Prisma Finance - Exploring Ethereum’s Liquid Staking Tokens

Liquid staking is experiencing exponential growth as the liquid staking token narrative is in full flow. As we approach the launch of Prisma Finance, we give a brief overview on what sparked this growth, capturing attention and fostering innovation within the sector. In this context we will highlight some of the Ethereum-based liquid staking providers and the exciting new primitives that are emerging.

Market landscape

Source: dune.com/queries/1933076/3188545

Following the successful implementation of the Merge, and despite rumors of massive unstaking surrounding the Shanghai update, there has been a significant increase in ETH being staked on the Beaconchain. Current data indicates that more than 22 million ETH has been staked, which represents approximately 19% of the total ETH supply.

According to data from DefiLlama, various liquid staking providers have close to 9.5 million ETH staked, with Lido holding the largest market share at ~74%. However, over the past year, Coinbase, Rocket Pool, and Frax have been steadily increasing their market share, especially in recent months. As a result, the liquid staking provider landscape is rapidly evolving into one of the most exciting new categories within DeFi, with fierce competition to attract the majority of stakers. New protocols like Prisma are an opportunity to further level the playing field for all LST providers.

Source: Defillama

Let’s dive into the Liquid Staking major actors by market share:

Lido DAO (wstETH)

Staked ETH: 7.1m   Market share: 73.87%   30d change: +12.05%

Lido stands out as the largest liquid staking provider, capturing ~74% of the market for liquid staked ETH, with close to 7.1 million ETH staked.  Lido's prominent market position can be attributed to its first movers advantage, which allowed it to establish a strong position and gain a competitive edge in providing robust liquidity for wstETH.

Coinbase (cbETH)

Staked ETH: 1.1m   Market share: 11.88%   30d change: -1.71%

In a relatively short period of time, Coinbase has emerged as a strong competitor, surpassing Rocket Pool to secure the position of the second-largest liquid staking provider. Coinbase’s centralized staking service issues cbETH, an ETH liquid staking token that represents its fair value in relation to ETH. This sets it apart from other ETH liquid staking tokens that are designed to track the price of ETH in a 1:1 ratio.

Rocket Pool (rETH)

Staked ETH: 738k   Market share: 7.72%   30d change: +23.77%

Rocket Pool ranks third among liquid staking providers, with over 738k ETH staked and a market share of close to 8%.What distinguishes Rocket Pool is its emphasis on decentralization, boasting a network of over 2700 node operators. The entire process of creating, withdrawing, and delegating rewards is managed by Rocket Pool's smart contracts on the Execution layer.

Frax Finance (sfrxETH)

Staked ETH: 235k   Market share: 2.46%   30d change: +30.78%

By utilizing the Frax Finance ecosystem to optimize yield, Frax has successfully secured the fourth position among liquid staking providers. Frax's distinct approach has enabled holders to enjoy a considerable yield, as reported by DefiLlama, reaching nearly 10% at some point. This attractive yield has contributed to the swift growth of Frax's liquid staking token, solidifying its position in the market.

Binance (WBETH)

Staked ETH: 72k   Market share: 0.75%   30d change: +1.17%

WBETH, a recently introduced liquid staking token by Binance in late April, offers users the opportunity to participate in DeFi initiatives outside of Binance while retaining their eligibility for ETH staking benefits. As a new participant in the liquid staking market, Binance has undertaken strategic measures to secure liquidity for WBETH, including engaging with bribes on Curve. These efforts highlight Binance's active involvement in establishing a solid position for WBETH within the competitive landscape of liquid staking.

What’s next?

For liquid staking tokens to effectively be integrated into DeFi, it is crucial to establish substantial and lasting liquidity for these assets. The success and functionality of these tokens rely heavily on the presence of appropriate incentive structures. Liquid staking issuers recognize the significance of liquidity as they compete to attract the relatively limited number of ETH stakers and liquidity providers. The accumulation of deep liquidity becomes a key factor in driving the adoption and seamless integration of liquid staking tokens within the broader DeFi ecosystem.

Existing DeFi protocol primitives lack the necessary incentive structures required for liquid staking tokens to establish lasting deep liquidity. Many of the existing DeFi protocols often overlook the integration of emerging LSTs such as rETH and sfrxETH.

While DeFi protocols are beginning to integrate emerging LSTs into lending markets, their design is not optimally adapted to maximize capital efficiency for these LSTs.

Prisma addresses these challenges by leveraging the best of what DeFi has to offer, creating a specific flywheel incentive structure for LSTs and their providers. The Prisma protocol provides users access to the Prisma’s native overcollateralized stablecoin, acmkUSD, using any of the listed liquid staking tokens (LSTs) as collateral. This approach allows holders of liquid staked ETH tokens an access to unparalleled capital efficiency without undermining and exposing the protocol to weaker centralized assets. As Ethereum staking rewards accrue, loans secured by LSTs gradually see their collateral value increase, making it safer from liquidation.

The integration of a Curve pool further enhances the benefits for users. By staking their stablecoin, users can earn additional rewards in the form of CRV and CVX, which the protocol strongly incentivizes through participation in Curve wars. This particular structure encourages users to actively engage in the Curve ecosystem and maximize their returns.

Prisma's codebase has been designed to be completely immutable with flexible governance parameters to be managed by vePRISMA holders. Over the next weeks, Prisma will review its launch collaterals, assessing their level of decentralization and risks to find the most suitable parameters for each of them. If you wish to learn more about Prisma, please refer to our launch announcement or keep in touch with us using the links below:

Twitter: https://twitter.com/PrismaFi Discord: https://discord.gg/prismafinance Website: https://www.prismafinance.com/