The Shapella upgrade—merging Ethereum’s Shanghai and Capella updates—launched on April 12, 2023, unlocking a pivotal feature: the ability to withdraw staked ETH. This milestone marked the full realization of Ethereum’s transition to Proof-of-Stake (PoS). With full staking functionality now live, the landscape of ETH staking has entered a new phase, reshaping yield expectations, competitive dynamics among staking providers, and the emerging role of Liquid Staking Derivatives (LSD) and LSDfi in the broader Ethereum ecosystem.
This article explores how ETH staking yields may evolve, analyzes the competitive positioning across staking models, and examines the transformative potential of LSDfi in driving user behavior and DeFi innovation.
Understanding ETH Staking Models
Ethereum’s PoS design intentionally avoids native delegation and caps profitable validator node size at 32 ETH. This architecture prioritizes decentralization by limiting the influence any single entity can exert over consensus. However, solo staking demands significant technical expertise, hardware investment, and ongoing maintenance—barriers that have led to the rise of alternative staking solutions:
- Solo Staking: Users operate their own validators. While this maximizes control and supports network decentralization, it requires deep technical knowledge and continuous monitoring.
- Staking-as-a-Service (SaaS): Third-party operators manage validator nodes on behalf of users who contribute 32 ETH. Users retain custody of withdrawal keys, balancing convenience with security.
- Liquid Staking: Platforms like Lido pool user funds to stake ETH and issue liquid tokens (e.g., stETH) representing staked positions. These tokens are tradable and composable in DeFi, enabling users to maintain liquidity while earning staking rewards.
- CEX Staking: Centralized exchanges offer staking services with minimal user friction, often issuing wrapped tokens (e.g., cbETH, bETH). However, users surrender custody and rely entirely on exchange integrity.
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Historically, CEXs dominated early staking due to their large custodial ETH holdings. But with the rise of Lido—backed by institutions like Paradigm—and the strong composability of stETH, liquid staking gained momentum. Post-Shapella, a notable shift occurred: many users migrated from CEXs to liquid staking or solo setups, reducing centralized exchange dominance.
Today, Lido leads with 31.8% market share, followed by major CEXs and decentralized alternatives like Rocket Pool. Despite growing competition, liquid staking remains the dominant model—driven largely by yield efficiency and DeFi integration.
Future Trends in ETH Staking Yields
Staking yield is a primary motivator for participation. Currently, total ETH staking APR averages around 5.4%, composed of:
- Consensus Layer (CL) Rewards (~3.4%): Issuance-based rewards that decrease as total staked ETH increases.
- Execution Layer (EL) Rewards (~2.0%): Derived from priority fees (gas) and MEV (Maximal Extractable Value).
As more ETH is staked, CL rewards diminish due to Ethereum’s anti-inflationary design. At a projected 30% staking ratio, CL APR could fall to ~2.4%.
EL rewards, however, are independent of staking volume. Flashbots data shows EL APR fluctuates significantly—averaging ~1.5%, but spiking during high-activity periods like meme coin seasons. During such events, EL rewards have briefly exceeded CL rewards, pushing total yields toward 10%.
But long-term sustainability of EL income faces headwinds:
1. MEV Uncertainty
MEV currently contributes ~45% of EL revenue. Yet Ethereum’s core developers view MEV as a centralizing force. Initiatives like Proposer-Builder Separation (PBS) aim to reduce MEV advantages for large validators. More radically, researcher Justin Drake has proposed MEV burn—a mechanism to destroy MEV revenue and channel its deflationary benefit to all ETH holders.
If implemented within 3–5 years, MEV could effectively disappear as a staking income stream.
2. L2 Migration
With Ethereum’s roadmap pivoting toward rollup-centric scaling, increasing transaction volume is shifting to Layer 2s. Since L2-generated MEV and fees accrue locally—not to L1 validators—this trend will gradually erode EL rewards on the mainnet.
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Combined with rising staking adoption, these factors suggest a future APR closer to 3%—a stark decline from current levels. This shift could dampen incentives for solo stakers who bear higher operational costs for marginal returns.
Why Liquid Staking Will Maintain Dominance
Despite Shapella enabling withdrawals for solo and SaaS stakers, liquid staking retains structural advantages rooted in composability and capital efficiency.
Even if base staking yields drop to 3%, LSDs like stETH can generate significantly higher effective returns through DeFi strategies:
- Liquidity Pools: stETH/ETH pairs on Curve offer LP APRs exceeding 50%, translating to net yields well above 25% after accounting for impermanent loss.
- Yield Aggregators & Options Protocols: Platforms like Ribbon or Asymetrix enable single-sided stETH strategies yielding over 25% APR.
