With the Cancun upgrade approaching, the Ethereum Liquid Staking (LSD) track and the derived Restaking track are gaining increasing popularity. Currently, the leading ETH staking project, Lido, and the leading restaking project, EigenLayer, have respectively become the largest and second-largest DeFi protocols.

1. Concepts Related to Ethereum Liquid Staking

With the upgrade from Ethereum 1.0 to Ethereum 2.0, the consensus mechanism has shifted from PoW to PoS, no longer relying on miners' computing power to maintain the network. This effectively addresses the high energy consumption, potential security challenges, and network congestion issues of the PoW mechanism, providing sustainability and security to support large-scale dApps. However, Ethereum node validators need to stake at least 32 ETH, presenting a high capital threshold and requiring technical and hardware requirements, which is unfriendly to ordinary users.

Ethereum staking involves locking ETH in the Ethereum network to support its security and operation, with stakers receiving rewards. The official definition is to deposit 32 ETH to activate validator software, with validators responsible for storing data, processing transactions, and adding new blocks to the blockchain, thereby ensuring Ethereum's security while earning new ETH in the process.

LSD stands for Liquid Staking Derivatives, which allows more retail users to participate in staking without barriers and earn rewards without maintaining staking infrastructure. With more tokens participating in staking, the Ethereum network becomes more secure. Staking reduces ETH's market liquidity, helping to reduce supply and elevate its price. Liquid Staking Tokens (LST) designed to unlock the liquidity of staked ETH quickly gained a large user base and assets, marking the beginning of LSDfi.

Restaking is a mechanism where already staked assets on the Ethereum network are staked again on other consensus protocols, supporting these networks and earning corresponding returns while still enjoying Ethereum network's economic security. This promotes interconnectivity between different consensus networks and the overall blockchain ecosystem's prosperity.

2. Types and Principles of Ethereum Staking

Currently, there are four main ways to participate in Ethereum staking:

1. Solo Staking: Users run a full node themselves to participate in Ethereum network validation. Users have complete control over their nodes and staked ETH, enjoying all staking rewards. This method requires technical knowledge and maintenance of the node, and at least 32 ETH for staking.

2. Staking as a Service (StaaS): Platforms provide staking services where users supply ETH, and the platform handles technical operations and maintenance. Users need not worry about technical issues and node maintenance, making it suitable for users without a technical background, though a service fee is required.

3. Centralized Staking Services: Centralized platforms like exchanges offer staking services where users stake ETH on the platform. It's simple to operate, suitable for ordinary users without handling technical issues, though platform risk and potentially higher service fees exist.

4. Staking Pools: Multiple users pool their ETH together in a shared pool to act as validators. This lowers the staking threshold, allowing users to participate with as little as 0.01 ETH. However, rewards are shared among participants, and some control is transferred to the pool operator. The platform issues tokens representing the staked ETH, usually called Liquid Staking Tokens (LST).

The Ethereum liquid staking track mainly refers to the fourth method, which opens new token income channels for ordinary users, unlocks the liquidity of staked assets, and derives various LSDfi and Restaking protocols, promoting the rapid growth and wide participation in the DeFi ecosystem. The Ethereum liquid staking track is mainly divided into three categories:

1. LSD and LST: Liquid Staking Tokens (LST) and Liquid Staking Derivatives (LSD) are the foundation of the liquid staking market, designed to address the liquidity shortage of traditional staking. Protocols or projects providing liquid staking services issue Liquid Staking Certificates (LST) representing users' staked assets in the protocol. These certificates can be freely traded in the market or used to participate in other DeFi projects, thus improving the liquidity and efficiency of the originally locked assets. For example, Lido's stETH/wstETH, Frax's sfrxETH, Rocket's rETH, etc. Lido protocol collects ETH in the pool and stakes them collectively through node operators, calculating income and dividends according to predetermined rules. The platform regularly distributes income to token holders. Users stake ETH to obtain stETH at a 1:1 ratio, with stETH token balances updated daily. stETH is highly liquid, supporting trading and redemption.

2. LSDFi: LSDFi is an advanced play on Liquid Staking Derivatives, combining LSD and DeFi elements to provide users with more flexible income and risk management strategies. Users can deposit Liquid Staking Tokens into specific DeFi protocols like Pendle to obtain Principal Tokens (PT) and Yield Tokens (YT). This mechanism allows users to customize their investment strategies based on risk preference and market expectations to maximize returns.

3. Restaking and LRT: The concept of liquid restaking (Restaking) was first proposed by Eigenlayer's founder. This mechanism increases stakers' returns, improves capital efficiency, further releases liquidity, and enhances network security by sharing validator node values to enhance respective blockchain security, achieving so-called "security sharing". Liquid Restaking Tokens (LRT) as a product of restaking, provide additional leverage to release more liquidity and bring higher returns to users. Eigenlayer's restaking has four modes:

• Native restaking: Direct staking of ETH.

• LST restaking: Using Liquid Staking Tokens (like stETH) for restaking.

• ETH LP restaking: Using tokens from ETH liquidity pools for restaking.

• LSTLP restaking: Using tokens from Liquid Staking Token liquidity pools for restaking.

3. Overview of the Current State of Ethereum Liquid Staking Track

According to recent data from DeFiLlama and Dune Analytics, as of March 7, 2024, the total staking amount on the Ethereum Beacon Chain reached 31.65 million ETH, with staked ETH accounting for 26.37% of the total ETH supply. Compared to other PoS chains, Ethereum's staking rate is relatively low. This low staking rate is partly due to the current withdrawal restrictions and the imperfect staking process, leading many users intending to participate to remain on the sidelines. As Ethereum's ecosystem and technology improve, the staking rate is expected to grow significantly in the future.

