Sebastian Sinclair

Ether (<a href="https://blockworks.co/price/eth" target="_blank" rel="noreferrer noopener">ETH</a>) is witnessing its highest levels of staking activity following a critical update earlier this year.



The network’s <a href="https://blockworks.co/tag/ethereum-merge" target="_blank" rel="noreferrer noopener">transition to Proof-of-Stake</a> (PoS) late last year, coupled with Ethereum&#8217;s &#8220;Shapella&#8221; network upgrade in April, which enabled withdrawals of staked ETH as well as rewards, has led demand for new validators to reach its highest level in two and a half years.



Previously, users could stake their ETH to the Beacon Chain as early as December 2020, but it wasn’t until Shapella was fully implemented that it became possible to withdraw.



As a result, over 1 million ETH was withdrawn shortly after the upgrade, sparking temporary concerns as to whether demand would simply rush to the exit indefinitely and cause the price of ETH to dip.



Yet, this rush has been balanced by an influx of eager validators waiting for activation, indicating a sustained demand for Ethereum staking, an analysis by <a href="https://coinmetrics.substack.com/p/state-of-the-network-issue-208#new_tab" target="_blank" rel="noreferrer noopener">Coin Metrics</a> shows.



“The entry queue has reached its highest level since the Beacon Chain’s genesis in December 2020, with a total of 64,000 validators eagerly waiting to participate,” Coin Metrics said.



In contrast, there are effectively <a href="https://beaconcha.in/validators#exiting" target="_blank" rel="noreferrer noopener">zero validators</a> wishing to withdraw, that are stuck in the queue. That’s a <a href="https://blockworks.co/news/ethereum-validators-withdraw-620m-eth">stark contrast</a> to withdrawal queues just last month, which stood at roughly 17,500.



The surge of new validators has helped drive the active validator count to a new high of nearly 584,000, <a href="https://beaconcha.in/" target="_blank" rel="noreferrer noopener">data shows</a>. This number has more than made up for the transient decrease in complete withdrawals that occurred when withdrawals were initially introduced.



As the number of active validators approaches the 589,000 mark, an internal protocol parameter, known as the Churn Limit, will rise, allowing for the daily activation of an extra 225 validators.&nbsp;



However, even with this increased pace, individuals or staking pools spinning up new validators to join the queue today would still need just over a month to become active, Coin Metrics noted.



<h2>Liquid staking tokens predicted to fuel staking value</h2>



A budding narrative in the decentralized finance (DeFi) world underscores the escalating demand for Liquid Staking Tokens (LSTs).&nbsp;



These tokens, representative of staked assets, bring a new level of liquidity to the traditionally <a href="https://figment.io/assessing-staking-risks-illiquidity-and-price-volatility/" target="_blank" rel="noreferrer noopener">illiquid PoS model</a> by allowing staked assets to participate in DeFi applications while still contributing to the network&#8217;s security. 



They provide a bridge between staking and DeFi by offering liquid tokens that represent staked ETH, allowing holders to freely interact with DeFi protocols while still earning staking rewards.&nbsp;



The growing prominence of LSTs within DeFi is intricately linked to Ethereum&#8217;s staking ecosystem. Behind every LST, there is a staking operation, providing the required security and validation for the Ethereum network.&nbsp;



Some of the established decentralized players are jockeying for market share, such as Lido DAO (<a href="https://blockworks.co/price/ldo" target="_blank" rel="noreferrer noopener">LDO</a>), Frax (<a href="https://blockworks.co/price/FXS" target="_blank" rel="noreferrer noopener">FXS</a>) and Rocket Pool (<a href="https://blockworks.co/price/RPL" target="_blank" rel="noreferrer noopener">RPL</a>), alongside centralized staking providers such as Coinbase, and a slew of others, with new offerings cropping up regularly post-Shapella.



