Crypto’s Liquid Staking Sector Rises to Near Record High with $15 Billion Surge

While investors continue to withdraw capital from the decentralized finance (DeFi) industry at large, one particular sub-sector is growing at breakneck speed. Here’s the latest.

The total value locked (TVL) within liquid staking protocols has ballooned to $20 billion as of September 2022. That’s up from roughly $5 billion in June 2022 – a 292% increase.

According to DeFi Llama, most of that capital ($14 billion) is locked up with Lido, the market’s most dominant liquid staking provider. This makes Lido the number one DeFi protocol by TVL, with decentralized stablecoin provider MakerDao coming in a distant second at $5 billion.

“Staking” is when a crypto user locks away their assets within a proof of stake blockchain protocol to provide security for the network. Stakers are rewarded with periodic returns for the service of locking away their coins.

Staking generally poses a troubling technical barrier to entry, which even experienced developers like Vitalik Buterin have expressed discomfort with. Liquid staking services like Lido take this technical burden off of users’ shoulders, allowing anyone to reap the benefits of staking in return for part of the staking fees.

They also provide stakers with new assets backed 1:1 by the assets they’ve chosen to stake (Ex. stETH for ETH, or stSOL for SOL). This lets users effectively retain access to their assets while still earning yield from them.

Staking became possible on Ethereum’s mainnet in September 2022. Since then, total staked ETH surged from 13.9 million ETH to 29.3 million ETH – much of which is within liquid staking protocols.

Lido and Rocketpool saw their TVL peak at $21 billion in April 2022, shortly before the collapse of Terra detonated the crypto market, reducing the value of all assets locked within DeFi protocols.

Why Lend Instead of Stake?

According to Richard Galvin – co-founder of DACM – part of the success of liquid staking protocols is related to the pressure on centralized staking services in the U.S. “The regulatory crackdown around staking products offered by centralized exchanges has definitely helped liquid staking,” he told Bloomberg.

The Securities and Exchange Commission (SEC) has sued major crypto exchanges including Kraken and Coinbase for failing to register their staking provision services as securities offerings. Upon receiving charges in February, Kraken agreed to pay a $30 million fine and immediately shut down its staking service.

The success of the sector is also coupled with a broad withdrawal from non-staking related DeFi, with TVL across all other protocols now totaling $37.7 billion – less than after FTX’s collapse in November.

Yields for depositing one’s assets into lending protocols are struggling to keep up with staking. For example, Aave provides ETH depositors with 2.3% APY, versus the 3.7% APR offered by Lido.