Bessie Liu

Zero-knowledge rollup solution zkSync Era has added its first liquid staking protocol, Rocket Pool, to its network.&nbsp;



ZkSync Era <a href="https://blockworks.co/news/zksyncs-evm-era-opens-to-the-public">first launched</a> on Ethereum in March. Including Rocket Pool, 58 projects are now live and operating on the layer-2 solution.



Users will have the ability to stake ether (<a href="https://blockworks.co/price/eth">ETH</a>) on Era through holding <a href="https://blockworks.co/price/reth">rETH</a> in their wallets, with staking rewards occurring automatically, just like on mainnet.&nbsp;



Nick Ashley, Rocket Pool’s marketing manager, told Blockworks that Rocket Pool has had to face specific challenges that present themselves in keeping the protocol running smoothly while staying true to the ethos of decentralization and remaining permissionless.&nbsp;



“These include shuttling validator statuses and balances from the Beacon Chain to the Execution Layer, monitoring for protocol compliance, and calculating rewards,” Ashley said.



The liquid staking derivative is keeping a close eye on industry developments, whether that’s distributed validator technology or zero-knowledge (zk) proof technology, Ashley noted.



Following its deployment on Era, Rocket Pool’s research team has been looking into how zk proof technology could assist in the competing oracle tasks in an even more decentralized way than it is currently.



“Potential benefits include lower costs, increased efficiency and reliability, and an overall more streamlined system,” Ashley said. “But at the same time, this is juxtaposed with an abundance of caution and strong safety culture.”



The liquid staking derivative is currently also deployed on optimistic rollups Arbitrum and Optimism, and Ashley remains cautious about deploying on new networks.&nbsp;



“The main factors that would be considered when choosing which network to launch on are whether there are similar shared core values […] we are committed to helping the ecosystem to grow and scale while also remaining secure and decentralized. We are always open to considering a launch elsewhere but don&#8217;t have any immediate plans right now.&#8221;



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zkSync Era Welcomes its First Liquid Staking Protocol

Macauley Peterson

Maker DAO is synonymous with its DAI stablecoin, but the DAO has never directly supported front-end access to the offering. Instead, user-facing products have been the purview of third-parties such as Oasis, DeFi Saver and Instadapp.



That’s changing with the launch of Spark Protocol, which will give users access to a wholesale dai credit line directly injected from Maker.



MakerDAO will initially own the product, which is expected to later be spun out into its own sub-DAO, according to Sam McPherson, co-founder of Phoenix Labs, a research and development company which built the protocol’s smart contracts and front end.



“MakerDAO is still the ultimate authority, but the sub-DAOs are where the innovation and growth initiatives occur,” McPherson told Blockworks. “You can think of it kind of like a subsidiary of MakerDAO.”



<h2>What is Spark Protocol?</h2>



The product consists of two components: Spark Lend and its associated front-end interface.



Both the smart contracts and the front-end took Aave’s open-source codebase as a starting point, which were then customized to focus on <a href="https://blockworks.co/price/dai">DAI</a>, rather than a general purpose borrowing and lending market.



“One of the main advantages is we get liquidity directly from Maker at the cheapest rate possible,” McPherson said. “This is going to be a big killer feature for the lending protocol.”



Unlike Aave, Spark will have a custom interest rate model that is not variable based on utilization — supply and demand. Instead, the rate is set by governance and remains flat no matter how many users are accessing dai liquidity, right up to a governance-set debt ceiling.&nbsp;



The <a href="https://vote.makerdao.com/executive/template-executive-vote-spark-lend-d3m-onboarding-may-02-2023#proposal-detail">initial cap</a> will be $5 million, but McPherson expects it to rise to $200 million within two-to-five weeks. The lower starting point is a safety measure.



The first collateral assets on the protocol will be ETH and stETH — Lido’s staked ether token — with additional liquid staked ether tokens (LSTs) to be onboarded in the future.



“The reason we’ve chosen these is because they are decentralized in nature,” McPherson said, noting “the market for Spark is entirely focused on promoting decentralized collateral for Maker Core.”&nbsp;



That’s in contrast to the other stream of collateral assets for backing dai, often referred to as “real-world assets” (RWA) — though some dislike the term.&nbsp;



The decentralized side is Spark’s focus. As for what comes next, it will come down to liquidity and risk assessment. “It looks like Rocket Pool is a likely next candidate,” McPherson said. <a href="https://maker.blockanalitica.com/">Block Analytica</a>, a risk team in Maker, provides simulations to inform governance on-boarding decision-making.&nbsp;



In general, the <a href="https://blockworks.co/tag/shanghai-upgrade">Shapella upgrade</a> was a major de-risking event for LSTs on Ethereum.