The liquid staking LSD market accounts for approximately 44% of the overall staking market, with the total Ethereum staking amount being 13.87 million ETH, equivalent to a scale of about 49 billion USD. The staking share of the liquid staking protocol Lido is 71%, followed by Rocket at approximately 8%.

Moreover, according to recent data from CoinGecko, as of March 7, 2024, the market value of the Ethereum Liquid Staking (LSD) track has exceeded 6.1 billion USD, and the market value of the Ethereum Liquid Restaking (Restaking) track has exceeded 35.21 million USD. Below are the top ten projects in the current Ethereum liquid staking track by token market value.

Top 10 Tokens in the Ethereum Liquid Staking Track:

4. Potential Projects in the Ethereum Liquid Staking Track

Several potential projects and investment opportunities in the Ethereum liquid staking track are worth noting, as these projects provide innovative staking, restaking, and security sharing solutions.

1. EigenLayer: As a leading project in the liquid staking track, EigenLayer promotes the Restaking concept through its restaking protocol, allowing users to restake already staked Ethereum or Liquid Staking Tokens (LST). With support for multiple staking tokens and restaking score mechanisms, EigenLayer provides flexible participation methods for users. According to the roadmap, EigenLayer will launch the Active Validator Service (AVS) mainnet in Q1 2024. Currently, EigenLayer AVS is in the testnet phase. In February, EigenLayer opened the fifth LST restaking window for four days, removing all LST deposit limits. EigenLayer plans to introduce a new method for allocating restaking points, setting the cap at 33% of the future total issuance for any LST, LRT, or individual deposits.

2. Ankr: Through its global distributed node network, Ankr supports multichain access for over 40 blockchains, offering one-click node deployment and management services. It provides developers with instant API access to major blockchains and DeFi protocols. Recently, in collaboration with Restake Finance DAO, Ankr offered restaking opportunities for ankrETH liquid stakers, allowing users to earn higher returns without locking assets. Additionally, Ankr partnered with Babylon to launch a BTC staking protocol, extending Bitcoin's security to all participating PoS chains, providing new staking yield pipelines for Bitcoin holders.

3. ether.fi: As a liquid staking platform, ether.fi offers the liquid restaking token eETH, allowing users to earn collateral rewards by staking ETH while automatically restaking ETH in EigenLayer without manual operation. Ether.fi's double points activity helps earn more airdrop tokens. Recently, ether.fi announced on the X platform that about 40% of the tokens would be distributed to the community, mainly through community allocations, grants, and emissions.

4. AltLayer: Designed for rollups, AltLayer is an open and decentralized protocol enhancing security, decentralization, interoperability, and fast finality through restaked rollups. Its core products include VITAL, MACH, and SQUAD, responsible for active validation services, faster rollups finality, and decentralized ordering, respectively. AltLayer has attracted heavyweight investors such as Jump Crypto and Gavin Wood. According to the airdrop standards and tokenomics announced by AltLayer, 13.05% will be allocated to EigenLayer restaking users.

5. Pendle: By tokenizing future yields, Pendle creates a new market through integration with top DeFi protocols like Aave and Compound, offering a cross-protocol yield tokenization platform. Users can manage and customize their risk exposure by separating future yields and principal tokens.

5. Risk Analysis of the Ethereum Liquid Staking Track

1. Smart Contract Vulnerabilities: Since most liquid staking protocols rely on smart contracts, vulnerabilities in these contracts could lead to fund losses. Even rigorously audited protocols cannot entirely avoid this risk. For example, Ankr suffered a hack, losing 7 million USD.

2. Node Operator Security Issues: While node operators do not differ much technically, their operational security and efficiency can still impact staking rewards and network stability. Misbehavior by node operators could also result in asset losses.

3. Asset Bubbles: The rapid increase in the value of new wrapped tokens or their values might cause market valuations to detach from their real values, increasing market bubble risks.

4. Nested Risks: Token mapping and equity locking form speculative leverage, leading to multiple derivative certificates for assets. Protocols mutually depend on liquidity, and issues in one protocol could trigger a chain reaction.

5. Complexity from Restaking: Although the introduction of the LRT system solves liquidity issues, it adds system complexity and operational risks, potentially introducing additional security risks.

6. Prospects of the Ethereum Liquid Staking Track

1. Staking Rate Growth Potential: Despite the currently low staking rate of Ethereum, as technology advances and user awareness increases, staking participation is expected to grow significantly.

2. DeFi Ecosystem Integration: As an essential part of the DeFi ecosystem, LSD's integration with other tracks like lending and DEX will drive the development of the entire DeFi ecosystem, providing investors with more yield opportunities and innovative products.

3. Expansion of Collateral Asset Types: With the development of Restaking projects, more asset types like BTC, USDT, etc., might be introduced, enhancing network stability and security while promoting efficient capital utilization.

4. Cross-Chain Integration: Restaking projects might integrate cross-chain with other blockchain networks, promoting the further development of the DeFi ecosystem.

5. Rise of Modular Blockchains: With the development of modular blockchains, LSD projects have the opportunity to improve the operational efficiency and security consensus of Ethereum assets through innovative solutions and cooperative models, opening up broader market space.

In conclusion, with the Cancun upgrade, the expected approval of Ethereum ETFs, and the upcoming BTC halving, the Ethereum liquid staking track will gain new growth momentum and investment opportunities. Especially LSDFi and Restaking projects provide participants with more flexibility and yield potential, and their development prospects are optimistic. Investors should carefully assess risks, closely monitor industry dynamics, and seize future investment opportunities.

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