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stETH Incentives Could End Sooner Than Expected
By: Aleksandar Gilbert
Coinbase and other centralized exchanges are Lido’s main competitors in the liquid staking industry, Lido co-founder Vasiliy Shapovalov told a crowd at Devcon, Ethereum’s marquee conference this week.
Holding roughly $6B in user assets, Lido is the second largest protocol in decentralized finance and the market leader in crypto’s liquid staking business, in which companies or protocols give their customers tradeable tokens in exchange for staking Ether, or other tokens, like SOL, through their platforms. Those derivative tokens can, in turn, be put to work in the decentralized finance ecosystem to earn yield.
Lido Finance TVL, Source: The Defiant Terminal
But Lido – a decentralized protocol governed by the thousands of people who hold its LDO token – has lost market share after Coinbase entered the liquid staking business earlier this year. In May, Lido accounted for almost one-third of staked Ether. It now accounts for 29% of staked ETH, according to data collected by crypto firm Rated.
Meanwhile, nearly 800,000 ETH worth $1B has been staked through Coinbase since June and growth seems to have accelerated after the exchange launched its cbETH token.
Many in the crypto community look askance at centralized exchanges like Coinbase. Despite their critical role as the on- and off-ramps to digital assets, centralized exchanges are custodial entities vulnerable to state regulation – the antithesis of a technology built to facilitate peer-to-peer transactions resistant to government intrusion.
In his presentation at Devcon, Shapovalov predicted that the liquid staking industry will ultimately have “few winners,” with domination by a Lido-like protocol or a centralized exchange the likeliest outcomes. The latter, he continued, would be a worst-case scenario for Ethereum.
Despite centralized businesses’ economic advantage, Shapovalov told The Defiant that the battle for the future of liquid staking is a “winnable fight” that depends entirely on the broader struggle between traditional finance and decentralized finance.
“We are very much dependent on the whole DeFi stack to win against the CeFi options,” he said. “The only thing that CeFi does better than DeFi right now … is probably just capital efficiency. Derivatives are much more easily made on centralized exchanges.”
Shapovalov said that capital efficiency in DeFi will improve over time. But DeFi could also be hobbled by regulations “that allow CeFi to be the on-ramp where people stay, mostly.”
Shapovalov also discussed the millions of dollars in incentives Lido has doled out in order to prop up liquidity of its derivative token, called staked ETH or stETH.
Lido has spent almost $300M on incentives to date, according to data it has compiled. Rocket Pool, its primary decentralized competitor, recently launched its own liquidity incentives in a bid to gain market share.
Lido Scrambles to Counter Coinbase and Rocket Pool as Staked ETH Market Heats Up
Shapovalov said liquidity incentives will eventually be unnecessary, and perhaps sooner than the Lido team expects.
After the spectacular collapse of crypto hedge fund Three Arrows Capital in June, Lido had to revise its assumptions about how interested people would be in buying stETH at a discount.
stETH usually trades at or near the price of ETH, but when Three Arrows imploded, the hedge fund tried to sell off its assets in a bid to remain solvent, including a massive amount of stETH. So much, in fact, that stETH “de-pegged,” dropping as low as 93 cents to every dollar of ETH. It has since recovered to its normal range of about 99 cents to every dollar of ETH.
“People [were] eager to buy cheap staked ETH,” Shapovalov said. “We don’t really have to incentivize it that much. We need [however] to have enough price discovery and for momentary liquidity pools to fill that bid, basically, so people can buy on [automated market makers] at size.”
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