Narrative 2024: LSD & Restaking
Liquid staking has been widely implemented across the L1 ecosystem to make staking more accessible. Protocols like Lido help liquidate staked assets, while continuing to generate rewards and economically secure the network.
As the largest L1 blockchain, Ethereum features many highly competitive protocols in pursuit of market dominance. In contrast, other L1 ecosystems face less competition, with only a few protocols competing.
Protocols like Lido, Ankr, and Stader, despite their expansion to many other L1 blockchains, don't get a significant market share over their respective native protocols.
For example, Lido's success in the Ethereum ecosystem was not repeated in the Solana ecosystem, and they eventually gave up.
In this episode, I'll focus on the Ethereum Liquid Staking landscape, which has seen the most substantial adoption and development. For Solana in January we will make another update. And besides LSD Ethereum, we'll also touch on the most important update of the staking landscape, which is "Restaking" in this episode.
Liquid Staking on Ethereum
Ethereum staking experienced significant growth in 2023, primarily driven by the Shapella upgrade, which unlocked ETH WD from Beacon Chain.
The amount of ETH staking increased substantially, from around 16JT ETH at the beginning of the year, to 28.8JT ETH in December 2023. This means an increase of 80% within a year.
Source: Dune (@hildobby)
From the total supply of 120.2JT ETH, it means that the staking rate is at 24%. The amount of ETH staking is slowly reaching the estimated target of 33.5JT ETH, or about 27% of the total ETH supply. This is a number that is considered optimal for strong network security.
LSD adoption has also been widespread, with ~44% of all ETH staked in the LSD protocol. Growth is fueled by ETH holders hungry yields and the utility of LSD tokens is also increasing in DeFi.
LSD ETH tokens are deeply integrated in money markets and DEXes. We also touched on L2s in Friday's episode such as Blast, Mantle, and Manta that utilize LSD to offer "native-yield" opportunities to users.
Source: Dune (@hildobby)
Staking growth on Ethereum has shown signs of slowing down, with monthly ETH staking amounts trending downward since May 2023. The highest spike around May 2023, coincided with Ethereum's Shapella upgrade.
The spike was due to this upgrade in favor of ETH withdrawal reducing the risk of ETH holders who were staking before.
Currently, the amount of ETH in the LSD protocol stands at over 12.5JT, double from 6.25JT at the beginning of 2023.
Sumber: Dune (@hildobby)
Lido stands as the dominant leader in this market, with 9.14JT ETH staking. It is followed by Coinbase's cbETH, with 4.16JT ETH, and RocketPool with 830RB ETH staking.
Lido maintained market dominance and showed significant growth among these platforms. Lido increased 4.57JT ETH, which is a 99% increase since the beginning of this year. In comparison, Coinbase and Rocketpool increased 34.4% and 88%.
Lido remains strong even during this expanding competitive LSD landscape. This means there is a strong network effect from the stETH integration. The utility of stETH increases compared to other LSD tokens, giving it a huge competitive advantage.
As most LSDs offer similar yields, stETH stands out due to its higher secondary market liquidity and wider utility in DeFi. This is an important advantage, as the underlying asset is the same... ETH. 
In addition to major players like Lido, Coinbase, and Rocketpool, there are developments from smaller LSDs in the Ethereum ecosystem:
- Frax is showing steady growth, rising from 38RB to 233RB ETH staking by 2023. Frax's strengths are in its innovative sfrxETH design, and its integration within its own ecosystem (especially Fraxlend).
- Binance is experiencing a significant inflow of ETH into bETH, probably from new stakers opting to go straight to their centralized exchange.
- Mantle is utilizing ETH held by its protocol to bootstrap its mETH offering. mETH is intended to generate yield for Mantle, and facilitate liquidity on the DEX.
- New protocols in the Liquid Staking realm have been overwhelmed by the significant market capture, unable to break the 100RB ETH barrier. The most prominent names are Swell and EtherFi, both of which introduce various incentives for stakers.
- Swell, Ether.fi, and Renzo are new projects that implement Liquid Staking on the EigenLayer. So their ETH yields many forms of yield, including points for each of those LSD protocols and EigenLayer points.
The Liquid Staking market on Ethereum is highly competitive and saturated, making it difficult for new LSD challenges that have nothing to do with CEX, to gain a substantial market. Especially if it does not have a strong network effect and its adoption in the DeFi ecosystem is limited.
LSDFi
During the time that Liquid Staking brought a new wave of innovation to DeFi products, LSDFi started to form a new narrative. But, many of these projects lost adoption during the time their high yield incentives were depressed.
There are only a few select names like Prisma and Lybra that seem to have an okay foundation in the DeFi lego around Liquid Staking (LSDFi).
The total value of LSD across various DEX, CDP, and lending protocols has reached $7M. This growth comes along with the expansion of LSD, fueled by DeFi applications increasing in availability. 