In essence, <a href="https://blockworks.co/news/liquid-staking-derivatives-tvl">the explosion of LSTs within DeFi</a> implies a parallel increase in Ethereum staking activity. As the role of LSTs becomes more integral to DeFi&#8217;s future, it may inadvertently fuel the demand for ETH, Blockworks was <a href="https://blockworks.co/news/liquid-staking-derivatives-shanghai-upgrade">previously told</a>.



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Ethereum Staking Demand Skyrockets Following Network Upgrade

Macauley Peterson

If you start dropping references to &#8220;Ethereum request for comment” in polite conversation, you can expect some blank stares. But sometimes innocuous technical lingo like ERC-20 (tokens) and ERC-721 (NFTs) can become the crypto-equivalent of a household name.



Proponents of the tokenized vault standard ERC-4626 — specifically those in the advocacy group 4626 Alliance which announced an expansion to 11 members Thursday — hope that this little pull request, finalized in March 2022 will find its place in a future ERC hall of fame.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">1/🌟 The 4626 Alliance is thrilled to announce a stellar lineup of new members joining forces to propel the ERC-4626 standard: <a href="https://twitter.com/yearnfi?ref_src=twsrc%5Etfw">@yearnfi</a>, <a href="https://twitter.com/fraxfinance?ref_src=twsrc%5Etfw">@fraxfinance</a>, <a href="https://twitter.com/sommfinance?ref_src=twsrc%5Etfw">@sommfinance</a>, <a href="https://twitter.com/AlchemixFi?ref_src=twsrc%5Etfw">@AlchemixFi</a>, <a href="https://twitter.com/Blockworks_?ref_src=twsrc%5Etfw">@Blockworks_</a>, <a href="https://twitter.com/MorphoLabs?ref_src=twsrc%5Etfw">@MorphoLabs</a>, and <a href="https://twitter.com/joey__santoro?ref_src=twsrc%5Etfw">@joey__santoro</a> <a href="https://t.co/vgTl4fs1Rq">pic.twitter.com/vgTl4fs1Rq</a>&mdash; 4626 Alliance (@erc4626) <a href="https://twitter.com/erc4626/status/1654121022201950208?ref_src=twsrc%5Etfw">May 4, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Disclosure: Blockworks is among the members of the 4626 Alliance.



The standard was first <a href="https://eips.ethereum.org/EIPS/eip-4626">proposed</a> by <a href="https://blockworks.co/tag/fei-protocol">Fei</a> co-founder Joey Santoro in late 2021. Within months, it sparked the <a href="https://twitter.com/joey__santoro/status/1504603906726240258">interest</a> of developer teams from major DeFi protocols such as Balancer, <a href="https://blockworks.co/tag/yearn-finance">Yearn</a> and <a href="https://blockworks.co/tag/frax">Frax</a>.



That prompted Blake Richardson and Vikram Arun, co-founders at Superform, to champion the standard, forming the 4626 Alliance alongside mStable, Balancer and Aztec.



“Our thesis is that 4626 creates the new DeFi summer,” Richardson told Blockworks. He predicts it will be as important as the ERC-20 token standard that led to <a href="https://www.blockworksresearch.com/glossary#initial-coin-offerings-icos">the ICO boom</a>.



<h2>DeFi’s “ERC-20 moment”</h2>



To date, DeFi has failed to be adequately composable and easy to understand, and has suffered from security risks as a result of a lack of standards, Richardson said. Projects have been forced to author bespoke adapters in order to link up with each other, adding complexity and time to deploy dApps safely.&nbsp;



“Instead of all these isolated groups of people building things that don’t interact with each other, we can build entirely unique composable projects,” Richardson said.



One example is Sommelier — also a member of the 4626 Alliance — which <a href="https://blockworks.co/news/defi-multichain-sommelier-axelar">announced its launch on Arbitrum</a> this week. Co-founder Zaki Manian lamented the standards problem in DeFi, and said that 4626 could speed up his team’s work.



