The Shanghai Hard Fork: A Game-Changing Moment for Ethereum
Scheduled for March 2023, the Ethereum Shanghai hard fork marks a significant milestone in the network’s transition to its proof-of-stake (PoS) model, which officially began during the Merge on September 15, 2022. The most exciting part? Staked Ether (ETH) will finally be unlocked, allowing once-locked assets to flow freely for the first time since December 2020. Over 16.6 million ETH, valued at a staggering $28 billion, currently sits gracefully in the PoS staking protocol.
Deflationary Dreams Fulfilled
Ethereum’s evolutionary journey was partially aimed at making Ether’s supply deflationary, and since the Merge, that mission is showing results. In just 154 days, approximately 24,800 ETH has been burned, resulting in a yearly deflation rate of 0.05%. As of February 16, 2023, with a total Ether supply hovering around 120 million, more than 10% is set to be unlocked. Ready, set, liquidity!
Liquid Staking Derivatives: The Knight in Shining Armor
Now, how does one make the best of a locked-up situation? Enter liquid staking derivatives (LSD). Not just a clever acronym, these derivatives enable users to benefit from staked ETH while still holding the ticket to the liquid market. These protocols take a slice of the pie, locking native Ether and providing a derivative token that can be traded on secondary markets.
- Cash Flow Control: Thanks to LSD, 57% of staked Ether is liquid—far surpassing the 43% that remains illiquid.
- Price Flexibility: Since numerous investors are cushioned with liquidity, the potential for a massive sell-off post-Shanghai diminishes.
Profitability: A Shaky Status
Deciding to stake is like getting hitched; returns are uncertain, and running the numbers is crucial. Many early stakers locked Ether when prices were a modest $400-$700. Fast forward to Ether’s peak at $4,200, and it’s clear that many investors are now staring at unrealized losses, thanks to a 69% price correction. Binance notes that about 2 million ETH was staked at those earlier prices, leaving a group of hopeful believers in a tight liquidity situation.
“We note a sizable amount of ETH (around 2M) was staked at prices in the US $400–700 range—this represents the earliest stakers in December 2020.”
Lido Takes the Crown: Decentralized Finance Leader
In early January 2023, Lido surpassed MakerDAO to claim the title of the highest total value locked in decentralized finance. It now boasts over 5 billion ETH staked, accounting for 29.2% of all staking entities. For those who staked through Lido, nearly 30% can tap into current liquidity. This shift alters the power dynamics, as solo stakers, who risk running their own nodes, now represent only 24.9% of all stakers.
With nearly 55% of total staked Ether held by Lido and solo stakers, the fears regarding a major price dump could be somewhat alleviated. However, some analysts are still echoing warnings about potential dips as the hard fork approaches.
