What Does Ethereum’s Shanghai Upgrade Mean for Liquid Staking Derivatives (LSDs)?

Kevin Dwyer

February 6, 2023

4 min read

As Ethereum’s Shanghai update looms in March, the crypto community and media have been anticipating a shift toward Liquid Staking Derivatives or “LSDs” as opposed to traditional staking on various platforms (however, all staking is expected to grow). This has led to a recent increase in price for tokens associated with liquid staking providers like Ankr Staking (ANKR). Let’s take a deeper look at what’s coming with the next Ethereum update and how it might impact liquid staking.

What Is Coming With the Shanghai Update?

Ethereum’s Shanghai Fork or Upgrade will bring several changes to the network, upgrading its scalability, speed, and models for transactions and gas. This includes several EIPs bundled into one, but the update that is most relevant to liquid staking will be EIP-4895.

ETH Unstaking (EIP-4895)

One of the most important upgrades coming with the Shanghai upgrade will be the long-awaited ability for all to unstake or withdraw their ETH from the Ethereum staking contracts. This means all who have staked on Ethereum will be able to redeem their staked ETH amounts on a 1:1 basis for ETH.

Why Will the Shanghai Update Likely Bring More Liquid Staking Use?

Shortly after ETH staking was introduced, Ankr pioneered a mechanism that would allow much more flexibility for stakers while still benefiting from staking rewards – liquid staking. Ankr Staking and other liquid staking providers allowed users to stake their ETH while receiving new tokens in return (sometimes referred to as “derivative” tokens) that represent their value and deliver staking rewards just by holding it. They could then trade this token on the secondary market (DEXes), giving them the flexibility to exit their staking position, unlike other staking platforms. Additionally, users could earn an additional layer of rewards by contributing their liquid staking tokens to DeFi earning solutions like liquidity pools, farming, and vaults.

But after withdrawals are enabled for ETH staking, what will happen to liquid staking solutions? Will they still be as useful? The short answer is yes, not only will they still be just as useful, they will likely be more valuable than ever to Ethereum’s DeFi ecosystem.

Reduced Risk

Liquid Staking provides more flexibility and potential earning strategies so why wouldn’t everyone do it over traditional staking? The answer is that there are a few more moving parts in liquid staking that make it a little riskier such as potential for smart contract exploits, liquid staking tokens de-pegging from their value, or slashing. The Shanghai upgrade will solve for at least one of these problems as liquid staking tokens will be less likely to become depegged as they will be redeemable (unstakeable) for ETH on a 1:1 basis at any time. Also, as liquid staking providers had now had some time to iron out the kinks, security risks in smart contracts are lessened as well, but still present.

More Funds Flowing From Unlocked Staking Users

Many were happy to stake and lock their ETH with companies like Coinbase before they were able to learn about all the other options available to them, such as liquid staking and DeFi earning strategies. The Shanghai update will allow them to finally reevaluate their earning strategy when it comes to ETH, and it is likely that many will opt for more flexible and rewarding options like liquid staking. However, many are weighing in that the TVL staked ETH on the Ethereum chain will grow altogether – including boosting staking on platforms like Coinbase that could offer “automatic enrollment” staking.

Improvements to Liquid Staking & More DeFi Integrations

After the Merge was successful, DeFi flourished with liquid staking tokens leading the pack in earning strategies.

“Staked ETH is thus the first yield-bearing instrument to reach significant scale in DeFi, and has the potential to both significantly grow and radically transform the ecosystem in the coming years.” A quote from Nansen cited in Cointelegraph.

Using Liquid Staking Derivatives or “LSDs” in DeFi opens a great opportunity for stakers to gain not only staking rewards but also simultaneous DeFi rewards. They can contribute their liquid staking derivative tokens, such as Ankr’s aETHc, into liquidity pools, farms, and vaults to earn an extra layer of rewards. Because of this, in the past couple of weeks, liquid staking has gained massive momentum as tokens like ANKR, Lido (LDO), and Rocket Pool (RPL) have grown, with many speculating that their value will continue to expand along with the trend of liquid staking.

How Will Shanghai Change Ankr Staking?

Ankr Staking will need to ensure everything is ready to allow our users to redeem or unstake their ETH. Many of our users will likely want to move some of their funds around and unstake some of their assets. We will update the community soon on when exactly this will be ready.

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