“We’re actually talking to lots of other people in [Ethereum] DeFi about trying to work better [with 4626],” Manian told Blockworks. “If DeFi could collectively all adopt 4626, Sommelier could be everywhere and plug into every protocol in like a few days.”



Yield generating strategies are able to become more complex while also being harder for ne&#8217;er-do-wells to attack. Provisioning audits and ensuring safety has been a major obstacle&nbsp; because each individual protocol implementation has brought its own unique, often complex risks. 4626 — standardizing the tokenized vault — is expected to make the auditors’ job much easier.



But it’s not just about improving speed to market and helping projects become less <a href="https://blockworks.co/tag/hack">hack-prone</a>, the standard also enables new DeFi primitives such as tools for customizable yield exposures, like those developed by Sense Finance, Richardson said.



“Composability is one of the key value props of decentralization in the first place — the whole money Lego pitch for DeFi is one of it’s most critical for adoption,” according to Richardson, who thinks the types of applications that will be built using the standard, is set to rise dramatically.



For instance, <a href="https://blockworks.co/news/gearbox-is-releasing-v3">Gearbox uses 4626</a> to let levered yield strategies be included seamlessly into existing strategy vaults, such as those planned by Yearn Finance in its upcoming V3.



Increasing adoption within DeFi is the primary goal of the alliance, and once met, members will decide on the next steps, such as raising awareness of its benefits to the public.



“Most investors aren’t particularly standard conscious — if they buy an NFT with 1155 versus 721 it’s not changing their perspective a ton,” Richardson said. “However, I think the compound benefit of standardization will lead more people to adopt DeFi because they can start to trust it more.”



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Tokenized Vault Standard on Ethereum Set to ‘Kick Off New DeFi Summer’

Bessie Liu

The community governance for stablecoin issuer Frax has voted to increase the collateral ratio for its stablecoin to 100%, removing the small algorithmic component which contributed to its value.



Frax, once known as a protocol that partially backed its stablecoin with collateral while stabilizing the rest with smart contract algorithms, it’s now gradually moving towards full collateralization.



“The costs of being slightly undercollateralized now far outweigh the benefits – especially because it can undermine the perceived safety of FRAX,” Frax finance admin <a href="https://gov.frax.finance/u/hameed/summary" target="_blank" rel="noreferrer noopener">Hameed</a> wrote in a <a href="https://gov.frax.finance/t/fip-188-increase-cr-to-100/2147" target="_blank" rel="noreferrer noopener">proposal</a>.



Quorum for the proposal, which was set to <a href="https://snapshot.org/#/frax.eth/proposal/0x6d43531f54de3d52ad439dcb6c56e3eae1b833fceb4d484dcb3b20be070ca25d" target="_blank" rel="noreferrer noopener">7.2 million FXS</a> ($81 million), was well surpassed by 43 million FXS ($484 million) in total. Over 98% of community members voted in favor of implementing the changes.



Following the <a href="https://blockworks.co/news/terra-collapse-could-spell-end-for-algorithmic-stablecoins">collapse of algorithmic-backed stablecoins such as UST</a>, there has been a wide perception that they are less safe assets for users to hold.



“UST’s failure tainted the algorithmic stablecoin concept (whether fairly or unfairly). There is very little benefit in maintaining the current CR of 92%,” Hameed wrote. “Gradually shifting the protocol to 100% CR is the best path forward for the long-term health and growth of the protocol.”



The Blockworks Research team agrees.



“With Frax&#8217;s gradual transition to a 100% backing for its stablecoin, the token becomes less risky from a regulatory point of view,” they said. “This is a step closer to Maker&#8217;s model, where DAI is overcollateralized, which prioritizes safety.”



The proposal was designed to focus more on the end result — increase the credit ratio to 100% permanently — but does not touch on how the community plans to achieve this.&nbsp;



“There is no imminent need to increase the CR and there are many ways of reaching the target CR,” Hameed wrote. “Ideally growth, asset appreciation and protocol earnings will increase the CR to 100% over time.”



