BIT officially launched the LsETH/USDT trading pair: Compliant Ethereum staking services present opportunities for Ethereum staking ETFs

The cryptocurrency exchange BIT (bit.com) has launched the LsETH/USDT trading pair, making it the second centralized exchange to list LsETH after Coinbase, and the only exchange supporting the LsETH/USDT trading pair. Coinbase currently supports LsETH/USD and LsETH/ETH trading pairs.

BIT exchange's recent series of initiatives in the market has garnered widespread attention. The launch of small-cap options products, the introduction of financial innovation products such as square options, the establishment of a spot trading market for Eigenlayer points, and the debut of the LsETH/USDT trading pair are all actions reflecting its response to user demands, active financial innovation, and rapid feedback to market changes.

The launch of LsETH means that investors can more conveniently participate in staking activities on the Ethereum network, while also providing a simpler and more efficient option for those looking to earn returns through staking.

Ethereum ETF vs Ethereum Staking ETF

In this bull market, which was initiated by Bitcoin inscriptions and led by Bitcoin ETFs, ETH's performance has been lackluster. On May 21, 2024, influenced by news that the SEC might approve a spot Ethereum ETF, the price of Ethereum surged, rising from around $3,150 to over $3,600 within three hours, and later reaching a yearly high of $3,942.24 in the following days.

Due to regulatory uncertainty and the SEC's stance on staking activities within such funds, the SEC has currently excluded staking functionality from applications for spot Ethereum ETFs.

However, on June 17, Canada's Purpose Investments announced the conversion of its Ethereum Capital Corporation into a staking Ethereum ETF. This conversion indicates that Canada has taken the lead in accepting Ethereum staking after the SEC expressed unease about this concept.

On June 13, ++cryptocurrency derivatives trader Gordon Grant stated in an interview with The Block++ that for institutional investors, the lack of staking functionality may diminish the appeal of spot Ethereum exchange-traded funds (ETFs), and institutional funds may wait until staking is approved before investing in such funds.

Grant pointed out that, unlike Bitcoin, directly holding Ethereum may offer institutional investors performance advantages compared to spot Ethereum ETFs. Before the staking functionality of spot Ethereum ETFs is enabled, institutional traders will use on-chain solutions.

Grant is not the first to make this claim. ++JPMorgan stated in a recent++++report++ that the lack of staking functionality in approved spot Ethereum ETFs makes these products less attractive as investment vehicles. Analysts believe that the removal of staking functionality from ETF applications has made them "less appealing compared to platforms that offer staking rewards."

JPMorgan expects that spot Ethereum ETFs will attract up to $3 billion in net inflows for the remainder of the year. If staking is allowed, that number could rise to $6 billion.

The Compliance Pain of Cryptocurrency Staking

Cryptocurrency staking refers to the process of locking up digital assets to help secure a blockchain or provide validation services, thereby contributing to the system and earning corresponding rewards.

In August 2022, the SEC launched an investigation into the cryptocurrency staking services offered by Coinbase, which included Coinbase's staking program, asset listing processes, asset classification, and stablecoin products.

In February 2023, the SEC reviewed Kraken, pointing out that investors would lose control over their tokens when providing them to Kraken's "staking-as-a-service" platform, bearing risks associated with these platforms with minimal protective measures. Meanwhile, Kraken announced the termination of its staking-as-a-service program for U.S. users. SEC Chairman Gary Gensler stated that staking-as-a-service providers must register and provide comprehensive, fair, and truthful disclosures and investor protections.

On July 15, 2023, Coinbase announced that users in California, New Jersey, South Carolina, and Wisconsin would temporarily be unable to use its staking services.

So, why is the SEC's scrutiny of cryptocurrency staking services so stringent? The root of the issue lies in the fact that, apart from native staking, the staking services provided by centralized exchanges and staking service providers often have low entry barriers, making it difficult to discern whether there is money laundering involved; these institutions may also operate in a black-box manner, leaving users unaware of the specific flow of funds, which could be more about gathering deposits for interest. Furthermore, whether the crypto assets are genuinely staked on the network cannot be verified, not to mention whether network security is guaranteed.

This lack of transparency and potential high risks have prompted the SEC to conduct strict reviews of these staking services to ensure that investors' interests are not harmed and to promote healthy industry development. By requiring staking service providers to register and provide comprehensive disclosures, the SEC aims to enhance market transparency, protect investors, and prevent money laundering and other illegal activities.

