Analysts assessed the impact of Lido liquid staking on ETH


LSD protocols changed the Ethereum supply structure and emission dynamics. On lending platforms, derivatives like stETH have become more attractive than ETH, while the liquidity of stETH on DEXs has shrunk.

Glassnode experts noted the growing popularity of stETH in comparison with ETH, the demand for which is stagnating.

The shift is primarily driven by the attractiveness of stETH for building leverage versus providing liquidity in stETH-ETH pairs on DEXs.

As a result, about 7% of the supply of Ethereum actually replaced the derivative from Lido Finance (23% of the issue of the second largest capitalization is blocked in staking, 32% of this value is placed in the specified protocol). This figure continues to grow.

Data: Glassnode.

Lido Finance accounts for 32% of all ETH staked. The share among LSD providers reached 86.5%.

Data: Glassnode.

At the time of writing APR project is 4.07%, Lido commission is 10%. 28.8% of the total rewards from staking the second largest cryptocurrency by capitalization in the form of ETH goes to the owners of stETH, 1.6% each goes to node operators and the project treasury (a total of 32% is Lido’s share).

Data: Glassnode.

Lido also adds 0.95% ARP to the already mentioned 3.12% as a result of staking due to the MEV and priority fees received by validators. The protocol reinvested 104,743 ETH earned through this activity, bringing this additional return for stETH holders to 1.25%.

Data: Glassnode.

stETH holders receive automatic account upgrades based on the rewards they are owed, making the asset an income-generating version of ETH. Due to this property of stETH, the community has formed the opinion that the token can “replace ETH as Ethereum’s reserve currency.”

Analysts tested this hypothesis based on the dynamics of addresses using WETH and stETH. They found that after Terra collapsed in May 2022, the number of WETH+ETH wallets dropped by 5%. Over the same period, the rate for stETH+ wstETH increased by 142%.

Data: Glassnode.

A similar trend can be seen in the volume of transferred on-chain value. During 2022, in relation to ETH+WETH, the metric varied in the range from $6 billion to $10 billion. In 2023, it began to concentrate near its lower limit.

stETH reached its peak volume in the spring of 2022 and remained relatively stable until the end of the year. In 2023, it gained momentum again, jumping from $127 million to $450-880 million.

Data: Glassnode.

Analysts have taken notice of the growing use of stETH in DeFi. Since the beginning of 2022, one can observe a significant increase in the supply of wstETH (by 3 million), which indicates an increased preference for the token among users compared to stETH.

According to experts, only 70.5% of wstETH is locked in smart contracts.

Analysts explained the large amount of assets in wallets as a desire to reduce the tax base. The automatic update of the stETH balance is treated as taxable income – users may prefer the “wrapped” version, which increases the value rather than the number of tokens, they explained.

In comparison, wETH supply dropped by 62% over the same period. The decline in interest in the asset coincided with a decline in its use in smart contracts.

Data: Glassnode.
Data: Glassnode.

wstETH has replaced 74% of stETH supply. The token found the greatest use in Aave (14.4% stETH and 25.3% wstETH), DEX took over a small part. Curve accounts for only 1.4% of stETH, and other platforms account for even less.

Data: Glassnode.

Such a low value is an “alarming” factor from a liquidity point of view, since stETH and wstETH are traded primarily on DEX, experts emphasized.

The graphs below show that the reserves of the three stETH pools on Curve have fallen by 90.2% since May 2022. Over the same period, the figure for Aave increased by 53.6% (stETH was distributed approximately equally between v2 and v3).

“The transition is likely due to the fact that leveraged stETH positions offer more attractive returns compared to providing liquidity on a DEX,” – the experts explained.

Data: Glassnode.
Data: Glassnode.

Let us remind you that in August Lido reported growth TVL and “impressive” implementation of the protocol.

Previously, the developers launched the second version of the protocol. It introduced a Staking Router, which is designed to diversify the set of validators and promote further decentralization.

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