Shift toward Liquid Staking Derivatives expected after ETH Shanghai upgrade

The Ethereum (ETH) Shanghai update is set to be released in March, allowing withdrawals from the beacon chain and the unstaking of ETH now staked in ETH 2.0 validators.

With over 70% of ETH stakeholders now losing money because their ETH is unavailable, the Shanghai upgrade will allow them to access their ETH and decide whether to sell at a loss or retain long-term until they are back in profit.

Ethereum: Mean and Median Block Interval – (Source: Glassnode.com)

Post-ETH merge

The ETH integration occurred with the Bellatrix upgrade in September 2022. In the process, the beacon chain took over block validation, completing the move from Proof of Work (POW) to Proof of Stake (POS).

The beacon chain is managed by validators who must first deposit 32 ETH before they can begin operations. With over 16 million ETH committed in the ETH 2.0 deposit contract, the number of beacon chain validators has now hit 500,000, with a recent surge in additional active validators.

Ethereum: Proof-of-Stake Change in Active Validators – (Source: Glassnode.com)

New ETH credentials format

Validators who want to withdraw their staking rewards must update their withdrawal credentials to the new “0x01” standardized format. Validators who want to stop validating or exit their full balance must meet the same requirements.

Currently, over 300,000 validators have yet to change their credentials from “0x00,” while approximately 200,000 validators on the beacon chain have already updated.

The over 16 million ETH staked by the 500,000 total validators equals roughly 13% of the entire ETH supply — which will alter over time as a result of:

• Slashing — in the event of malicious behavior.

• Revenue earned from issuance and fees.

• Inactivity leak — if validators will block or attestations.

• New deposits and, eventually, withdrawals.



Ethereum: Proof-of-Stake Total and Effective Balance – (Source: Glassnode.com)

Liquid Staking Derivatives

Because of the nature of staked ETH, it is not tradable once staked. As a result, many providers developed that allowed ETH to be staked in exchange for a tradeable asset reflecting a portion of the staked ETH – these are known as Liquid Staking Derivatives (LSD).

To now, Lido is by far the largest LSD provider, with a market capitalization of over 5 million ETH. However, staking providers such as Lido, Coinbase, and Binance presently control major portions of the ETH market, highlighting difficulties with centralization.



Ethereum: ETH 2.0 Total Value Staked by Provider [ETH]

As a decentralized asset, ETH holdings gathered by the aforementioned ETH staking providers contribute to the idea that ETH is becoming overly centralized — and eventually controlled by firms with the highest holdings.

With the integration of the impending Shanghai upgrade, ETH investors and validators alike will be preparing to withdraw staked ETH in favor of positions that allow them to get the share and value of their staked ETH in the form of LSDs.

As a reminder, WikiBit is ready to help you search the qualifications and reputation of projects in a bid to protect you from hidden dangers in this risky industry!