Bittime - The future of the liquid staking token (LRT) ecosystem depends on how liquid the assets are, according to a report by crypto research firm Kairos Research. Once EigenLayer officially enables LRT withdrawals, the survival of this entire ecosystem will depend on the ability of liquid staking protocols to maintain the liquidity of their tokens.
Liquid Staking Mechanism and the Role of LRT
Liquid staking works by allocating Ether (ETH) or liquid staking tokens (LST) to a shared security infrastructure. Users then receive a proxy token representing the amount of assets they deposited to continue participating in the decentralized finance (DeFi) ecosystem.
The Kairos report uses EigenLayer as an example. Decentralized applications (dApps) can leverage the EigenLayer security infrastructure that has millions of staked ETH instead of creating their own set of validators.
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The report goes on to explain that the ability to exchange LRT for its underlying asset, namely ETH, plays an important role in the industry. This is especially true after EigenLayer opens withdrawals, as users may look for alternative sources of income (yield). However, the process to withdraw staked ETH from EigenLayer takes seven days, and investors may be looking for a way to get liquidity quickly.
Impact of LRT Lack of Liquidity
In such a situation, if LRT does not have sufficient liquidity, its value against ETH will fluctuate, causing problems in its use.
"As LRT becomes increasingly integrated into the broader DeFi ecosystem, especially the lending market, the importance of maintaining peg (peg value) will increase drastically. For example, currently LST, especially wstETH/stETH, is the largest collateral asset on Aave, the platform leading money markets, with total supplies of around $4.8 billion and $2.1 billion respectively," said Kairos analysts.
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In addition, abundant liquidity makes LRT prices more stable. The report cited Coinbase director Conor Grogan's post as an example of how Sam Bankman-Fried (SBF) managed to create a significant 'depeg' on stETH by selling $75 million into the market. This lack of liquidity caused a shock that Grogan said triggered a chain of events that led to the bankruptcy of hedge fund Three Arrows Capital.
Incentives to Maintain the Health of the LRT Ecosystem
Nonetheless, the report highlights that token incentives from protocols using the EigenLayer shared security structure and liquid staking protocols can play an important role in maintaining the health of the LRT ecosystem. "We think that token incentives could potentially play an important role here, and we look forward to seeing different token models following potential airdrops from other LRT providers," concluded the Kairos report.
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Also read:
What is Puffer Finance? Best Liquid Staking Solution for Ethereum
Ether.Fi (ETHFI): Opening a New Era of Liquid Staking in the DeFi World
Understanding Liquid Staking with Lido (LDO): A Liquidity Solution for Proof-of-Stake Staking
DISCLAIMER: This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.
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