It is important to note that minting FXS to increase the credit value is not under consideration.&nbsp;



“This is effectively an investment in the future of Frax that will increase protocol assets and remove the need for FXS emissions towards locked liquidity,” Hameed wrote.



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Frax Ditches Algorithmic Backing, Citing Terra Failure

Index Coop, a company that designs structured products on Ethereum, has launched a Diversified Staked ETH (dsETH) index — a tokenized strategy that proponents say will provide its users with a more sustainable and less risky yield.



The <a href="https://indexcoop.com/blog/faq-the-diversified-staked-eth-index-dseth" target="_blank" rel="noreferrer noopener">dsETH index</a> allows holders to distribute their assets across various liquid staking protocols. ETH liquid staking tokens listed in the index’s initial launch include Lido’s stETH, Rocket Pool’s rETH and StakeWise’s sETH2.&nbsp;



Additional tokens will be considered if they meet certain <a href="https://gov.indexcoop.com/t/iip-171-launch-the-diversified-staked-eth-index-dseth/4389#h-60-methodology-15" target="_blank" rel="noreferrer noopener">public inclusion criteria</a>.



This latest product is a way for “all of the liquid staking protocols [to band] together against the centralized exchanges, who are also big players in the staking industry,” ecosystem growth lead at Index Coop, Crews Enochs, told Blockworks.



“We want to reward protocols that are more decentralized with a higher share of that index,” Enochs said.



For this reason, Coinbase’s cbETH which has a non-competitive fee of 25% and Frax’s frxETH, whose node operators are all run by the Frax core team, have been excluded from the Index.



<h3>A move to decentralize Ethereum staking</h3>



Since the successful completion of the <a href="https://blockworks.co/tag/ethereum-merge">Ethereum Merge</a>, the ecosystem has been concerned about the gradual <a href="https://blockworks.co/news/flashbots-has-a-new-plan-make-tradfi-look-embarrassing">centralization of its blockchain</a> — Lido, Coinbase, Kraken and Binance hold a total of 55% of all staked ether, according to <a href="https://www.rated.network/?network=mainnet&amp;view=pool" target="_blank" rel="noreferrer noopener">data</a> from Rated Network.



“We hope dsETH will positively influence the liquid staking market by rewarding the most efficient and decentralized protocols with higher allocations in the index token,” Dev, Index Coop’s head of growth, said in a statement.



Rocket Pool’s rETH currently <a href="https://dune.com/index_coop/dseth" target="_blank" rel="noreferrer noopener">tops the list</a> in the index token basket — making up 41.20% of the token’s allocation.



“We want liquid staking protocols to focus on their core products, decentralization and low fees, and not worry so much about marketing and business development and all those integrations,” Enochs said. “If you just have a good-looking staking product, you will get included in this index.”



Once a staking token is included in the index, it can be used as collateral on lending platforms such as Aave — protocols will not need to look for integrations themselves, Enochs added



In the case that a staking token in the index becomes vulnerable to an exploit, Enochs notes that only that particular token’s share of the index will be affected.&nbsp;



“I think a misconception some people have is they think if one of these liquid staking tokens has some sort of exploit and the price starts going to zero, the whole index will go to zero. But that&#8217;s not the case, because it&#8217;s not continuously rebalancing,” Enochs said. “It’s not like a liquidity pool — so in that sense, you do get that risk mitigation.”



The dsETH token will not be made available by Index Coop to users with US IP addresses, out of regulatory concerns. The tokens will, however, be trading on decentralized exchanges (DEXes) such as Uniswap.



<h3>Finding a market</h3>



Index Coop has a history of launching new and innovative DeFi tokens, but not all are successful in the market. Several indexes were discontinued last month, <a href="https://docs.indexcoop.com/index-coop-community-handbook/products/legacy-products/market-neutral-yield-eth-mnye" target="_blank" rel="noreferrer noopener">including</a> the recently launched <a href="https://blockworks.co/news/earning-yields-just-became-easier-with-index-coops-latest-token">Market Neutral Yield ETH (MNYe)</a> product.



