users can also stake and run a node for a higher APR plus RPL rewards. RPL is the proprietary governance token of the RocketPool community. It advertises its ‘Stake + Run Node’ option as half as expensive as solo staking, which requires at least 32 ETH for activating an official set of validator keys.

RocketPool bases its APR on a seven-day moving average, which currently sits at 5.97% for simple staking — far higher than Coinbase’s 3.89% — and as high as 7.12% for its “Stake + Run Node” option.

RocketPool says it will socialize slashing penalties and other losses from a bad or deactivated node, which reduces the loss to any individual staker.

StakeWise does things a little differently

StakeWise operates a little differently by offering two liquid staking tokens.

When a user contributes ETH to StakeWise, StakeWise gives them deposit tokens plus reward tokens used to pay the ‘interest’ for staking ETH. Instead of simply rebasing the original token like Lido does to its stETH, StakeWise has sETH2 grant daily rewards in a token called rETH2. Holders can redeem rETH2 for ETH at a 1:1 ratio.

StakeWise offers real-time node monitoring as well as an API for third-party app development.

Frax does things VERY differently

Frax takes a very different approach with its token rewards. When users send ETH to its ‘frxETHMinter’ tool, they receive an equivalent amount of frxETH token. However, frxETH isn’t eligible for ETH staking rewards on its own.

Users have to go through one additional step to earn rewards. They need to exchange their frxETH tokens for ‘staked frxETH,’ or sfrxETH. Then they can earn interest on their deposited frxETH. Their sfrxETH will be worth the original frxETH, plus any frxETH rewards they received.

As one might expect, sfrxETH trades slightly higher than frxETH.

Conclusion

In summary, Coinbase, Lido, Stakewise, and Frax are four of the biggest ETH liquid staking pools. They may experience large redemption requests or a run on their liquidity pools on secondary exchanges after Ethereum’s upcoming Shanghai update enables withdrawals of staked ETH. Shanghai could activate by April 12.

On the other hand, the Shanghai upgrade might strengthen these liquid staking services by enabling true redemption of pooled, staked ETH via Ethereum’s official protocol.

Over the next four weeks, liquid staking will undoubtedly continue to provide a popular way to stake ETH while retaining a liquid staking token that usually trades close to par with ETH.

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