With the new ability to redeem ETH from LSTs, “we have much more confidence in these tokens maintaining their peg to ETH, which is very important for setting risk parameters,” McPherson said.



One novel feature of Spark is the availability of a tokenized Savings DAI — dai that’s locked in Maker’s DAI Saving Rate (DSR) module — which will allow users to enter and exit the DSR from the Spark front-end. That means holders of USDC can more seamlessly access the DSR in a way not possible today.



<h2>Decentralization details</h2>



Ownership of front-end interfaces has become a hot topic, particularly in US political circles, and McPherson said the front-end instance that runs at SparkProtocol.io will need to be compliant with any regulations in major jurisdictions.



However, the code is <a href="https://github.com/marsfoundation/spark-interface">available</a> on GitHub and anyone can download it and run it themselves.&nbsp;



“It’s very easy to download it and install yourself — and this is the ideal way that everybody should be interacting with it,” he said.



Spark Protocol uses Chainlink oracles rather than Chronicle price feeds used by Maker’s Oracle Safety Module.&nbsp;



Since it will have live price feeds, rather than Maker’s conservative one-hour delay on prices governing liquidations, Spark will run using loan-to-value ratios (LTVs) that are more in line with secondary markets like Aave and Compound.



On the roadmap is the need to harden the oracle system with additional redundancy which McPherson said should happen “in the near future.”



The product launch is “directly in line with the Endgame plan,” he said, for which the goal is to transition Maker Core to basic maintenance role, while other more complex Maker initiatives move into sub-DAOs.



“We’re dog-fooding this process as Spark Protocol in that this is the type of innovation that the Endgame plan is meant to foster within the outskirts of Maker Core.”



Dog-fooding is tech slang for the use of one&#8217;s own products. In this case, it’s both a model of how Maker’s practical governance is intended to evolve and a potential source of funds.



Revenue generated by the sub-DAO flows back to Maker Core, to the benefit of MKR holders.



“Spark Protocol is just one of many such innovations that will grow the DAI and Maker ecosystem and help foster this new explosion of DAI and Maker excitement,” McPherson said.



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Maker to Spark ‘New Explosion of DAI’ With Custom Lending Market

The Cosmos Hub has passed a signal proposal to replace existing Cosmos Hub staking, distribution, and slashing modules with the Liquid Staking Module (LSM).



Proof of stake blockchains are designed so that validators must lock up their tokens in order to participate in securing the network and earn rewards.



For <a href="https://blockworks.co/tag/cosmos" target="_blank" rel="noreferrer noopener">Cosmos</a>, this means that validators must lock up <a href="https://blockworks.co/price/atom" target="_blank" rel="noreferrer noopener">ATOM</a> tokens. 



Once a token is locked into the network, validators must wait 21 days before they are able to use them again — this is considered an unbonding period and its intention is to prevent masses of validators from suddenly withdrawing their tokens.



Implementing LSM means that ATOM token holders will be able to liquid-stake their already staked tokens without needing to wait for a 21-day unbonding period.&nbsp;



<a href="https://www.blockworksresearch.com/">Blockworks Research</a> Analyst David Rodriguez notes that this proposal is a big win for the Cosmos Hub and its wider ecosystem.&nbsp;



<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">I’m pretty hyped prop 790 passed today, which will bring the Liquid Staking Module to the Cosmos Hub. It will unlock ~$700M of ATOM liquidity (at current prices) to bring Cosmos DeFi to the next level. Slowly, but surely, the Hub community is moving in the right direction.&mdash; D ⚛️🛡️ (@EffortCapital) <a href="https://twitter.com/EffortCapital/status/1653964920734531586?ref_src=twsrc%5Etfw">May 4, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



“Cosmos <a href="https://blockworks.co/tag/liquid-staking" target="_blank" rel="noreferrer noopener">liquid staking</a> can unlock billions of dollars in staked liquidity and allow Cosmos DeFi to flourish over time,” Rodriguez said. “By double dipping in ATOM inflation and Cosmos DeFi yield, ATOM has a chance to become the de facto reserve asset of the ecosystem and make Cosmos DeFi much more attractive to users.”



