2024 Forecast: Liquid Staking Tokens Rising in Popularity

• Liquid Staking Tokens (LST) and their Role in Decentralized Finance (DeFi)
• Decentralized Applications and LSTs
• LST Architecture Models
• 1. Rebase Tokens
• 2. Rewards-bearing Tokens
• 3. Wrapped Tokens
• The Significant Role of LSTs in DeFi
• Additional Information

Liquid Staking Tokens (LST) and their Role in Decentralized Finance (DeFi)

A staggering $26 billion is currently entrenched in Liquid Staking Token (LST) protocols, making them the largest classification in the DeFi space. It's projected that this figure will continue to expand. The LST is a unique cryptocurrency that can seem complex initially. This utility token is produced when a proof-of-stake blockchain, such as Ethereum$2,315 -2.42%, is secured through the deposition of native cryptocurrency in a specific protocol. An example of this would be stETH, an LST issued by the protocol, Lido, when staking ETH on the Ethereum network.

Decentralized Applications and LSTs

Decentralized applications (dApps) like Lybra, Prisma, Sommelier, and Enzyme$22.0 4.18% that utilize these tokens are considered part of the LSTfi (LST finance) category. This category allows users to stake their LSTs as collateral or to be used for other DeFi applications. Hence, LSTfi is the usage of LSTs in DeFi. The advent of LSTfi occurred after the Shanghai upgrade to Ethereum on April 12, 2023, which enabled ETH withdrawals that were staked.

LST Architecture Models

The following three main LST architecture models exist:

1. Rebase Tokens

The balance of these tokens is automatically adjusted in response to deposits and rewards through a process known as rebasing. This usually occurs on a daily basis. Token holders won't see any visible transactional activity during rebasing. Examples include stETH from Lido and BETH from Binance, both classified as rebase tokens. The balance of your LST increases in tandem with your staking activities, making this type of LST user-friendly.

2. Rewards-bearing Tokens

These tokens appreciate in value over time. The value and rewards are dictated by the fluctuating exchange rate between the token and the staked asset. The number of LSTs remains the same, but the rate changes. This model is convenient, though somewhat less straightforward than rebase tokens. Reward-bearing tokens include rETH, cbETH, swETH, osETH, and ETHx.

3. Wrapped Tokens

Specific LSTs are available in a wrapped version. After wrapping, these tokens no longer undergo automatic balance adjustments and become reward-bearing tokens. Unlike rebasing, which occurs transaction-free, changes in the wrapped token's balance are facilitated through processes like minting, burning, or transferring. The rewards are built into the exchange rate. Wrapped LSTs, such as stETH and BETH, often have higher popularity and volume in DeFi and trading sectors because they aren't subject to rebasing.

The Significant Role of LSTs in DeFi

LSTs are integral to the DeFi ecosystem, providing users with an opportunity to engage in cryptocurrency staking without the need to manage validator nodes or handle hardware and software. As the DeFi sphere continues to expand, LSTs will persist in offering users the chance to earn rewards and participate in cryptocurrency staking with relative ease. With LST and LSTfi here to stay, understanding the mechanisms behind them and the key players in the market is critical. As we move into 2024, it is advisable to watch the trending LST protocols, LST-backed stablecoins, and pay close attention to the restaking space, especially with the upcoming mainnet launch of Eigenlayer anticipated in late March of the following year.

Additional Information

To delve deeper, consider exploring the LSTfi Report.

Edited by Jonathan Stoker