How is Ethereum’s liquidity staking developing now?

The liquid staking token market is showing mixed developments, and while Lido’s dominance may be in flux, token holding rates and concentration of large holders provide key information on industry trends.

Liquid Staking Tokens (LST) allow users to earn rewards from proof-of-stake blockchains without locking up funds. This idea has become one of the most important sub-sectors within the cryptocurrency space, with approximately $20 billion staked via Ethereum’s Liquid Staking Tokens as of November 2023.

Due to the large size of the staking market, many participants have joined the Ethereum liquid staking sector. Lido's stETH is still the dominant liquid staking token, but other protocols have made significant expansion and progress after the Shapella upgrade, especially after the Shapella upgrade introduced the staking withdrawal function in April 2023.

As liquid staking protocols enter the market, many have introduced unique mechanisms to gain a competitive advantage and differentiate themselves from existing options. Lido has played a central role in the liquid staking landscape of the Ethereum ecosystem, achieving significant scale by relying on institutional node operations. Prior to the Shapella upgrade, it had a dominant market share, accounting for over 90% of the liquid staking token market share. With the launch of the Shapella fork and increased investor confidence in holding liquid staking tokens, the new alternative has increased its market share, currently reaching 15%.

Alternative liquid staking token products are unique in different ways, such as Rocket Pool's rETH Token, which holds the second largest market share. Rocket Pool is particularly known for its strong commitment to decentralization. The main goal of the protocol is to foster a decentralized validator community and ensure that validator power is not concentrated in the hands of a few individuals or entities.

Liquid staking token models take different approaches, such as the Frax protocol, which uses a dual-token system of frxETH and sfrxETH tokens. In this dual-token model, one token is highly incentivized in the DeFi ecosystem, while individuals holding the other token can receive combined staking rewards from both tokens.

Furthermore, while Lido and its stETH Token dominate the current market, there are signs among various other tokens that point to their robustness and potential to remain in the market for the long term.

Currently, a staggering $18.3 billion is staked through Lido’s stETH, and the protocol also has the most holders in the market, with an impressive 238,600 unique addresses holding the token. After stETH, ankrETH ranks second with 149,000 holders, which shows a significant difference in the number of tokens held between the top two in the market.

In addition to stETH, another trend worth noting is the increase in the number of cbETH holders, which is Coinbase's Ethereum staking token that was launched just over a year ago. The number of holders of this token has continued to grow over time, indicating an increasing demand for this token and staking through Coinbase. While it may not have the highest number of holders, cbETH has managed to surpass other competitors in the industry and currently has 108,000 unique holders.
Additionally, as cbETH expands, another encouraging sign for its token health is that it has the highest percentage of holders among all liquid staked tokens.

54.26% of all addresses holding cbETH have held it for more than a year, showing strong commitment and long-term vision from holders. A large number of addresses holding coins is a positive indicator because it means that users trust the token and its underlying protocol. In this case, this shows a considerable degree of trust in its issuer, Coinbase.

This observation may be attributed to the cold storage method Coinbase uses to organize tokens. Specifically, if the tokens are held in the form of customer accounts within a centralized exchange, this may explain the lack of liquidity of the tokens. Even if this is true, it is a positive sign overall because if the demand for tokens decreases, the exchange will constantly re-arrange them because the tokens may be sold or destroyed.
Finally, the concentration of major holders is a function of the degree of decentralization. This helps to identify tokens where excessive concentration of holders may create unfavorable conditions for the ecosystem. Large holders may pose additional risks to other token holders, making this information valuable in assessing their potential impact on the market.

While this metric highlights that most tokens in the liquid staking token ecosystem are concentrated in the hands of large holders, it is worth noting the ongoing decentralization process in Lido's development. Over the past year, the concentration of whale holdings of Lido's governance token LDO has decreased. This concentration has decreased by more than 10%, from 67.8% to 56.4%.

This trend is also an indicator of the maturity of the token. Lower concentration means a wider distribution of token holders, indicating greater decentralization and reduced influence of individual holders, which is generally considered a positive development . Newly launched tokens often show a high concentration of large holders. Therefore, given that Lido's stETH token has been widely adopted and scaled, it is logical that the concentration of major holders of the governance token is decreasing over time.

Overall, the liquid staking market within the Ethereum ecosystem presents a dynamic landscape, with each token having its own unique characteristics and user base. While Lido’s stETH token has historically dominated, recent trends indicate a growing diversity of choice and an evolving competitive landscape. Notably, tokens like cbETH have attracted a large number of holders, highlighting their appeal and long-term potential. The proportion of users holding coins and the concentration of large holders are key indicators of token health and ecosystem decentralization. Additionally, the decline in whale holdings in governance tokens (such as Lido’s LDO) reflects the maturity of these tokens and their evolution toward greater decentralization.