Shapella: The Start of a Liquid Staking Gold Rush?
Get our take on Shapella and how it will impact Ethereum and the liquid staking ecosystem.
Apr 11, 2023
Since transitioning to proof of stake in September last year, Ethereum has been running a restricted version of the consensus mechanism that doesn't allow validators to withdraw their staked ETH.
Now, the time has finally come to take off the training wheels.
With Shapella, Ethereum enables staking withdrawals and fully matures into a proof of stake blockchain.
Dive into this article to get our take on the upgrade and how it will impact Ethereum and the liquid staking ecosystem.
Shapella: Shanghai and Capella
Since the inception of the Beacon Chain in December 2020, the Ethereum blockchain has seen a total stake of almost $35B, at the time of writing.
Shapella (Shanghai and Capella), which is doubly named as the first simultaneous upgrade of Ethereum’s execution and consensus layers, will enable validators to begin to withdraw their locked Ether (ETH) and any earned rewards.
Like all blockchain upgrades, this carries the small risk of unexpected bugs. But as it has been planned intensively and already rolled out on multiple testnets, we are not expecting any disruption.
Instead, the successful upgrade is likely to be an enormous leap forward for Ethereum, and one that has far-ranging consequences for almost everyone engaged in the ecosystem — from DeFi degens to the largest institutional capital allocators.
The staking gold rush
At present, the Ethereum staking rate sits at around 15%, which is below the average staking participation levels of 50-70% seen in comparable proof of stake blockchains.
The most significant reason for lower levels of staking on Ethereum is the absence of a withdrawal mechanism. Thus, as Shanghai lifts this barrier, we expect a liquid staking gold rush to begin, in which Ethereum's staking rate gradually climbs to hit similar levels of around 50-70% .
For Ethereum, this will help make the blockchain a truer expression of its core values: neutrality, censorship resistance, and near-unbreakable security.
And for liquid staking protocols, the sudden increase in appetite could lead to a dynamic shift in the market.
Liquid staking leads the way
Since liquid staking services were first launched on Ethereum in early 2021, they have controlled a growing proportion of the total amount of staked ETH.
In mid-2021, LSTs accounted for 20% of staked ETH. That figure is now around 42%
This growth is built on an undeniable benefit: offering stakers the ability to earn yield by committing ETH to support the blockchain, without sacrificing the ability to deploy that same asset elsewhere.
As liquid staking has grown in popularity, DeFi protocols have increasingly integrated liquid staking tokens to make this staking yield easily accessible to their users.
But at the same time, concerns have grown around the threat of centralization.
Creating a healthy liquid staking market
As they say in TradFi, liquidity begets liquidity — meaning that those liquid staked tokens with existing integrations and liquidity are naturally poised to capture more market share.
This has advantages — preventing liquidity from becoming too fragmented between many different staking tokens, and making it easier to trade staked ETH in dApps across the ecosystem. But it could also threaten the core values of Ethereum.
In the scenario that a single staking provider controls more than a third of the staked ETH, they could potentially capture the governance process of Ethereum and make decisions that are not aligned with the blockchain as a whole. As Ethereum researcher Danny Ryan points out, they could even reap "outsized cartel rewards'' to offer higher yields that deter stakers from using other protocols. Not to mention the impact that a slashing or smart contract hack event at such a dominant protocol could have on the Ethereum ecosystem.
At present, the level of staking centralization remains high, with almost a third of all staked ETH controlled by the largest liquid staking provider. But with Shapella, all of this could be about to change.
The fight for Ethereum neutrality
In the approach to Shanghai, the call for greater flexibility and permissionless among staking operators has grown louder — reinforced by the new availability of innovations like Distributed Validator Technology (DVT), which enables greater levels of decentralization by allowing a single Ethereum validator to be split across multiple nodes.
Given this demand, the enabling of withdrawals could see liquidity begin to shift around the liquid staking landscape, creating a healthier and more balanced market in which a diverse range of providers each control a small portion of staked ETH and compete to provide the best experience.
But for that to happen, ETH stakers need to make a conscious decision to stake in line with the values of Ethereum.
Swell Network aims to promote this healthy staking market by providing a compelling staking solution that aligns the interests of stakers with the appropriate design principles to maintain the robustness of Ethereum as a public good.
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