Other tokens moved to <a href="https://docs.indexcoop.com/index-coop-community-handbook/products/legacy-products" target="_blank" rel="noreferrer noopener">“legacy” status</a> were the Web3 Data Economy Index (DATA) and half a dozen leveraged index products launched on Polygon.



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Fresh Ethereum Staking Index Wants To Promote Decentralization

David Canellis

<div id="highlights-block_62a1c10bb98e8" class="highlights">
 <ul>
 <li>Terra’s UST’s fate hasn’t deterred traders from experimenting with TRON-powered algorithmic stablecoin USDD</li>
 <li>Bitcoin dominance has risen 15% to almost half of the entire crypto market</li>
 </ul>
 
</div>



It’s been a month since Terra’s algorithmic stablecoin UST <a href="https://cms.blockworks.co/?s=Terra" target="_blank" rel="noreferrer noopener">de-pegged</a> from the US dollar. At the time, Terra’s native token LUNA and UST were the ninth and 10th largest cryptocurrencies by market capitalization — together valued at $42 billion. Both tokens have since evaporated almost entirely, begetting a major market shakeup.



Bitcoin dominance is on the rise and most cryptoassets are in decline, yet one exchange token has bucked the downtrend. While algorithmic stablecoins may not be completely dead, UST’s demise has changed the stablecoin landscape dramatically.



Tether (USDT) is still the largest stablecoin ($72.5 billion versus USD Coin’s $53.9 billion), but the past month was its most significant dollar-denominated reduction across its seven-year history. USDT’s supply is down 13% over the past month, the equivalent of nearly $11 billion, after big money traders flocked to redeem their tokens throughout May’s market chaos.



“The drop in USDT since the UST collapse is a reflection of the relative market confidence in its issuer Tether (based in the British Virgin Islands) compared to that of USDC (issued by the US-based Centre Consortium, founded by Circle and Coinbase),” Genesis Trading wrote in its May <a href="https://info.genesistrading.com/hubfs/monthly-reviews/2022/May-2022-Monthly-Report.pdf" target="_blank" rel="noreferrer noopener">report</a>.



Algorithmic stablecoins such as Magic Internet Money (MIM) and Frax are also significantly smaller. MIM’s total supply has shrunk 87% while Frax’s has fallen 43% — with $3.6 billion altogether leaving those two protocols.&nbsp;



MakerDAO’s DAI, while not strictly algorithmic, has given up 18% of its supply since UST de-pegged — even though it is <a href="https://daistats.com/#/" target="_blank" rel="noreferrer noopener">overcollateralized</a> on-chain by more than half. In fact, Circle’s USDC and Binance’s BUSD (issued by Paxos) are the only top 12 stablecoins not to lose market share following UST’s demise.&nbsp;



Clearly, market participants now favor asset-backed tokens — just not Tether (USDT). USDC has seen its circulating supply surge $5.4 billion, an 11% boost. BUSD grew by $555 million, about 3%.&nbsp;



But it seems some still trust algorithmic stablecoins. TRON’s Decentralized USD (USDD), launched by blockchain founder Justin Sun just days before UST crumbled, has attracted $491 million over the past month — a 230% increase in supply.



USDD holders have been able to lock their tokens inside lending platform JustLend for double-digit yield all month, a prospect which has been a <a href="https://cms.blockworks.co/every-top-cryptocurrency-is-down-except-justin-suns-tron/" target="_blank" rel="noreferrer noopener">boon</a> to TRX’s price. USDD’s market value is now $703 million, ranking it the 10th biggest stablecoin behind Waves’ Neutrino USD and ahead of Paxos’ gold-backed asset PAXG.



