The Impact of Ethereum’s Shapella Upgrade on Staking and DeFi
The Ethereum Shanghai upgrade, also called Shapella, was finally implemented on April 12 after months of delays. Part of Ethereum’s major shift to adopt the Proof of Stake (PoS) consensus algorithm, the upgrade enables validators to withdraw their staked ETH from the Beacon Chain. As expected, Shapella has led to a surge in staking activity, especially thanks to liquidity staking protocols. The present article discusses this and other noticeable effects of the upgrade.
Record Weekly Inflow of Staked Ethereum
Shortly after the upgrade was executed on the mainnet and validators could withdraw tokens for the first time, the Ethereum network saw a record weekly inflow of ETH deposits for staking, according to Dune Analytics data provided by Tom Wan, an analyst at crypto investment firm 21Shares.
In the week from April 17 to 23, investors deposited about 571,950 ETH into staking contracts worth more than $1 billion. That was the largest weekly token inflow in staking contracts since the PoS was first adopted more than two years ago. At the time of writing, over $2 billion worth of ETH has been deposited into staking contracts.
The influx has been mainly driven by institutional staking service providers. The top five institutional staking service providers, including Bitcoin Suisse, Figment, Kiln, Staked.us, and Stakefish, were responsible for over 20% of the combined staked ETH during the record week.
Kiln co-founder and COO Thomas de Phuoc said his company saw a new interest in staking, even from traditional finance entities. He told Coindesk:
“Our sales team noted 60% more deals in the pipeline than at the same time last year, including from traditional institutions. We are discussing at the moment with some brokerage firms, investment banking services holding companies in the US or in Europe.”
Meanwhile, the number of staked ETH has grown to a record 19 million, while the staking rate of Ethereum broke above the 15% mark for the first time ever on April 27 and continues to increase as of the beginning of May.
Liquid Staking Protocols Rule DeFi
Some of the most important players in the Ethereum staking market are decentralized liquid staking protocols, which enable users to leverage yield opportunities in the decentralized finance (DeFi) sector while staking ETH. These protocols issue corresponding derivative tokens (LSDs) for deposited ETH based on a 1:1 ratio to be eventually used in DeFi.
Two weeks after the Shapella upgrade, liquid staking solutions are now dominating the DeFi space, with Lido being by far the largest player. As per DeFiLlama, liquid staking solutions have more total value locked (TVL) than decentralized exchanges (DEXs), becoming the top DeFi category. From April 13 to May 1, TVL on DEXs dropped by $1.66 billion. Meanwhile, it surged by $280 million on liquid staking protocols.
Lido alone accounts for over 73% of the liquid staking market and 24% of the entire DeFi sector.
Lido’s 30-day metrics demonstrate a modest increase of 5.50%, while Coinbase’s liquid staking platform fell 0.64%. The TVL of Rocket Pool surged by 29.24%, and Frax’s TVL jumped by 31.65%.
Following the Shapella upgrade, over 400,000 ETH worth almost $800 million has been added to liquid staking protocols.
Open Interest in Ethereum Futures Hits 1-Year High
The Shapella upgrade has caught investors’ attention to Ethereum, driving volatility and trading activity. This and other factors have catalyzed an increase in open interest in Ethereum futures. CoinGlass data showed that the open interest gauge hit a 1-year peak, with over $7.5 billion worth of ETH bets being held on Binance, OKX, Bybit, Deribit, and other platforms offering ETH futures and perpetual contracts.
What’s Next for Ethereum?
The enthusiasm for the Shapella upgrade is fading away, and the price of Ethereum is returning to the correlation to the rest of the crypto market, responding to common triggers like the banking crisis, regulatory updates, and other fundamentals.
Thanks to the transition from Proof of Work (PoW) to PoS, Ethereum has slashed its energy use by 99.9%, meaning that it is an environmentally friendly platform ready to transform the financial market. Ethereum still accounts for the largest share of DeFi and decentralized app (dApp) activity and is resilient against competitors like Binance, Solana, and Avalanche.
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