The World of LSTs

Unlocking the Potential of Liquid Staking Tokens

Introducing LSTs

Whether you're an occasional cryptocurrency investor or an experienced DeFi enthusiast, you've probably observed the increasing excitement surrounding one of this year's most captivating emerging asset categories: Liquid Staking Tokens (LSTs).

LSTs, which stand for Liquid Staking Tokens, mirror the value of a user's staked ETH, granting them access to liquidity and prospects for enhanced returns.

Understanding LSTs

LSTs function as tokens that mirror the value of a user's staked ETH, preserving liquidity and opening up avenues for enhanced yield potential. They serve as tangible evidence of staked ETH participation within Ethereum's staking pools. This effectively addresses the longstanding dilemma of having to make a choice between staking ETH to earn rewards and preserving its liquidity for other yield-generating activities.

Given that LSTs are fully tradable, users can stake their ETH to generate passive income while using their LSTs in various DeFi applications that generate income. This innovation effectively resolves the liquidity challenge associated with staked ETH and enables a new era of high-yield investment prospects for one of the most trusted assets in the world of cryptocurrencies.

LST Market Breakdown

As of September 28th, the Liquid Staking Tokens (LST) market is primarily controlled by three major players:

Lido (stETH): Lido commands the largest portion of the market, holding a substantial 70.93% share. Lido's stETH token represents 8.75 M staked ETH, amounting to a Total Value stock (TVL) of $14.2 billion.

Coinbase (cbETH): Coinbase secures a 10.51% market share with its cbETH offering. This token stands for 1.3 M staked ETH, contributing to a TVL of $2.2 billion.

Rocket Pool (rETH): Rocket Pool's rETH captures 7.68% of the market, staking 947,160 ETH, translating to a TVL of $1.54 billion.

This provides an overview of the current state of the LST market, highlighting the dominant players and their respective market shares.

*Please note that all data mentioned in this document is based on information available as of September 28th.

Categorizing Liquid Staking Tokens

From a yield distribution perspective, LSTs can be divided into two broad categories:

  1. Rebase LSTs:

Rebase LSTs (e.g., stETH and sETH2) provide holders with increasing LST tokens as their staking rewards accumulate over time.

  1. Non-Rebase LSTs:

Non-Rebase LSTs (e.g., rETH and swETH), on the other hand, see the value of the tokens held by their owners grow as staking rewards accumulate, eliminating the necessity to distribute additional LST tokens.

It's worth noting that, as of the time of writing, only two out of the Top 10 LSTs by Total Value Locked (TVL) employ the rebase model. Nevertheless, rebase tokens remain dominant within the ecosystem, primarily due to stETH's significant 71% market share.

We can further categorize LSTs according to their decentralization:

  1. Non-Custodial LSTs

Non-Custodial LSTs (e.g., stETH) are governed by DAOs (e.g., Lido DAO). The staking pools of these protocols distribute the deposits uniformly (round-robin) to various node operators based on the remaining capacity in each validator's slot. Moreover, DAOs are transparent and make quarterly reports on validators and node metrics.

  1. Custodial LSTs

Custodial LSTs (e.g., WBETH) are unilaterally governed by an institution (e.g., Binance). These companies do not publish information about their node operators, and all nodes are likely operated by the same entity, exposing the entire system to counterparty risk.

Unleashing the Unexplored Possibilities of the LST Market

Liquid Staking Tokens (LSTs) present exciting opportunities for DeFi investors. They offer a pathway to passive income through staked ETH while facilitating additional yield-generating opportunities via composability with DeFi. However, the question arises: Is the LST market truly realizing its full potential? Current data suggests otherwise.

Only 21% of ETH is staked, leaving an astonishing amount of ETH sitting idle. To put this in perspective, over 70% of Solana's tokens are staked. This discrepancy implies that, despite the ongoing excitement, there remains substantial untapped potential within the LST market.

To unlock greater Total Value Locked (TVL) in staked ETH, it is imperative to enhance the utility of LSTs. While the liquidity offered by LSTs holds immense promise in theory, the existing avenues for generating yield and the ability to create new assets on top of LSTs are somewhat limited.

This is where Chi Protocol steps in with USC - a scalable stablecoin backed solely by rebase and non-rebase non-custodial LSTs

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