What does Ethereum's Shanghai upgrade mean for Liquid Staking Tokens (LST)?
The Ethereum Shanghai fork or upgrade will bring several changes to the network, enhancing its scalability, speed, and transaction and gas models. This includes bundling multiple EIPs into one, but the update most relevant to liquid staking will be EIP-4895.Author: Ankr
As the Ethereum Shanghai upgrade approaches in April, the crypto community and media have been eagerly anticipating the shift towards Liquid Staking tokens or "LSTs," rather than traditional staking on various platforms (however, all staking is expected to grow). This has led to a recent increase in the prices of tokens associated with liquid staking providers like Ankr Staking (ANKR). Let’s take a deeper look at what the next Ethereum upgrade entails and how it might affect liquid staking.
What Will the Shanghai Upgrade Bring?
The Ethereum Shanghai fork or upgrade will bring several changes to the network, enhancing its scalability, speed, and transaction and gas models. This includes bundling multiple EIPs into one, but the update most relevant to liquid staking will be EIP-4895.
ETH Unstaking (EIP-4895)
One of the most anticipated upgrades brought by the Shanghai upgrade will be the long-awaited ability to unstake or withdraw ETH from the Ethereum staking contract. This means that everyone who has staked on Ethereum will be able to redeem their staked ETH amount for ETH on a 1:1 basis.
Why Might the Shanghai Upgrade Lead to More Liquid Staking Usage?
Shortly after the introduction of ETH staking, Ankr was the first to launch a mechanism that provides stakers with greater flexibility while still benefiting from staking rewards—liquid staking. Ankr Staking and other liquid staking providers allow users to stake their ETH while receiving new tokens that represent their value in return, earning staking rewards by holding them.
They can then trade these tokens on secondary markets (DEX), unlike other staking platforms, allowing them the flexibility to exit their staking positions at any time. Additionally, users can earn another layer of rewards by contributing liquid staking tokens to liquidity pools, farms, and vaults in various DeFi yield solutions.
But what will happen to liquid staking solutions after the ability to withdraw ETH is enabled? Will they still be useful? The short answer is yes; they are not only still useful but may be more valuable to Ethereum's DeFi ecosystem than ever before.
Reducing Risk
Many businesses and individual stakers will now be more willing to stake their ETH because they will have the ability to unstake at any time. This flexibility reduces the risks and downsides associated with long-term locked assets. Furthermore, for those looking to transition from traditional staking, the inherent risks of liquid staking will now be lower. Liquid staking offers more flexibility and potential profit strategies, so why isn’t everyone doing this instead of traditional staking?
The answer is that there are still some active components in liquid staking that make it riskier, such as the possibility of smart contract exploits, decoupling of liquid staking tokens from their value, or significant reductions. The Shanghai upgrade will address at least one of these issues, as liquid staking tokens are less likely to decouple since they can be redeemed for (non-stakable) ETH at a 1:1 ratio at any time. Additionally, as liquid staking providers now have time to address issues, the security risks in smart contracts have also decreased, though they still exist.
More Funds from Unlocked Staking Users
Many people are willing to stake and lock their ETH in companies like Coinbase before they can explore all their other options, such as liquid staking and DeFi profit strategies. The Shanghai upgrade will allow them to finally reassess their profit strategies regarding ETH, and many may choose more flexible and valuable options like liquid staking. However, many believe that the TVL of ETH staked on the Ethereum chain will grow overall—including an increase in staking on platforms like Coinbase that can offer "auto-enrollment" staking.
Improving Liquid Staking and More DeFi Integration
After the successful merge, DeFi has thrived, and liquid staking tokens are at the forefront of profit strategies.
"Thus, Staked ETH is the first yield instrument to achieve significant scale in DeFi and has the potential to grow significantly in the coming years and fundamentally change the ecosystem," Cointelegraph quoted Nansen.
Using liquid staking tokens or "LSTs" in DeFi provides stakers with a great opportunity to earn not only staking rewards but also DeFi rewards simultaneously. They can contribute liquid staking derivative tokens (such as Ankr's aETHc) to liquidity pools, farms, and vaults for additional rewards. Because of this, liquid staking has gained tremendous momentum in recent weeks with the growth of tokens like ANKR, Lido (LDO), and Rocket Pool (RPL), and many speculate that their value will continue to expand with the trend of liquid staking.
How Will Shanghai Change Ankr Staking?
Ankr Staking needs to ensure everything is ready for our users to redeem or unstake their ETH. Many of our users may wish to transfer some of their funds and unstake some of their assets. We will soon update the community on the exact preparation timeline. However, you can read about how we ensure the safe withdrawal of ETH as soon as possible after the Shanghai upgrade.
