stETH incentives could end earlier than expected
Coinbase and other centralized exchanges are Lido’s main competitors in the liquid staking industry, Lido co-founder Vasiliy Shapovalov told an audience at Devcon, Ethereum’s marquee conference, this week.
With around $6 billion in user assets, Lido is the second largest protocol in decentralized finance and the leader in crypto liquid staking, where companies or protocols offer their customers tradable tokens in exchange for staking Ether or other tokens such as give SOL. through their platforms. These derivative tokens can in turn be used in the decentralized finance ecosystem to generate income.
Lido Finance TVL, Source: The Defiant Terminal
But Lido — a decentralized protocol governed by thousands of people holding its LDO token — lost market share after Coinbase entered the liquid stakes business earlier this year. In May, Lido accounted for nearly a third of ether staked. It now accounts for 29% of ETH staked, according to data collected by crypto firm Rated.
Meanwhile, nearly 800,000 ETH worth $1 billion have been staked through Coinbase since June, and the growth seems to have accelerated after the exchange launched its cbETH token.
ETH liquid staking balance
centralization risks
Many in the crypto community look askance at centralized exchanges like Coinbase. Despite their crucial role as gateways to digital assets, centralized exchanges are custodians susceptible to government regulation — the opposite of a technology designed to facilitate peer-to-peer transactions that are resistant to government interference .
In his presentation at Devcon, Shapovalov predicted that the liquid staking industry will ultimately have “few winners,” with dominance through a Lido-like protocol or a centralized exchange being the most likely outcomes. The latter, he continued, would be a worst-case scenario for Ethereum.
Despite the economic advantage of centralized companies, Shapovalov told The Defiant that the battle for the future of liquid staking is a “winnable battle” that depends entirely on the broader battle between traditional and decentralized finance.
“We are very dependent on the entire DeFi stack to win against the CeFi options,” he said. “The only thing CeFi is doing better than DeFi right now…is probably just capital efficiency. Derivatives are much easier to create on centralized exchanges.”
Shapovalov said that capital efficiency at DeFi will improve over time. But DeFi could also be hampered by regulations “that allow CeFi to be the driveway people are on most of the time.”
Shapovalov also spoke about the millions of dollars in stimulus Lido has spent to shore up the liquidity of its derivative token, dubbed staked ETH or stETH.
$300 million spent
According to its own data, Lido has spent nearly $300 million on incentives so far. Rocket Pool, its primary decentralized competitor, recently rolled out its own liquidity incentives to gain market share.
Lido floods Layer 2s with staked ETH after launch of Incentives program
Lido looks to counter Coinbase and Rocket Pool as staked ETH market heats up
Shapovalov said liquidity stimulus will ultimately be unnecessary and perhaps sooner than the Lido team anticipates.
Following the spectacular collapse of crypto hedge fund Three Arrows Capital in June, Lido was forced to revise its assumptions about people’s interest in buying stETH at a discount.
stETH normally trades at or near ETH’s price, but when Three Arrows imploded, the hedge fund attempted to sell its assets to stay solvent, including a massive amount of stETH. So much, in fact, that stETH was “decoupled” and fell as low as 93 cents per dollar ETH. It has since recovered to its normal range of around 99 cents per ETH dollar.
“Persons [were] eager to buy cheap ETH,” Shapovalov said. “We don’t really have to encourage that. We need [however] to have enough pricing and momentary pools of liquidity to meet that offer so people can keep buying [automated market makers] in this size.”
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