According to Genesis: “The jury is out on whether the UST collapse will turn out to be proof that algorithmic stablecoins are a flawed concept, or whether different design choices could be successful in the future.”



<blockquote class="wp-block-quote">“The event has highlighted the importance of understanding nuances in this space and that not all stablecoins are created equal.”</blockquote>



Still, the collective supply of the top 12 stablecoins at the time of UST’s de-pegging — not counting UST itself — is down by $9 billion.



<h3>Bitfinex’s LEO most resilient cryptoasset</h3>



According to price data reviewed by Blockworks, Bitfinex’s Unus Sud Leo (LEO) token was the best performing top 100 token (excluding stablecoins and wrapped tokens) by market value — the only token to increase in value over the month, albeit by half a percent.



Bitfinex raised $1 billion of USDT in 10 days with LEO’s private token sale in May 2019. The idea was to replace $850 million lost when the exchange’s embattled third-party payment processor Crypto Capital Corp was raided by authorities.



Bitfinex rebuys and burns LEO to reimburse investors who contributed to the sale, while regular Bitfinex users receive discounts on fees when holding LEO in their accounts. The company committed to eventually burning all one billion LEO tokens, of which it has already destroyed around 6.5% of the supply.



Crypto exchange tokens <a href="https://cms.blockworks.co/native-crypto-exchange-tokens-hint-at-first-sign-of-broader-market-recovery/">outperformed</a> much of the market in May. Many have burn mechanisms similar to LEO’s as a way to reward holders. KuCoin’s native token KCS has been the third-best top 100 crypto asset post-Terra, falling only 3.5%. But FTX’s FTT and Binance’s BNB weren’t so hot — both tanked 20%.



LEO’s price doubled earlier this year when US authorities revealed they <a href="https://cms.blockworks.co/couple-arrested-as-government-recovers-3-6b-in-stolen-bitcoin/" target="_blank" rel="noreferrer noopener">seized $3.5 billion in bitcoin</a> stolen from the exchange back in 2016. Bitfinex has said it will commit at least 80% of the recovered net funds to repurchase and burn LEO tokens within 18 months of the date of recovery.



A Bitfinex spokesperson told Blockworks LEO’s performance should be viewed as a measure of its customers’ confidence and trust in the platform.



<blockquote class="wp-block-quote">“We have also begun to see what may be a correlation between the performance of LEO, and the prospects of Bitfinex receiving the stolen bitcoin that was seized by the US authorities earlier this year,” they said.</blockquote>



Other top-100 tokens performing relatively well in Terra’s wake include TRX (down 3.5%) and monero (down 9%). Bitcoin came in at number five, falling 14% from nearly $35,500 to $30,400. BTC is currently range bound with no clear momentum.



Ether, on the other hand, sank 30% over the month — about average for the top 100. Bitcoin dominance rose almost 15% to now represent nearly half of the digital asset market, while ether dominance fell almost 9% to just under 18%.



On Wednesday, the second largest cryptoasset by market cap took an important step toward its planned Merge, as the Ethereum Ropsten testnet <a href="https://cms.blockworks.co/ethereum-ropsten-testnet-successfully-merged-to-proof-of-stake/" target="_blank" rel="noreferrer noopener">successfully transitioned</a> to proof-of-stake.



As for the losers: LUNA aside, the native digital asset for Terra-powered lending protocol Anchor was the worst hit, down 91%. Tokens for lending platform Convex Finance and privacy blockchain Secret Network collapsed 66% and 62% respectively, while move-to-earn project StepN fell 60%.&nbsp;



Alternative networks Oasis and Avalanche both drained by 55%, decentralized finance governance token Yearn lost 54% of its value, while metaverse project ApeCoin and layer-11 assets NEAR, MINA and solana all halved in price.



While crypto markets fell throughout April in the lead up to UST’s de-pegging, all digital assets are worth 20% less since the stablecoin went kaput, representing $336.6 billion in value lost.



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