The prominent leaders in each of the LSDFi sectors are:
- Curve dominating DEX
- MakerDAO at the forefront of CDP
- Aave leads the lending category
Source: DeFiLlama
As Lido's stETH holds the majority of the market among Ethereum LSDs, it makes up most of the TVL in LSDFi activity. On the other hand, Frax's frxETH has a higher TVL in DeFi than rETH, despite its smaller supply.
This is due to 2 main factors: Frax's leverage in Convex allows incentives to be directed towards frxETH, adding to its liquidity depth and integration within Fraxlend.
This aspect provides a unique benefit to frxETH compared to other LSDs.
Pendle v2 becomes the first protocol to generate trading volume with sustainable yields.
Pendle's rise is primarily a result of the abundant liquidity of LSD tokens and the narrative around "real yield". The connection was organic volume for trading. LSD dominates Pendle's current TVL, at over 60%.
Pendle will continue to be an important part of the crypto DeFi landscape and onchain activity.
Bottom line, it's hard to expect drastic changes to Ethereum's core LSD landscape. Lido will most likely continue to enjoy market dominance, while other protocols compete for the rest.
Now, on to 1 major development that will certainly change the Ethereum staking landscape over 2024 and beyond... that is Restaking!
Restaking and EigenLayer
EigenLayer is a protocol that extends the usefulness of ETH staking by using it for the security of other infrastructure. So it's not just Ethereum, it can secure bridges, appchains, rollup sequencers, and DA networks.
In essence, EigenLayer is an external protocol that "restakes" ETH and leverages Ethereum's huge economic value for third-party networks. They call it Active Validated Service (AVS).
EigenLayer offers two main restaking options--LSD and Native. The current EigenLayer restaking landscape can be categorized into 4 different types:
- LSD restaking (EigenLayer): Depositing assets like stETH or swETH into EigenLayer contracts, so they can be used for restaking.
- Restaking Liquid LSD: Deposits that are "locked" in EigenLayer contracts, assisted by protocols such as KelpDAO to become liquid, allowing depositors to enjoy more flexible liquidity to enter and exit positions. But currently limited by EigenLayer's LSD deposit limit.
- Native Restaking (EigenLayer): For restaking ETH that is directly staked on the Beacon Chain. Validators simply change their withdrawal credentials to EigenLayer. This is done through the EigenPod contract, which governs the validator's balance and withdrawal status.
- Restaking Native Liquid: This service includes direct, but liquid ETH staking and restaking. This model is beneficial for protocols, as EigenLayer does not limit the amount of direct native restaking. Protocols that adopt this method can also generate fees from the ETH staked, so the potential is more favorable.
EigenLayer is rapidly attracting adoption, as evidenced by the fast-filling deposit cap. At the time of recording this video, there was $880JT of LSD restaking on EigenLayer.
So far, restaking ETH on EigenLayer has not added risk by securing other applications. In fact, it has only been a lucrative opportunity to accumulate EigenLayer points in airdrop speculation.
As long as Liquid Restaking places its position and role in the market, the DeFi protocol will receive its benefits. Since ETH Liquid Restaking offers higher yield rewards than regular ETH staking, their position in the DeFi protocol could incur higher borrowing fees.
Mayan added revenue for DeFi protocols such as Prisma, Lybra, Aave, MakerDAO, etc.
As we saw with stETH, if users loop by lending stETH and taking ETH loans for staking, the same can be done for ETH liquid restakes.
MakerDAO has consistently increased the interest rate on ETH loans during 2023, as the LSD yield subsidizes the cost of borrowing.
However, because each layer of restaking offers a different risk profile, there are complex challenges for the DeFi protocol. Perhaps they will not want to integrate ALL types of ETH liquid restaking, let alone those exposed to compound risk.
For example: Bridge is notoriously prone to being exploited and suffering huge financial losses. The DeFi protocol may be reluctant to adopt ETH liquid restaking with exposure to bridges.
The DeFi protocol will probably favor restaking liquid ETH that has separate exposure to networks that they view as low risk. The goal is to minimize major slashing events. Be extra vigilant before ETH liquid restaking integration.
The downside of differentiating risk profiles is that not all ETH restaking assets are seen as equal. This leads to liquidity and implementation splits across different DeFi protocols. That scenario makes the landscape even more complex. It becomes complicated to figure out the value and utility of the various assets, in relation to their respective risks.
More Yield, More Problems!
Restaking carries greater risks, which can have a significant impact on the entire industry. The main concern is the temptation of higher yields, which brings ETH to riskier networks for more money.
Large slashing events can lead to unstaking volumes. A surge in demand leads to longer unstaking times. If restaking liquid ETH is the largest source of collateral in DeFi, events like this are almost certain to cause bloodshed.
As long as the WD staking queue gets longer, people will rush to find a way out through the secondary market, which could lead to a "depeg" event. Users who are leveraged using restaking liquid ETH will likely be liquidated, and secondary market liquidity will dry up. This all ends up as "bad debt" for the money market.
The possibility of this ecosystem-wide outbreak scenario could hinder the adoption of ETH liquid restaking in DeFi. This risk is most evident in the "pooled risk" design. Therefore, adoption may be skewed towards isolated pools, so that the risk is spread out.
