As a fundamental aspect of validating and securing proof of stake (PoS) blockchains, staking on the Ethereum network has captured significant attention since “The Merge,” according to an extensive report from Coin Metrics.
The Coin Metrics team notes in their weekly report that currently, over 31M ETH (~26% of supply and $120B in value) has “been staked, with nearly 980K active validators securing the Ethereum network.”
As mentioned in the Coin Metrics report, this robust security foundation “renders attacks against the network prohibitively costly.”
Fundamentally, staking pools and custodial staking platforms bring together ETH stakers and infrastructure providers (i.e., node-operators), “allowing deposits of any ETH increment in return for a tokenized claim on capital staked—known as a liquid staking derivative (LSD).”
As a result of lower barriers to entry and greater accessibility to get yield on ETH, “adoption of this sector has grown tremendously.”
The report from Coin Metrics added that “a vibrant ecosystem of LSD’s have emerged from Lido’s stETH to Coinbase’s cbETH and Rocket Pool’s rETH, with diverse token models.”
Boosted by their fungibility, composability, and yield, liquid staking tokens are “a predominant form of liquidity on decentralized exchanges (DEX’s) and collateral across lending markets, stablecoin products, Layer-2’s and now restaking applications, showcasing their utility across the ecosystem.”
In their latest State of the Network Coin Metrics focus on the market dynamics and risks of this sector, looking at the largest one’s in the market today.
As stated in the update from Coin Metrics, Ethereum’s staking ecosystem has “grown substantially, with staking pools and liquid staking tokens garnering meaningful adoption.”
The report added that enhanced accessibility and utility have led to “the deep integration of LST’s within the on-chain ecosystem.”
However, as highlighted in this report, this growth comes with crucial trade-offs, “emphasizing the need to monitor associated market risks.”
With Ethereum stakeholders contemplating the implementation of staking related EIP’s (Ethereum Improvement Proposals), such as “max-effective balance”, “max churn-limit” and potential issuance changes, the trajectory of this sector is “poised to evolve,” according to Coin Metrics.
The report explained that liquid staking tokens also have a unique role to play in the emerging practice of “restaking”—a concept popularized by EigenLayer.
The update pointed pointed out that users can either deposit liquid staking tokens or restake “natively” by setting withdrawal credentials towards EigenLayer contracts, “enhancing yield from validating other networks by leveraging Ethereum’s economic security.”
While this unlocks additional utility, it introduces implications around “the concentration of LST’s into restaking protocols, liquidity in secondary markets and the integration of ‘liquid restaking tokens’ (LRT’s) across the on-chain ecosystem.”
The report from Coin Metrics concluded that the intersection of liquid staking tokens “within the restaking ecosystem constitutes a key trend to focus on as this sector continues to evolve.”