The decentralized finance (DeFi) space has been in correction mode, its current TVL of $50 billion representing less than a third of its peak in late 2021. The good news is that the market is preparing for another wave of DeFi adoption, primarily thanks to liquid staking tokens (LSTs), which have become the second-largest DeFi sector after decentralized exchanges (DEXs).
LSTs revolve around the Ethereum ecosystem, enabling Ether (ETH) stakers to benefit from yield farming opportunities while their ETH tokens are locked to maintain the network that recently upgraded to a proof-of-stake (PoS) consensus mechanism. Liquid staking protocols provide users with LSTs in exchange for their locked ETH based on a 1:1 ratio to let them explore DeFi use cases during the staking process. Some protocols call these substitute tokens “liquid staking derivatives” (LSDs), but LST is a more accurate term since it represents ownership of staked ETH.
How will ETH’s Shanghai upgrade impact the DeFi space?
Following the Shanghai upgrade (also called Shapella), more ETH is expected to be staked, which will stimulate the liquid staking sector and boost DeFi. We may see another DeFi boom similar to that of 2020 when Compound and its native token COMP made waves to trigger the DeFi summer. This time, LSTs have the chance to become the face of DeFi instead of DEXs and lending protocols.
Shanghai is a major Ethereum upgrade that allows stakers to withdraw their staked tokens for the first time since the Beacon Chain was integrated at the end of 2020. It is estimated that about 1.1 million ETH tokens have become instantly withdrawable. While some of it will likely be sold through exchanges, a great part of it might be used for staking purposes again, and this time, liquid staking protocols will be flooded.
With the Shanghai upgrade already live since mid-April, we can see a gold rush of LST adoption, with the DeFi community embracing LSTs for their ability to be the “internet bond” and provide a native form of yield. This can lead to DeFi protocols racing to get ahead by integrating LSTs. The sooner that DeFi protocols integrate LSTs, the greater the chance to secure a better place in the upcoming DeFi race, as the Shanghai update is expected to boost demand for staking services that also provide yield opportunities.
This liquid staking protocol addresses main obstacles in LST space
Even before the impact of the Shapella upgrade becomes evident, liquid staking protocols are popular due to their unique functionality. Nevertheless, many of them deal with a range of pain points that impact user satisfaction. One of the challenges is the complexity of token models, which can create confusion for users who may struggle to understand the mechanics and implications of their investments. This complexity can stem from the varying tokenomics, reward structures, and risk profiles of different protocols, making it difficult for users to navigate the ecosystem and make informed decisions.
Another major issue is poor user experience, which can be attributed to the lack of user-friendly interfaces, inadequate documentation, and insufficient support services.
High fees are also a concern in some liquid staking protocols, as they can significantly eat into staking yields and reduce the overall attractiveness of liquid staking.
One of the few liquid staking protocols that is working to address these challenges is Swell, which lets users stake ETH and receive swETH to start earning rewards in DeFi. While there are many liquid staking options, Swell aims to fix all the issues and compile the best offerings into a user-friendly experience. Swell focuses on simplicity, enabling ETH stakers to seamlessly dive into the journey of DeFi through its noncustodial decentralized application (DApp).
Source: Swell
Besides an improved user experience, Swell is reducing fees to unlock more rewards for users. As a rule, the fee rate for staking ranges from 10% to 25%, and may go even higher. With Swell, users can expect no protocol fees for a limited period.
Swell is also putting a great emphasis on security, especially as the DeFi market has been plagued by hacking attacks and scams. The protocol is audited by high-profile blockchain security services including Sigma Prime.
Swell can help DeFi projects, including lending protocols, DEXs and yield farming services, attract more users and secure a continual growth of the sector’s TVL. Meanwhile, individual stakers can start earning rewards without any deposit barriers.
With the DeFi race driven by liquid staking gaining traction, Swell will contribute to the next DeFi transformation by helping DeFi protocols grow their communities while offering stakers the best yield opportunities.
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