To alleviate some risk, a limit of 25% will be placed on liquid staking tokens which can be staked, and this limit can be changed through the Cosmos Hub governance.



Further, LSM will introduce a mechanism called a “validator bond,” where each validator must self-bond <a href="https://blockworks.co/price/atom">ATOM</a>s at a ratio of 1:250 to receive ATOM tokens from liquid staking delegations.&nbsp;



Traditionally, if a validator were to be malicious, their self-bond would be slashed — with LSM, validators will be required to put more skin in the game, Rodriguez notes. This means that delegations will have the choice to delegate their ATOM to a validator who has self-bonded more tokens.&nbsp;



A little over 60% of ATOM holders voted in this <a href="https://wallet.keplr.app/chains/cosmos-hub/proposals/790">signal proposal</a>. Among them, 87% voted in favor of the proposal, with only 6% voting against and a little less than 7% choosing to abstain.



A proposal to implement LSM will likely be created later in the year.



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Cosmos Hub Staking May Soon be Revamped Following Latest Proposal

DeFi protocol Sommelier announced the launch of a new ETH liquid staking token vault called Real Yield ETH on Wednesday.



Real Yield ETH is the brainchild of strategy provider Seven Seas Capital and Web3 data analytics firm DeFine Logic Labs.



The vault is designed to generate yields on liquid staking tokens including rETH, stETH and cbETH through two primary techniques: leveraged staking on Aave and Compound, and providing liquidity on Uniswap V3. The protocol is expected to make more tokens available on Real Yield ETH in the future.



“The original foundational idea behind real yield ETH was having an index of the best yield on ETH,” Stephen Henkel, the CEO of Define Logic Labs, told Blockworks.



Existing index tokens peg their holders to the validation yield and are dependent on how much commission validators or the protocols are taking, Henkel said.



In the case of Real Yield ETH, which is considered a yield-weighted index, the more yield a particular strategy can receive, the more it will take from that index.



“As a strategy reaches its soft cap of TVL, the incoming TVL can go into other strategies, so it is continuously weighed in such a way that it can take in more and more TVL,” Henkel said.



Although Real Yield ETH is built on top of Sommelier — which is part of the Cosmos IBC, it is an ERC-4626 vault and will live on the Ethereum blockchain.



Sommelier helps these unique strategies come to life as the technology enables “Uniswap V3 tick optimization, really tight leverage loops and taking multiple positions across multiple assets and protocols,” Sun Raghupathi, the co-founder and CEO of Seven Seas, told Blockworks.



<a href="https://www.blockworksresearch.com/">Blockworks Research</a> Analyst David Rodriguez notes that “Sommelier&#8217;s strategy of leveraging an app-chain to optimize the Ethereum DeFi experience that offers non-custodial, institutional-grade mid-frequency strategies that change with on-chain market conditions is a 0 to 1 improvement on yield aggregation protocols like Yearn Finance.”



“Based on (unofficial) backtested models, RealYieldETH should be able to scale to over $60M TVL while providing ~13%+ APY without liquidity incentives,” Rodriguez said. “This is &gt;2x yield than the next competing ETH-based yield opportunity offered by Frax&#8217;s sfrxETH product.”



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Sommelier Launches New ETH Liquid Staking Token Vault

Daniel Dizon

Ethereum&#8217;s staking pool market is still relatively young. But it has now reached a critical milestone of maturity with Shapella.



And as this liquid staking market has grown, it has shown itself to be vulnerable to winner-takes-most dynamics, with the top players potentially destroying the decentralization that makes Ethereum valuable in the first place.



