Which protocols will benefit from the upcoming Ethereum Shanghai upgrade?

A new narrative is emerging in DeFi. The upcoming Ethereum upgrade will have a huge impact on liquidity staking protocols. Here’s why I think liquidity staking is a growing trend and opportunities to invest in it.

First, what’s interesting about Ethereum’s Shanghai upgrade (coming in March)?

Once the upgrade is complete, $ETH staking withdrawals will be enabled. Many people are skeptical about staking $ETH since withdrawals are not currently possible.

This is why only 14% of ETH supply is staked. In comparison, most L1s have over 40% staked.

Here’s where things get interesting: if more people will stake ETH after the Shanghai upgrade (which is very likely), most will choose liquid staking derivatives.

Because liquidity staking derivatives can be used throughout DeFi without giving up staking returns, liquidity staking provider income could take off after the staked $ETH can be withdrawn.

Revenue goes up -> their tokens benefit too.

Therefore, here are a few coins expected to benefit from the Shanghai upgrade:

$LDO

Lido is the largest $ETH liquidity staking provider. It charges a 10% fee on staking rewards. A portion of this fee is sent to the DAO treasury.

advantage:

• Lido is a leader in this segment.

• It is the fifth most undervalued protocol based on the price-to-fee ratio.

• 82% of $LDO supply is in circulation (and token inflation is minimal).

shortcoming:

• No revenue sharing with LDO holders.

$RPL

The second largest liquidity staking protocol.

advantage:

• Rocket Pool prioritizes decentralization (anyone can run a node).

• $RPL has a low inflation rate (5%).

• Staking $ETH with Rocket Pool can generate higher rewards.

shortcoming:

• No revenue sharing with $RPL holders.

$SWISE

Another liquidity staking protocol.

advantage:

• Stakewise V3 will be available soon.

• Anyone can stake $SWISE to receive a percentage of the protocol revenue.

• Anyone can join as a node operator (more decentralized).

shortcoming:

• Not popular enough for mainstream users.

• $SWISE has a high inflation rate.

$FXS

A protocol to build an ecosystem of DeFi products around $FRAX and $FPI. $frxETH (FRAX’s $ETH liquid collateralized derivative) was launched a few months ago and has experienced tremendous growth since then.

advantage:

$frxETH's TVL is growing very fast.

$frxETH is offered on Curve with an attractive yield.

8% of $ETH staking revenue is shared with $veFXS holders.

shortcoming:

• $frxETH is relatively new and not as popular as other liquid staking derivatives.

• $FXS’s current inflation rate is 24%.

It’s too early to predict which of these protocols will benefit the most from Shanghai. However, if Shanghai is not delayed, a new narrative around liquidity staking is likely to emerge.