Ethereum proof of stake has been live for about a year now and about 31.1 million ETH sits in the beacon deposit contract at the moment with about 39% of it liquid staked.

The single largest liquid staking protocol is Lido at the moment with 8.8 million ETH staked through stETH. Coinbase comes second, then the biggest is Rocketpool and then comes Frax, Stakewise, Ankr, Cream and many others. Lido has been facing some backlash recently for doing too well because that might become a “centralization threat” to Ethereum down the line. This blog gives some good insights of the attack vectors that might arise from Lido.

An important feature of liquid staking is accessing staked capital that is put on stake for participating in consensus, and hence, “liquidity” is important. Each ETH staked with Lido mints an stETH, which you can then sell for ~1 ETH on secondary markets, put up as collateral to borrow other crypto from protocols like Maker, AAVE, Lybra etc, deposit on Pendle to strip your asset into principal and yield components, and so much more. And this is pretty much everything one would like to do with LSTs.

At the core of all these “utilities” is the ability to find good prices for LSTs on the secondary market, i.e, liquidity. Bootstrapping liquidity for staked assets has become relatively expensive recently and this will naturally increase with more competition in the space.

Protocols so far have relied upon incentivising liquidity provision to maintain liquidity on their assets. There are certain considerations that LPs have before providing liquidity -

• Liquidity of the base asset

• Fee params of the AMM

• Volumes

• Switching costs (gas fee to keep rebalancing one’s portfolio across markets)

However one of the major concerns for LST/ETH LPs is entering a position might leave them holding the LST without additional exit liquidity. They would then sell the newly acquired LST into outside markets which might or might not have stale prices.

End of day, liquid staking is a service. It allows users to delegate stake to validators to earn staking rewards. And hence, these service providers tend to want to keep liquid staking, “liquid”. In secondary markets, AMM LPs are responsible for keeping these receipt tokens liquid. Providing liquidity to newer and smaller pools does not make a lot of sense without incentives, the sole reason being uncertain volumes. The goal for any LST protocol is to provide the most robust exit liquidity for anyone in their ecosystem to give confidence to investors that they can exit early if need to.

What is Lucidly Finance?

We’re standardising the cost for providing liquidity.

Protocols/DAOs spend a lot of efforts in structuring the correct incentive mechanisms to bootstrap liquidity for their tokens. Popular infrastructure at the moment allows DAOs to acquire liquidity based on weekly/bi-weekly gauge voting systems. They place incentives at a fixed or market rate to attract liquidity/emissions to liquidity pools. LPs on the other hand are expected to keep rebalancing their portfolios to capture yield fluctuations. This method has been the status quo for multiple cycles but lack a guarantee for reliable liquidity and on-demand liquidity provisioning.

We believe markets would be more efficient if there are mechanisms in place to react to immediate demand for liquidity and Lucidly is building exactly that. We are focusing our efforts on ethereum LST markets at the moment.

We will release another blog with more details and until then ✌️.