With <a href="https://blockworks.co/news/ethereum-set-date-for-eth-withdrawals" target="_blank" rel="noreferrer noopener">Shapella</a> (the combo of the Shanghai and Capella upgrades), liquid staking will take another critical step towards maturity, making now a critical time to steer the industry in the right direction — toward more decentralization instead of less.&nbsp;



<h2>The threat of liquid staking monopoly</h2>



The amount of ETH locked in liquid staking pools has soared in the past two years to hit 7.6 million, representing more than 40% of the total staked ETH amount.&nbsp;



While this might seem like a large number, the total stake is only 15% of ETH’s total supply — a very small fraction compared to the ~50% to 75% staking participation rates seen in other <a href="https://blockworks.co/news/proof-of-work-vs-proof-of-stake-whats-the-difference" target="_blank" rel="noreferrer noopener">proof-of-stake blockchains</a> where withdrawals are already implemented.&nbsp;



Having a single dominant liquid staking protocol —&nbsp;or even a single centralized staking service provider — does offer some advantages. A singular protocol makes it easier to trade staked ETH while also preventing liquidity from being split across too many staking tokens. As they say in traditional finance, liquidity begets liquidity.



But at a certain point, this dominance becomes damaging. Node operators that are bound together — either operationally, politically, or through a liquid staking governance token — are more likely than not to act as a single unit that holds outsized influence over the network.



If this single protocol controls less than a third of staked ether, then it may not become a threat. But if it verges over this safety threshold, that means that a singular protocol could effectively influence the entire blockchain.



A centralized entity is more likely to succumb to pressure to censor transactions, or to establish a stranglehold on the network and reap an outsized share of MEV opportunities. Passing these superior returns on to their users (or even retaining the value extracted for themselves) would then further cement the protocol as the market leader, creating what ETH researcher Danny Ryan called &#8220;outsized cartel rewards&#8221; discourage prospective stakers from choosing other protocols.



Even disregarding the misaligned incentive structure, a smart contract bug or mistake leading to a large slashing event at a dominant staking provider could lead to outsized losses, making it more likely to shake confidence in the entire Ethereum ecosystem.



These reasons and more are why multiple Ethereans — including the likes of Vitalik Buterin and SuperPhiz — have argued that a single staking protocol should never control any more than 15% to 33% of staking activity.



<h2>Creating a healthy liquid staking market</h2>



In an ideal world, ETH holders looking to earn yield through staking would set up their own validator infrastructure and &#8220;solo stake&#8221; independently for maximum network security.



But in reality, the majority of holders don&#8217;t have the technical capability or the requisite 32 <a href="https://blockworks.co/price/eth">ETH</a> to solo stake. They are instead likely to opt for third-party solutions such as liquid staking protocols, which knock down the barrier to entry and give them liquid rewards to deploy elsewhere in DeFi.&nbsp;



To help create a liquid staking market that doesn&#8217;t damage Ethereum&#8217;s diversity or decentralization, these liquid stakers should do two things:



First, turn away from centralized and permissioned solutions and toward those that are more aligned with Ethereum. This means trust-minimized, non-custodial protocols that use diversified and resilient node operator sets, especially those that are seeking to employ innovations that aid decentralization.&nbsp;



Take distributed validator tech (DVT) as an example, which allows a single Ethereum validator to be split across multiple nodes, improving network resilience and reducing the risk of slashing. This creates less risk of centralization even if a single staking provider becomes dominant.



Second, liquid stakers should stake with the values of Ethereum in mind. The qualities of decentralization, diversity and censorship resistance are ultimately what gives ETH value, and the best way to uphold them through liquid staking is to avoid contributing to the outsized dominance of a single staking provider.&nbsp;



<h2>The time to preserve network neutrality is now&nbsp;</h2>



Ultimately, taking the overall ethos of Ethereum into consideration will help create a diverse staking market composed of multiple providers that each have a relatively small slice of market share, all competing on a level playing field.



As the withdrawal of staked ETH is unlocked with Ethereum&#8217;s Shanghai upgrade, the boom in liquid staking protocols will naturally accelerate — and if left unchecked, the potential threat of these protocols centralizing Ethereum along with it.



All we need to do is make sure that people understand the stakes when choosing what to do with their ETH.



<hr class="wp-block-separator has-alpha-channel-opacity"/>


<div class="wp-block-post-author-biography">Daniel Dizon is a cryptocurrency entrepreneur. He is the founder of Swell, an Ethereum liquid staking protocol backed by Mark Cuban, Bankless, Framework, and more. Prior to Swell, Daniel founded and exited a Web2 start-up and advised governments on emerging blockchain technologies. His insights have been featured in numerous publications such as TechCrunch and Yahoo.</div>


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Stakers, Don’t Let the Shanghai Upgrade Centralize Ethereum

Bob Baxley

DeFi industry: There is a new war on the horizon. Unlike the Curve Wars, fought over stablecoin liquidity dominance, this war will be fought over the future of liquid staking tokens.&nbsp;



The catalyst for this upcoming battle?&nbsp;



The <a href="https://blockworks.co/news/ethereum-set-date-for-eth-withdrawals" target="_blank" rel="noreferrer noopener">Ethereum Shanghai fork</a>, set to take place on April 12, when more than 18 million in staked ether (~$34.2 billion) will become unlocked and battlelines will be drawn.



