$ETH Liquid Staking Protocols Gaining Momentum as Shanghai Upgrade Getting Closer

One of the observations of early 2023 is that many $ETH liquid staking protocols are on a good run. The Shanghai upgrade is arguably the most important milestone for Ethereum to achieve this year, and it's only about three months away. The upgrade will enable the withdrawals of staked $ETH, which is thought to be a bullish sign for $ETH liquid staking solutions.

On January 2nd, Lido, the biggest liquid staking protocol, overtook Maker to become the DeFi protocol with the highest TVL. It has maintained its position since then. Over the last seven days, the price of $LDO has gone up by 63%. Currently, Lido occupies the $ETH staking market, with a market share of over 29%.

The performance of other liquid staking protocols' tokens also reflects what's trendy. Rocket Pool ($RPL), StakeWise ($SWISE), Ankr ($ANKR) and Frax ($FXS) all enjoyed more than 20% rises during the last week. Stader ($SD), which was first built on Terra and plans to launch its $ETH liquid staking derivative (LSD) $ETHx, has gone rocket high with a 124% increase.

The attention drawn to the liquid staking market doesn't come from nowhere. In the first All Core Developers call in 2023, Ethereum developers reiterated that the Shanghai upgrade is scheduled for sometime in March. In addition, a public testnet will be launched in February. So far, not delaying the Shanghai upgrade is the top priority for Ethereum developers.

Compared with some other major Layer1 chains, the staking ratio of $ETH is very low. Only 13.24% of the $ETH supply is being staked, whilst the staking ratio of $ADA and $SOL are over 70%. One of the reasons that stops people from staking $ETH is the lack of ability to unstake. This will not be a problem after the Shanghai upgrade, which will mitigate the risks of staking.

For liquid staking solutions, they need to deal with another challenge prior to the enabling of staked $ETH withdrawals, which is to keep their LSD pegged to $ETH. In Blockworks' year-in-review of 2022, researcher Dan Smith said, "one of the issues for staking derivatives throughout this year (2022), primarily $stETH, has been the ability to keep price parity with $ETH due to the inability to directly arbitrage via withdrawals. This (the Shanghai upgrade) should therefore help alleviate price concerns while also giving users the ability to obtain their $ETH if they so choose." This also explains why liquid staking protocols benefit from the upgrade.