Liquid staking is not really a new thing in crypto. POS blockchains have already had it for some time now. I remember farming stFTM pairs on Fantom and stONE pairs on Harmony a while back.

But now that Ethereum has joined the party after they go full POS with the merge, liquid staking gets newfound popularity. Why? The answer lies in the upcoming Shanghai upgrade.

With the upgrade, beacon chain stakes are finally allowed to withdraw their staked ETH. The assumption is, those stakes will continue to stake ETH, only perhaps the majority of them want to stake it through an LSD (Liquid Taking Depositors)— instead of self-staking.

Why liquid staking

Not everyone has the 32 ETH required to set up a validator. So, for those smaller holders to be able to enjoy the benefit of staking, liquid staking is invented. Also, maintaining validators is not something everyone would like to do since it requires both commitment and knowledge.

Furthermore, when you stake a native coin on a validator, your asset will be withheld on those validators. You can’t do anything with your ETH until you withdraw them again. In essence, it’s alright because that’s what staking supposedly is, but of course, people want more, for the sake of something called capital efficiency.

How it works (How to liquid stake ETH)

Instead of whip out your own validator and self stake, you stake your ETH through a third-party. When you stake through Lido, for example, you get stETH in return (on your wallet.) Further, you can use these stETH to farm yield on various DeFi protocols.

ETH liquid staking has less risks of the underlying asset being unbacked. For as long as a stETH contract exist, there’s always an ETH staked on validators somewhere. In this sense, the asset is more secure than stablecoins as some stables still fully rely on human trust like USDC or USDT. stETH is also more secure than othe ERC20 contracts issued by DeFi protocols. An example that comes to mind is BTC contracts on Ethereum network.

And it’s also worth mentioning that ETH is not a random ERC20. It’s a blue-chip asset with stable demands. Even when there was a black swan event such as the 3AC liquidation that causes stETH to slightly depeg, it was not a real depegging event. There was simply an imbalance in the stETH-ETH liquidity pool ratio. The ETH itself is safe.

The LSD protocols

Based on this Dune Analytics chart, there’s a handful of LS depositors out there available for the public. We’re going to talk about the three biggest ones: Lido, Rocket Pool, and Stakewise. We’re going to skip Coinbase because it’s not exactly DeFi and add the new rising star, Frax Finance.

Lido

Lido needs no introduction as the largest ETH2 staking platform. Lido’s main appeal lies in its reputation. A protocol built by the most hardcore OGs of Ethereum and backed by the most OG of crypto VC (Paradigm), Lido represented a grassroots Ethereum project. Back when DeFi was still new — in 2020 — Lido, alongside names like UniSwap, Curve, or AAVE, were the trailblazers of the industry.

Lido is the biggest, but when users flock in one DeFi place like Lido, there’s one big disadvantage you would care about (provided you won’t care that much about the monopoly slash centralization threat by being the majority liquid staking depositor).

That disadvantage is the yield that gets smaller. Among other staking platforms, Lido offers a yield of 4,9% APR.

Yield: 4.9%. Fee: 10% out of the yield.Contracts: stETHFarming opportunities:Lido’s stETH has the most opportunities for farming across DeFi. Most notably, the biggest stETH-ETH liquidity pool on Curve provides an additional 6% APY, in fees and reward tokens, with supposedly few impermanent losses (since both assets move in a correlated way.)Other choices are Convex (6.5% APY) and Balancer (4% APY.)

Rocketpool

Rocketpool offers two ways of staking for users:1. Staking + running a node with 7.4% APR + , but the minimum deposit is 16 ETH.2. Just staking. Straightforward deposit with as low as 0.01 ETH minimum. 4.37% APR at the time of writing.

The #1 choice is certainly not for everyday users, more like advanced users who still build the courage to be solo stakers, and those who don’t have 32 ETH or think it’s still too much.

The choice for users to run their own node makes Rocketpool the most decentralized LSD protocol out there (2,025 node operators compared to Lido’s mostly big fish 23 operators). So if you are a user who prioritizes decentralization, Rocketpool might fulfill your ideals more.

Commission fee: 15% (yep, it’s high)Contracts: rETHMore yield opportunities: Not as many as Lido, but with some solid LP-ing opportunities like in Balancer and Aura Finance.

Stakewise

Stakewise is pretty small, and there are only 4 operators controlling several hundred nodes. Regardless, they managed to amass a shy more than 100 million TVL with thousand depositors.

When you stake ETH on Stakewise, you get two tokens, sETH representing your staked ETH, and rETH which represents the staking rewards. A different approach compared to other protocols.

Token: sETH2, rETH.Commission: 10%.APR: 4.9%.Yield opportunity: Very few, with probably the only notable one being the liquidity pools on UniSwap. The APR, however, is better than what Curve and Convex offered with Lido’s sETH. (12.84% APR for ETH-sETH2 pool, and 12.84% on rETH2-sETH2 pool). The big APR is comprised of multiple reward tokens users can earn by providing liquidity, including the Stakewise governance token SWISE.)

Frax Finance

Frax Finance is known previously more as the inventor of fractional stablecoins called FRAX. But recently they decided to dab into ETH liquid staking as well.

Their ETH staking service became popular instantly. Users have minted 82,274.7658 frxETH in total, with 40,164.12 of it being staked as sfrxETH. With a total of $135,460,551 in TVL in the span of three months, it’s quite an achievement.

However, just like everything else with Frax Finance, their mechanism is quite confusing, especially for those who are not technical in DeFi.

Staking on Frax Finance is not straightforward. First, you need to deposit your ETH to mint frxETH, a stablecoin that’s pegged to ETH. frxETH doesn’t get staking yield, for that, you must stake it by swapping frxETH to sfrxETH.

It might be looks like a hassle, but the reason why people are willing to go through it is that the yield, which is a whopping 7.07% APR — twice what Lido, Rocketpool, or StakeWise offer. Now you know why Frax Liquid Staking is popular.

Token: sfrxETH.Commission: -.APR: 7.07%.Yield opportunity: frxETH-ETH Curve Liquidity Pool with 8.52% APR

Another thing to note about Frax ETH staking is that they use in-house validators (with a total of 2,077 active validators.) Arguably they’re less decentralized than RocketPool or even Lido.

So, which one would you pick to stake ETH? If I can summarize it in one sentence: Lido has the best reputation and varied farming opportunities, Frax has the juiciest yield, and Rocketpool is the most decentralized. In the end, it depends on your appetite, of which one you prioritize the most, whether it’s security, decentralization, or profit.

https://medium.com/crypto-24-7/which-one-is-the-best-for-ethereum-liquid-staking-c9630abce1a5