I believe that <a href="https://blockworks.co/tag/shanghai-upgrade" target="_blank" rel="noreferrer noopener">Shanghai</a> will provoke a period of intense competition among liquid staking protocols that will come to be known as the “Liquid Staking Wars” —&nbsp;albeit wars that will ultimately benefit the entire industry.



Those of us who were here for DeFi Summer will remember the Curve Wars well: the ruthless competition between the emerging stablecoin protocols, who “fought” on the Curve DEX to have the deepest liquidity and most diverse set of liquidity pairings.&nbsp;



Let’s review the ingredients that precipitated the Curve Wars:&nbsp;



1) a DEX Automated Market Maker (AMM) especially designed for trading stablecoins (Curve);&nbsp;



2) a mechanism for protocols to incentivize liquidity providers (LPs) to move from LPing one stablecoin to another (Curve incentive contracts);&nbsp;



and 3) a bunch of new stablecoin protocols jockeying for market share (USDC, USDT, DAI, FRAX, LUSD, etc).



I see striking similarities with the Curve Wars in the burgeoning competition between protocols that offer liquid staking tokens (LSTs) — yield-bearing tokens that allow holders to stay liquid while enjoying the yield from staked ETH.&nbsp;



We already see the same ingredients coalescing with:



1) novel DEX AMM protocols especially designed to facilitate LPing liquid staking token (LST) pairs;&nbsp;



2) incentive contracts that LST protocols can use to reward LST LPs; and



3) a cascade of emerging LST protocols vying for market share.



The Liquid Staking Wars have one last different ingredient — the imminent Shanghai upgrade that will enable LPs to easily and cheaply unstake ETH from one LST and move it to another LST.



The Liquid Staking Wars will be won by whichever protocol can capture the most TVL and volume for their LST. I believe that the battle for LST supremacy will see its first skirmishes by early May and that it will have a lasting impact on the DeFi ecosystem.&nbsp;



After all staked Ethereum becomes unlocked in mid-April, unstaked ETH holders will be incentivized to move their ETH from one liquidity staking token solution to another, always seeking the highest potential returns in liquidity pools. LST protocols will likewise be incentivized to capture market share by having their token be the most liquid.&nbsp;



This war — or competition between LST protocols to provide the dominant asset in crypto — will reshape all crypto pairs across all DEXs.&nbsp;



Liquidity provider (LP) strategies will also evolve based on the yield-bearing characteristics of LSTs; DEXs will evolve their offerings to accommodate this new landscape; and the DeFi industry will benefit from a wave of innovation (as we see in most periods of increased competition).



<h2>The Liquid Staking Wars’ tactics will mirror those of the Curve Wars</h2>



We will see LST protocols attempt to differentiate themselves through innovation, usability and yield. The most obvious mechanism will be yield: LST protocols will seek to maximize the incentives for LPs to fund liquidity pools using their LST over any other LST.&nbsp;



Post Shanghai, there will be a big opportunity cost for LPs who add liquidity to ETH-denominated pools instead of pools denominated in an LST. The ETH LPs will be foregoing ~4% return for no good reason.&nbsp;



Even pre-Shanghai, we have seen a massive demand for LST yield: Liquid staking tokens have skyrocketed in total value locked (TVL) to account for more than $14 billion, according to DeFiLlama as of April 3, 2023. The LST sector is second only to the current size of all decentralized exchange protocols combined.&nbsp;



Some may claim that Lido — with a near <a href="https://defillama.com/lsd">75%</a> of LST TVL market share — has won the war before it has even begun. But while Lido has established itself as a leader, entrants such as Frax, Coinbase, Rocket Pool, and new protocols that have yet to launch are jockeying for position to have their LST become the preeminent ETH replacement.&nbsp;



As with any war, the winners and losers will be defined by strategically deploying the right set of tactics on the battlefield.