Liquid Collective ------ Establishing Industry Standards for Liquid Staking

Liquid Collective is a multi-chain liquid staking protocol designed to provide institutions with non-custodial decentralized liquid staking solutions. Liquid Collective emphasizes compliance and security, requiring users to complete KYC/AML (anti-money laundering) certification with node operators.

The core component of Liquid Collective is smart contracts. Users can deposit any amount of ETH into the smart contract, without the 32 ETH restriction. When the smart contract balance reaches 32 ETH, the ETH in the contract will be staked to node operators in a cyclical manner. Node operators include Coinbase Cloud and Figment, which run validation node infrastructure on Liquid Collective and earn network rewards; Liquid Collective itself does not operate validation nodes.

When users deposit ETH into the Liquid Collective protocol, they receive LsETH. LsETH (Liquid Staked ETH) is a token generated when Ether (ETH) is staked through Liquid Collective's liquid staking protocol. It represents the staked ETH and its accumulated network rewards, minus any fees or penalties.

The total supply of LsETH does not change with the quantity of staking rewards and network penalties at the protocol layer, but is balanced by the "exchange rate" between LsETH and ETH. For example, if we stake 100 ETH through Liquid Collective and receive 100 LsETH at a 1:1 ratio, and a month later the staking rewards amount to 20 ETH, assuming no network penalty fees were incurred in the meantime, the total amount of ETH at the protocol layer would be 120 ETH. At this point, if one wishes to exchange 100 LsETH for 120 ETH, they would need to multiply by an "exchange rate" of 1.2. Similarly, at this exchange rate of 1.2, one would need to stake 120 ETH to obtain 100 LsETH. Here, the calculation of the exchange rate is the total balance of staked ETH divided by the total supply of LsETH. An oracle will report data from the consensus layer to the execution layer every 24 hours and report the balance of staked tokens, accrued staking rewards, and penalties to be deducted to the core contract of Liquid Collective to calculate the new exchange rate.

Exchange Rate =

LsETH is based on the Ethereum ERC-20 token model, and its exchange rate fluctuates to reflect the value of accumulated rewards and penalties. The advantage of using ERC20-based cToken contracts is that user staking rewards, compound interest, etc., are fully automated, requiring no manual operation, thus maximizing the reduction of gas consumption. At the same time, since the exchange rate changes in real-time, LsETH is essentially indistinguishable from other tokens, allowing users to use LsETH for trading, collateral lending, and even re-staking it on Ethereum through EigenLayer.

Liquid Collective achieves non-custodial, decentralized solutions while ensuring compliance, enhancing the security of the Ethereum network. For institutions, using Liquid Collective's staking services can help navigate regulatory scrutiny and avoid sanction screening; on the other hand, unlike other Ethereum staking options, Liquid Collective releases the liquidity of staked assets, allowing LsETH to be used for exchanges and integrated with DeFi.

Liquid Collective believes that the various liquid staking products currently on the market lead to fragmentation, with different protocols competing for DeFi resources, and different standards of LST tokens limiting liquidity, lacking compliance and composability.

Therefore, Liquid Collective aims to establish an industry alliance for decentralized management by bringing together key participants in the DeFi ecosystem. This alliance includes The Liquid Foundation, Alluvial, Coinbase, Figment, Kiln, Acala, Rome Blockchain Labs, Kraken, Staked, Bitcoin Suisse, and other Web3 organizations, involving integrators, cross-chain builders, node operators, and more. For Liquid Collective, a decentralized and compliant liquid staking solution is not the end goal; the ultimate aim is to establish a liquid staking standard for the industry based on this solution.

Conclusion

BIT exchange is committed to providing users with more diverse trading options and more flexible trading pairs to meet the needs of different investors. By continuously launching new products and trading pairs, BIT exchange demonstrates its leading position in innovation and adaptation to market demands.

Moreover, the launch of LsETH as a new type of staking ETH token on BIT exchange not only helps enhance the market visibility and liquidity of the product but also provides investors with more investment opportunities and strategies.

From the feedback of major financial institutions and the market, whether ETH ETFs can inject a boost into the currently sluggish market largely depends on the staking functionality, especially whether staking ETH ETFs can gain regulatory approval. In other words, compliant ETH staking services will be one of the keys to ETH making breakthroughs in the market. For individual investors, holding LsETH is a simpler and more efficient choice compared to directly holding ETH and engaging in complex on-chain staking operations. This not only simplifies the operational process but also allows for enjoying the returns of holding ETH along with the additional rewards from staking, achieving a win-win situation.