ViaBTC | Ethereum Shanghai Upgrade Approaching: A Challenge or Opportunity for LSD Projects?

4 min readMar 22, 2023

With the Ethereum merge in September 2022, the block generation mechanism has changed from PoW (Proof of Work) to PoS (Proof of Stake). As a result, the traditional method of mining blocks with mining machines is phased out, and new ETH can only be released through staking rewards. However, the staked ETH, which amounts to more than 17 million ETH, cannot be withdrawn for the time being, with a total value of over $31.4 billion based on the current market price.

A large amount of ETH staked on the beacon chain, which is not liquid during the staking period, has given rise to a new emerging field called Liquid Staking Derivatives (LSD). Liquid staking involves users staking ETH in a protocol, which then stakes ETH on behalf of the user and mints a ETH claim token for the user at a 1:1 ratio, such as Lido’s stETH, Rocket Pool’s rETH, and Frax Finance’s frxETH.

These LSD projects not only allow users to use their assets more flexibly after staking, but also lower the entrance threshold (users can participate without staking as much as 32 ETH). However, as the Ethereum Foundation’s core development team has officially confirmed that the Shanghai upgrade will take place at block 6,209,536 on April 12, the withdrawal of staked ETH will allow users to switch to other LSD projects, which will inevitably lead to more intense competition in this emerging field.

Below are three well-known LSD projects at present:

01 Lido

Lido, the largest provider of liquid staking services in the LSD segment, has a market share of approximately 74.3% in ETH liquidity staking, with over $10.18 billion worth of staked ETH. When users stake their ETH on the Ethereum beacon chain using Lido, they will receive a corresponding number of stETH, a token voucher representing their ETH staked on the Ethereum beacon chain at a 1:1 ratio.

stETH that users receive can be used as regular ETH. Moreover, Lido allows users to stake any amount of ETH but charges a 10% management fee on all staking rewards. This fee will be distributed to Lido DAO and node operators.

Apart from Ethereum, Lido also supports staking on several other chains, including Polygon, Solana, Polkadot, and Kusama.

02 Rocket Pool

Rocket Pool is a decentralized and permissionless ETH staking service provider. In the case of Lido, nodes that require permissions are entirely responsible for validation, potentially posing long-term risks to the network. Rocket Pool, however, takes a different approach: the network’s advantage lies in the fact that there are no trust assumptions, but only code standards.

Similarly, users of Rocket Pool also receive rETH at a 1:1 ratio from ETH staked. Besides, the network also features independent node operators and SaaS service providers. ETH holders can choose to pay SaaS providers or become operators themselves by staking 16 ETH. As operators, users can earn commissions and $RPL rewards from the network, in addition to the rewards from ETH staking.

At the moment, over 400,000 ETH have been staked through Rocket Pool, a network with 2,210 node operators.

In October 2022, Frax Finance, a stablecoin protocol with a hybrid algorithm, introduced an Ethereum liquidity staking product called frxETH. In less than six months, frxETH quickly rose to prominence with 121,682 ETH deposits and a 1.6% share of the LSD market, thanks to its high staking returns.

In the Frax ecosystem, ETH comes in two forms: frxETH and sfrxETH. By controlling the correlation between the yield of the ETH/frxETH LP and that of sfrxETH staking, Frax can not only influence the balance of frxETH assets but also adjust the ETH staking yield at any moment to offer exceptional returns and attract more stakers.

In the past two months, the average APR of Frax has stood at around 10%, sometimes exceeding 16%, far higher than similar platforms such as Lido and RocketPool.

ETH Staking Distribution

According to Dune Analytics, as of March 21, there are 568,438 staking addresses, with 17,672,874 ETH staked.

In particular, liquidity staking accounts for 35.8% of all ETH staked, CEXs make up 26.2%, staking pools occupy 13%, whales hold 19.7%, and other accounts constitute 5.3%.

It is clear that LSD still holds the largest market share.

As the Shanghai upgrade approaches, we will witness some changes and upgrades, which stand to make a profound difference in the Ethereum ecosystem. For project teams providing LSD for Ethereum, the Shanghai upgrade marks a critical moment. Projects should be prepared for a market reshuffle to survive the upcoming competition.