Support for Liquid Staking Tokens is growing rapidly due to the Ethereum Shanghai upgrade drawing closer. This has inspired more protocols to start embracing LSTs.

Overview

• The Potential of LSTs and their Use Cases

• The Process of Liquid Staking

• The Benefits of LSTs

• The Potential Downsides of LSTs

• Combining LSTs with Vesper and Metronome

The Potential of LSTs and their Use Cases

As the Shanghai upgrade draws closer, the popularity of Liquid Staking Tokens (LSTs) has only grown stronger. This is mainly due to the fact that there is huge potential for more liquidity in the Ethereum LST market. But why? Well, ever since the Ethereum network successfully merged with the Beacon chain back in September 2022, users have had their deposited ETH essentially in limbo as they were not given a withdrawal date. The Shanghai update enables these staked assets to be withdrawn, currently slated for mid April 2023. This has put a lot of eyes on Ethereum and its earning potential. However, not everyone can afford 32 ETH, the required amount to stake. These Liquid staking protocols provide users with a much easier and cheaper alternative as they offer great flexibility and accessibility. With 1:1 (minus any accrued rewards) backed tokens and derivative features, participants gain access to additional DeFi markets, with the ability to enter or exit at any time, making it an attractive option for users.

So let’s quickly take a step back to fully understand why this update is so important. Typically when staking tokens, users are required to lock them up for a certain period of time to earn rewards. That means the longer you leave them in, the more rewards you will get. However, until recently, this was extremely inefficient for stakers who still wanted to access their funds as they turned temporarily illiquid. But, what if there was a way to continue earning those staking rewards while still being able to navigate the DeFi landscape and earn additional rewards elsewhere? That’s where LSTs come into play. Liquid Staking Tokens give users a new superpower through tokenization, enabling staked assets to be utilized on other DeFi protocols while still earning rewards.

Jordan Kruger, Co-Founder of Vesper and Metronome recently showed her support for LSTs, saying that:

“LSTs offer the highest capital efficiency — its truly a best of both worlds scenario — as token holders are able to use their tokens and participate in DeFi while still receiving the rewards that come from traditional locking and staking.”

The Process of Liquid Staking

Liquid staking offers a straightforward way to enhance the utility of your assets. You can easily implement it and access its benefits by following these simple steps:

• Deposit your assets into a liquid staking dApp such as Rocket Pool or Lido

• The application will then stake your ETH or other assets on its own validator nodes

• In doing so, you will receive a liquid token that represents your share at a 1:1 ratio (minus any rewards)

• With this liquid token, you can then navigate the DeFi landscape and deposit it into other protocols to earn an additional yield, like Vesper

• When rewards are paid out your balance will be compounded and increase in value

The Benefits of LSTs

As we discussed earlier, Proof of Stake networks require users to stake their tokens in exchange for rewards. However, this approach can lead to capital inefficiency as stakers cannot use their tokens elsewhere until a certain period of time has passed. So, what are the actual benefits of LSTs?

Lower Barrier to Entry for All:

With the introduction of LSTs came pooled staking. This eliminated the need for large amounts of ETH and specialized knowledge to get involved. When you compare this to solo staking, the process of contributing becomes considerably more straightforward and cost-effective.

Increased Capital Efficiency:

Upon depositing their ETH into LST protocols, users are issued a token that represents their stake, often including accrued rewards. This enables them to explore the DeFi ecosystem and employ the token on other platforms such as lending protocols (Euler), synthetic applications (Metronome), and yield aggregators (Vesper), enabling them to earn additional yield on top of their staked ETH rewards.

Encouraged Staking:

Since LSTs offer a much simpler option, they encourage more users to begin staking on Ethereum’s PoS network. This is highly advantageous for the entire ETH ecosystem as it enhances the network’s security and stability by increasing the number of stakers, thereby promoting greater decentralization.

Socialized Slashing:

Staking “slashing” occurs when the blockchain takes away a validator’s tokens for hardware misconfiguration or downtime. However, with LSTs, staking is pooled with multiple validators, therefore any slashing that occurs will be spread across the entire pool of participants, leading to a substantial decrease in penalties.

The Potential Downsides of LSTs

Now as you can clearly tell, LSTs have huge advantages when it comes to increasing capital efficiency. However, just like all protocols a part of DeFi, there are always going to be some kind of potential risks, including:

De-pegging:

As liquid staking tokens trade freely in the market and are not directly pegged to the price of ETH, this opens them up to “de-pegging” risks. As a result, this could lead to a breakdown of trust and cause users to hastily withdraw their stakes, draining market liquidity. If this occurred, users would most likely incur huge losses due to the discounted price of their assets. An example of this happening in 2022 was with Lido’s staked ETH (stETH), where users rushed to sell their positions at the same time, reducing the overall price by 5–7% below ETH.

Smaller Market:

Although there is often liquidity for LSTs, it’s generally much smaller than traditional “blue-chip” cryptocurrencies, such as ETH. This could mean some protocols offer an “unbonding period” to unstake their tokens. In the case of Polkadot, for example, it is 28 days. If this happened during a sudden market shift, it might be more beneficial for the staker to sell their LST token instead. If an LST protocol didn’t have deep liquidity and a rush of exiting positions, the risk of high slippage could result in huge losses.

Smart Contract Attack Vectors:

Before considering involvement with LSTs, it is crucial to determine whether you prefer a centralized or decentralized provider. A centralized provider maintains custody of funds, whereas a decentralized provider enables users to deposit funds through smart contracts without requiring custody. However, utilizing smart contracts comes with inherent risks, such as the potential for exploitation and theft of backing assets.

Combining LSTs with Vesper and Metronome

Now that you have a good understanding of LSTs and their potential benefits, you might be wondering how you can get involved and start taking advantage of them. Luckily, Vesper has been consistently expanding its support for various LST protocols, giving users the ability to deposit their tokens and begin earning additional APY right away.

By utilizing the Vesper Grow Pools, you not only have the opportunity to earn rewards in staked ETH and Vesper yield simultaneously, but you can also receive additional VSP, Vesper’s native token. This unique combination of capital efficiency is unparalleled in the space and offers unmatched benefits.

If you’re eager to explore the world of Liquidity Staking Tokens, then Vesper has you covered with their “LST Trifecta.” Currently, they have pools available for some of the most popular LSTs to date, including:

• rETH, a staked ETH token available through Rocket Pool.

• stETH, Lido’s contribution to the LST market.

• cbETH, Coinbase’s own proposition, and Vesper’s most recent addition.

So, where does Metronome come into the picture? Well, Synth will provide support for all Vesper Grow Pool LSTs. This means that you can deposit your Vesper positions into Metronome to generate synthetic assets, which ultimately enhance LST functionality even further. By doing so, you can utilize your vaLST-assets to increase your overall APY on Vesper by looping them through Metronome.

Metronome Looping Architecture — Source: Metronome

If we take the image above as an example of the looping process, you can do the following for Vesper LST assets:

1. Deposit ETH into an LST protocol such as Coinbase

2. Take that LST token (in this case cbETH) over to Vesper and put it into your chosen Vesper Grow Pool (vacbETH)

3. Head over the Metronome Synth and use it as collateral to generate Synthetic ETH (coming soon)

4. Visit the Curve Liquidity Pool for Metronome and swap Synthetic ETH (msETH) for ETH

5. Go back over to Coinbase and repeat the process until satisfied

Disclaimer: Looping deposits for yield increases the risk of liquidation. The more looping that is deployed, the higher the risk.