HashKey has had a good day in the last 24 hours with bagging the first crypto exchange license under Hong Kong’s new crypto regime. That is not all. The Capital arm, according to a document shared with Cryptopolitan, predicts that DeFi markets stand to gain advantageously from liquid staking derivatives.
HashKey Capital’s Bold Prediction
HashKey Capital, one of Asia’s largest and most prominent crypto funds, has released its annual report on the DeFi Liquid Staking Derivatives (LSD) market. Among the findings, it was determined that the LSD market’s total value locked surpassed $22 billion this year, while the total market capitalization of all LSD initiatives surpassed $18 billion.
Although the broader crypto market has struggled to shrug off the bear market sentiment that dominated the industry in 2022, the growth of LSD markets has exploded since the April 2023 launch of Ethereum‘s Shanghai Upgrade. According to the report, the LSD market’s TVL increased by more than 15% in the subsequent two months.
As witnessed by crypto investors and echoed by HashKey Capital, Ethereum’s Shanghai Upgrade was the most significant modification to DeFi’s most dominant network since the Merge in 2022, when it migrated to a proof-of-stake consensus mechanism. Ethereum benefited from Shanghai’s changes to the EVM object format, the introduction of Beacon Chain withdrawals, and the reduction of L2 transaction fees.
Details addressed in HashKey’s report
Henrique Centieiro, a senior researcher at HashKey Capital, authored the LSD report and set out to evaluate the status of this segment of the DeFi market, forecast its future growth, analyze current market patterns, and identify its key players. The research team at HashKey, managed by Jupiter Zheng, predicts a bright future for LSD investors.
The report provided several intriguing insights into the LSD market, noting that Ethereum staking is currently a $100 billion-plus opportunity with the potential to become a $1 trillion market over the long term.
This potential is demonstrated by the fact that Ethereum users stake an astounding $140 million worth of Ether per day on the main chain, with over $3 billion in TVL added since the April upgrade. HashKey discovered that the average monthly staking inflow for ETH has quadrupled in value since the introduction of Shanghai.
Even more exciting, every piece of data suggests that this trend will accelerate. According to Zheng’s team, the percentage of staked ETH will more than double in the next years, accounting for 45% of the cryptocurrency’s total circulating supply, worth hundreds of billions of dollars. ETH had a total market cap of more than $226.2 billion at the time of writing.
According to Henrique, the increased interest in ETH staking will result in rapid expansion LSDs, displacing native staking and centralized exchange staking as investors seek larger return potential. However, the paper emphasizes that LSD is still a young and developing sector and that developing protocols will overtake the more established protocols that are currently dominating.
In the future, any rational actor with have 100% of his or her ETH staked in LSDs […] Further implementation of the EIP-4337 standard allows fees to be paid with ERC-20 tokens, effectively making the strategy of holding ETH redundant.Henrique Centieiro
According to the research, Rocket Pool has been the fastest-growing LSD protocol in recent months, stealing market share from more well-known companies such as Coinbase’s cbETH. According to the report’s authors, this development demonstrates how much the DeFi community values decentralization.
What are Liquid Staking Derivatives?
Liquid staking derivatives are the newest trend in the decentralized finance (DeFi) industry, providing a new method to earn yield on crypto assets. Due to the lockup nature of ETH, Liquid Staking was developed to enable users to receive a receipt token for staking ETH with a liquid staking provider.
This receipt token is also referred to as a Liquid Staked Derivative (LSD). LSD is a liquid token similar to the vast majority of other crypto tokens in that it is entirely fungible, transferable, fractional, etc.
LSDs unlock the liquidity of your staked ETH because they have the same value as the staked ETH that is momentarily locked. Using the LSD token enables you to indirectly use staked ETH in DeFi activities such as selling, providing liquidity, lending it as collateral, etc., in order to earn an additional yield on top of the staking yield.
HashKey warns that as more investors enter the market, staking yields will fall. However, the compatibility of LSD with DeFi means that investors have additional chances to increase their total yields.
Validator networks are likely to become even more democratized and decentralized in the future as new developments, such as Distributed Validator Technology, are introduced. According to HashKey, this will result in a rush of new opportunities for developers, investors, and crypto consumers alike.