With crypto market apathy in full effect, decentralized finance (DeFi) activity has plummeted across the board in 2023 – all but in one sub-sector.
Liquid staking protocols are approaching an all-time high in total value locked (TVL), having appreciated nearly 293% since their June 2022 lows.
The Rise of Liquid Staking
According to DeFiLlama, liquid staking protocols now hold $20.5 billion in assets – up from slightly over $5 billion 15 months ago. Lido alone boasts $14.1 billion in staked assets, of which the vast majority ($14.05 billion) is Ether (ETH).
Staking is when crypto users temporarily lock away their coins within the blockchain to secure the network while receiving periodic crypto rewards in return. From an investor perspective, it is similar to lending out one’s assets to borrowers for a variable interest rate – though its generally considered less risky.
Since staking can be a highly technical affair, liquid staking providers make staking more accessible for layman users for a modest fee. They also provide stakers with assets pegged directly to their staked coins (ex. stETH for ETH), retaining their ability to sell/trade their assets at will.
Liquid staking topped out at $21 billion TVL in April 2022, shortly before the fallout from Terra’s collapse destroyed half of the value across DeFi. Lido effectively monopolized liquid staking at the time, but it now shares part of the market with RocketPool, Coinbase, and Binance.
Ethereum is the big difference maker: After transitioning to proof of stake in September 2022, assets deposited within its staking contract have more than doubled to 29.4 million ETH ($48 billion).
As noted by blockchain analytics provider Nansen, the amount of staked ETH has now surpassed the amount circulating on exchanges.
Essentially, now that the merge has occurred, staking is much more attractive now.” a Nansen data journalist told CryptoPotato via DM. “Depeg risk [is] not a big issue now if users are able to withdraw their staked ETH.”
What About the Rest of DeFi?
Behind Lido, the next most valuable defi protocol is stablecoin provider MakerDao, which holds $5 billion in assets. That’s lower than the $6.5 billion it held shortly after FTX’s collapse, which cratered asset values for crypto locked within the protocol.
Similar declines are visible across lending and DEX protocols Aave and Uniswap respectively, which are down ~80% and ~66% respectively from their all-time highs.
According to its website, Aave’s current APY for ETH lenders (2.1%) is outmatched by Lido’s APY for ETH stakers (3.6%).