This competition — and specifically the competitive incentivization of liquidity pools it will entail — should also benefit other participants across the DeFi ecosystem. LSTs have a place not just paired with each other or with ETH in pools, but also with other utility tokens. For example, instead of WBTC-ETH being a popular pool on DEXs, I expect to see WBTC-WSTETH, WBTC-cbETH or WBTC-rETH. 



I expect a groundswell of co-incentive liquidity pool structures pairing utility and yield tokens. These partnerships should benefit long-tail tokens by providing the liquidity required to build their businesses, as well as some of the most well-known utility tokens seeking to expand their influence.



In addition to maximizing incentives into liquidity pools, subtle differences in Automated Market Makers (AMMs) can provide significant advantages to LST protocols — especially considering how LSTs gain value over time from the yield of underlying staked ETH. This intrinsic value-growth dictates that LPs will need to more closely monitor their positions to keep their liquidity active as prices move. Pairing with an AMM that can maximize LP capital efficiency for an LST pair, as an example, can provide significant benefit.&nbsp;



I anticipate increased innovation from DEXs, specifically around the functionality of AMMs. To win the Liquid Staking Wars, protocols will need a set of tools to incentivize the liquidity of their liquid staking tokens using minimal incentives and maximum efficiency. Protocols that can boost LP incentives through this type of “surgical incentivization” and provide greater capital efficiency will ease the capital requirement burden from LSTs. This will in turn enable the LSTs to maximize their return on incentives, and capture a greater market share.



For stakers and LPs, it&#8217;s essential to understand the financials (fees, etc.) before they stake or provide liquidity on a particular platform. As mentioned, due to the unique return structure of LSTs, some existing AMMs are not capital efficient for LST liquidity. This is because LSTs and the unique liquidity challenges they represent did not exist when these AMMs were developed.&nbsp;



For instance, infinite-range AMMs like Sushi, Balancer, and Uniswap v2 are known to have low efficiency for almost any pair.&nbsp; But even Range AMMs like Uniswap v3 and related forks can have a low efficiency for an ETH-LST pair, because the price in the AMM will continuously exceed the LP’s range unless the LP actively manages their position or stakes a very wide price range. In addition to the incentives offered, LPs must be aware of these crucial structural details of the protocols before they deploy their capital.



Even though I am calling this next phase in DeFi after Shanghai a “war,” what it’s ultimately leading to is more liquidity injected into the ecosystem. And with greater capital efficiency in liquidity pools ushering in an era of more “active capital,” these volumes will be more consistently utilized to the benefit of the entire industry.



<hr class="wp-block-separator has-alpha-channel-opacity"/>


<div class="wp-block-post-author-biography">Bob Baxley is a technologist, entrepreneur, and builder of technology companies. Bob is the core builder at Maverick Protocol, a new infrastructure for decentralized finance built to facilitate the most liquid markets for traders, liquidity providers, DAO treasuries, and developers. Bob designed Maverick AMM, a revolutionary Dynamic Distribution AMM that provides greater capital efficiency and control for liquidity providers.</div>


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Why the Ethereum Shanghai Upgrade Will Lead to War

Liquid staking derivatives (LSDs) are gaining momentum in the cryptocurrency market as the long-awaited Ethereum Shanghai hard fork nears.



LSDs have edged past lending in combined total volume locked (TVL), making it the second-largest decentralized finance (DeFi) service, behind liquidity in decentralized exchange protocols.



An estimated $14.3 billion is currently locked up in LSDs, data from <a href="https://defillama.com/categories">DeFiLama</a> shows, with Lido dominating the space, making up <a href="https://dune.com/hildobby/eth2-staking">almost 93%</a> of the total liquid staking market share.



Following Shanghai, investors who have locked their ether in the Beacon chain will be able to finally withdraw their staked ether, including the protocols providing liquid alternatives.



The ability to withdraw may make liquid staking even more popular thanks to growing confidence in the Ethereum blockchain, Alluvial co-founder and Chief Operating Officer Mike Taormina <a href="https://blockworks.co/news/liquid-staking-derivatives-shanghai-upgrade">previously told</a> Blockworks.&nbsp;



“The Shanghai upgrade will finally enable withdrawals and remove uncertainty…we think that more people will end up participating [in liquid staking],” Taormina said.