- Collateralization: stETH (or its wrapped form wstETH) is accepted as collateral on top protocols including Aave, MakerDAO, and Compound—with loan-to-value ratios close to ETH.
These capabilities allow liquid stakers to achieve total effective yields over 30%, far surpassing solo staking returns—especially when factoring in time, effort, and technical overhead.
Moreover, DeFi’s increasing reliance on LSDs creates a self-reinforcing cycle: more LSD usage → greater protocol integration → stronger liquidity → higher demand for LSDs.
Even if users care about decentralization, opportunity cost prevails: “I support solo staking ideals—but 30% yield is hard to ignore.”
The Rise of LSDfi and Its Ecosystem Impact
Post-Shapella, a wave of LSDfi projects emerged—protocols that use LSDs as core collateral or yield-bearing assets. While many are forks of existing DeFi primitives (stablecoins, lending markets, AMMs), their shared trait is targeting LSD holders as ideal users: they’re already engaged in DeFi, hold appreciating assets, and are highly yield-sensitive.
This makes them perfect targets for new protocol incentives. Projects like Lybra, Pendle, and Eigenpie attract LSD deposits by offering boosted yields—sometimes far exceeding native ETH returns.
A flywheel effect emerges:
- LSDfi protocols offer high yields → more users convert ETH to LSDs.
- Increased LSD supply → more capital flows into DeFi.
- More protocols integrate LSDs → further entrenching their utility.
Eventually, nearly every DeFi application may become “LSD-aware,” making LSDfi not a niche sector—but a foundational layer of Ethereum’s financial infrastructure.
Crucially, LSDs capture the beta of this innovation wave: as LSDfi grows, so does demand for underlying LSD tokens.
Ethereum Foundation’s Strategic Concerns
Despite the momentum behind liquid staking, the Ethereum Foundation maintains cautious oversight:
- Avoid Over-Staking: High staking ratios reduce economic bandwidth—the circulating supply available for DeFi and transactions—potentially weakening Ethereum’s utility as a base layer.
- MEV Is Problematic: Unchecked MEV creates centralization risks and complex trust layers (e.g., MEV-Boost). Long-term plans favor MEV redistribution or burn mechanisms.
- No Single LSD Monopoly: The Foundation worries about any one LSD (like stETH) becoming so dominant it effectively replaces ETH in DeFi—posing systemic risk.
Consider a scenario where Lido suffers a catastrophic exploit compromising withdrawal keys. Given stETH’s deep integration across DeFi, recovery might require a contentious hard fork—echoing the DAO incident.
To counterbalance this, the Foundation promotes solo staking tools and debates capping dominant LSD market shares. But market forces favor coordination around Schelling points—natural defaults like Lido—even without central planning.
We’re thus facing two possible futures:
- Decentralized Ideal: Moderate staking levels; most ETH remains liquid; solo validators dominate.
- Market Reality: A few powerful LSDs absorb most staked ETH; LSDs become de facto base assets in DeFi.
The latter appears increasingly likely—not by design, but by user preference for convenience and yield.
Frequently Asked Questions
Q: What changed after the Shapella upgrade?
A: Shapella enabled withdrawals of staked ETH and rewards, completing Ethereum’s move to PoS and increasing user flexibility across all staking methods.
Q: Is liquid staking safe?
A: It introduces smart contract and centralization risks (e.g., Lido’s node operator set), but major protocols have strong audits and insurance mechanisms. Diversification helps mitigate exposure.
Q: Will staking yields keep falling?
A: Yes—both due to rising total stake size (lowering issuance rewards) and potential MEV reduction or burn. Expect long-term base yields closer to 3%.
Q: Can LSDs replace ETH in DeFi?
A: In practice, yes—they’re already widely used as collateral. But this concentration poses systemic risks if one LSD fails.
Q: Why does MEV matter for regular stakers?
A: MEV boosts validator income today, but its concentration benefits large players. Burning or redistributing MEV could create fairer rewards for all ETH holders.
Q: Should I stake via CEX or decentralized options?
A: Decentralized options (especially liquid staking) offer better composability and align more with Ethereum’s ethos. CEX staking involves custodial risk and less innovation upside.
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Final Thoughts
The post-Shapella era has accelerated structural shifts in Ethereum’s staking economy. While base yields trend downward due to inflation control and L2 migration, liquid staking thrives by unlocking superior capital efficiency through LSDfi.
The interplay between yield-seeking behavior, protocol incentives, and composability ensures that liquid staking—and its derivative ecosystem—will remain central to Ethereum’s evolution.
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