Many centralized entities also offer staking products to their customers, removing the need to interact with DeFi directly.



There are currently 17.5 million ether staked via centralized exchanges such as Coinbase, Kraken and Binance, which are some of the largest staking providers in the space. Making up 11.85%, 7.08% and 5.92% of the total ETH staking market share respectively.



The US Securities and Exchange Commission crackdown on centralized staking provider Kraken, which <a href="https://blockworks.co/news/kraken-settles-sec-crypto-staking-program">reached an agreement</a> with to end its on-chain staking services in the country, has energized interest in decentralized alternatives.



<figure class="wp-block-embed is-type-wp-embed is-provider-flourish wp-block-embed-flourish"><div class="wp-block-embed__wrapper">
<iframe class="wp-embedded-content" sandbox="allow-scripts" security="restricted" title="Interactive or visual content" src="https://flo.uri.sh/visualisation/12907886/embed#?secret=S9aL7fnQdw" data-secret="S9aL7fnQdw" frameborder="0" scrolling="no" height="575" width="700"></iframe>
</div><figcaption class="wp-element-caption">Governance tokens for popular LSD providers are mostly outpacing bitcoin since the Kraken settlement</figcaption></figure>



Update March 8, 2023 at 8:32 am ET: A previous version of this article stated that Index Coop didn&#8217;t offer dsETH to US citizens. That has since changed, and they now offer dsETH to US customers.



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Liquid Staking Derivatives Surpass Lending TVL

Ben Strack

<div id="highlights-block_6283a172153fa" class="highlights">
 <ul>
 <li>Alluvial’s founding team includes former executives at Figment, Kiln and Index Cooperative</li>
 <li>New protocol will require contributors to enable embedded KYC and AML checks</li>
 </ul>
 
</div>



Crypto exchange Coinbase’s cloud division is working with Figment to support the founders and operators building what it calls the first enterprise-grade liquid staking protocol.&nbsp;



The news was revealed Tuesday during Blockworks’ <a href="https://cms.blockworks.co/events/permissionless/" target="_blank" rel="noreferrer noopener">Permissionless event</a> in West Palm Beach. Software development firm Alluvial is building the new protocol, which the company ultimately intends to be governed by a decentralized autonomous organization (DAO).&nbsp;



Liquid staking on Ethereum has grown from less than 1% market share in January 2021 to more than 30%, according to <a href="https://dune.com/hildobby/ETH2-Deposits" target="_blank" rel="noreferrer noopener">Dune Analytics data</a>.&nbsp;



“There has been growing demand amongst institutions and enterprises that want to access liquid staking but haven’t had a solution that meets compliance and security standards,” Coinbase Cloud Senior Manager Mara Schmiedt told Blockworks. “With Alluvial, we are enabling that access and are focused on unlocking the next wave of adoption and financial innovation in the space.&#8221;



Coinbase acquired blockchain infrastructure platform Bison Trails in January 2021 to become the foundational team and platform of <a href="https://www.coinbase.com/cloud" target="_blank" rel="noreferrer noopener">Coinbase Cloud</a>. The business offers Web3 application programming interfaces (APIs), services, and infrastructure for software builders.



<a href="https://www.figment.io/" target="_blank" rel="noreferrer noopener">Figment</a> is focused on offering staking and application layer solutions for token holders and developers building on Web3 technology. The firm <a href="https://cms.blockworks.co/figment-closes-funding-round-at-1-4b-valuation/" target="_blank" rel="noreferrer noopener">raised $110 million</a> in a Series C round in December, bringing its post-money valuation to $1.4 billion.



Alluvial is led by Matt Leisinger, former head of liquid staking products at Figment; Nicolas Maurice, the former chief technology officer of staking-as-a-service platform Kiln; and Mike Taormina, former head of institutional business at the Index Cooperative.



Liquidity is key to unlock the next chapter of financial innovation in Web3, the companies said.



The non-custodial protocol will allow users to stake their tokens and receive receipt tokens that prove ownership of the staked tokens. They can then use those receipt tokens to participate in the broader Web3 economy.&nbsp;&nbsp;



It will require all contributors to enable embedded know your customer (KYC) and anti-money laundering (AML) checks.



Coinbase Cloud and Figment plan to perform staking services on the network and run validators with clients across regions and cloud providers. Other security-focused validator operators will be added to the protocol over time.



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