Liquid Staking Tokens: Can They Bounce Back?

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This research was originally posted on May 25, 2023.

Liquid staking tokens (LSTs) represent staked assets on PoS networks, allowing users to earn rewards and access liquidity without tying up their funds.

The Shapella upgrade of Ethereum, implemented on April 12, brought various changes, resulting in enhanced security and efficiency of Ethereum 2.0.

A week after Shapella, we saw no heavy withdrawals. Instead, more ETH was going into the staking protocols.

However, most liquid staking tokens have underperformed compared to ETH, implying a decrease in value relative to the native asset, despite the upgrade being weeks old.

LSTs such as stETH, cbETH, ankrETH, and rETH have suffered a decrease in value ranging from 5% to 15% compared to ETH over the past few weeks.

Data Analysis

LST deviations pegged to ETH
LST deviations pegged to ETH

The upgrade reduced the inflation rate of ETH by burning a portion of the transaction fees.


stETH has the highest price ratio and the lowest yield among the four LSTs, which reflects its popularity and liquidity in the market. stETH’s highest price ratio among the four LSTs demonstrates its popularity and liquidity in the market. stETH has also seen its discount to ETH widen from 0.1% to 0.36% in the five weeks after the upgrade.


It has also lost around 3.29% of its peg against ETH. You can read why cbETH has lost its value and market share in the tweet below.

cbETH has the lowest price ratio and the highest yield among the four LSTs, which reflects its lower demand and higher risk due to its custodial nature.


ankrETH and rETH have similar price ratios and yields, but rETH has been more volatile due to its recent exploit that resulted in a loss of $31 million.


rETH has seen its premium to ETH shrink by almost 7%, while ankrETH has seen its discount to ETH fluctuate and shrink a whopping 11% in the same period.

ETH:ankrETH ratio
ETH:ankrETH ratio

All four LSTs have seen their price ratios and yields decline since the Shapella upgrade, indicating a loss of value and attractiveness compared to ETH.

Some possible factors that contributed to the decline in LSTs’ value compared to ETH

There are 4 main factors:

Reduced inflation: The Shapella upgrade introduced a new mechanism for burning ETH fees, which reduced the inflation rate of ETH from 4.5% to 1.8% per year. And at the time of writing this, it is around 0.806%. This made ETH more scarce and valuable and reduced the attractiveness of LSTs as a yield-generating instrument.


Increased demand: The upgrade also increased the demand for ETH as a deflationary asset and a store of value, especially among institutional investors and long-term holders. This increased the opportunity cost of staking ETH and reduced the supply of LSTs in the market.

Technical issues: Some LSTs faced technical and security risks that affected their trustworthiness and usability. For example, stETH suffered a solvency crisis in June 2022 when whales withdrew stETH from the liquidity pool and caused a price dislocation. rETH experienced an exploit in December 2022 that resulted in a loss of $31 million and a temporary halt of its service.

Regulatory uncertainty: The regulatory environment for staking services is still unclear and evolving and could challenge how LSTs are operated and taxed. For example, some jurisdictions may consider LSTs as securities or derivatives, which could impose stricter rules and requirements on LST providers and users.

How does inflation affect LSTs?

Inflation affects LSTs in two main ways:

  • It affects the value of LSTs relative to ETH. If ETH has a higher inflation rate than LSTs, then LSTs become more valuable and trade at a premium to ETH. On the other hand, if ETH has a lower inflation rate than LSTs, then LSTs become less valuable and trade at a discount to ETH.

  • It affects the yield of LSTs relative to ETH. If ETH has a higher inflation rate than LSTs, then LSTs offer a higher yield and attract more demand from income-seeking users. However, if ETH has a lower inflation rate than LSTs, then LSTs provide a lower yield and attract less demand from income-seeking users.

But why did LSTs initially have an upsurge? What can we expect now?

The initial upsurge in liquid staking demand can be attributed to the growth and acceptance of proof-of-stake (PoS) networks, particularly Ethereum 2.0.

Users must stake their native tokens to secure and validate the network, which involves locking up tokens for extended periods and incurring liquidity and opportunity costs.

However, liquid staking offers solutions to these challenges by enabling users to earn rewards and access liquidity without locking up their tokens.

Liquid staking has many advantages and opportunities for users who want to participate in PoS networks and benefit from the growing crypto ecosystem.

  • Users can increase their liquidity and capital efficiency by accessing their funds at any time and using them for other purposes.

  • This will also enhance their yield and return by earning rewards from staking and other high-interest rate platforms.

  • Diversifying their portfolio and hedging against market fluctuations or network failures can also help to reduce risk and volatility.

  • Staking tokens enables more users to contribute towards the validation and governance of PoS networks, thereby supporting network security and decentralization.

By extending the scope of alternative options, the sector could experience substantial growth as it offers a more comprehensive range of choices and features for various users and platforms. Currently, in the liquid staking space, multiple options are emerging and evolving, including:

aTokens vs. cTokens

There are different ways to represent the interest earned by LSTs, such as the aToken and cToken models.

  • The aToken model utilizes a unit increase method, whereby the number of aTokens increases as more assets are added to the pool from interest payments.

  • On the other hand, the cToken model uses an exchange rate increase method, where the exchange rate between the cToken and the underlying asset increases as more assets are added to the pool from interest payments.

Custodial vs. Non-custodial tokens

There are varying forms of custody and security for LSTs, including custodial and non-custodial tokens.

  • Custodial tokens are provided by a centralized entity that manages and possesses the underlying assets on behalf of the users.

  • On the other hand, non-custodial tokens are issued by a decentralized protocol that empowers users to maintain complete control and ownership of their underlying assets.

custodial vs. non-custodial
custodial vs. non-custodial


It's clear that LSTs are here to stay and are not limited to the Ethereum ecosystem.

Despite the uncertain future, ETH is currently a safer and more attractive option than stETH, cbETH, rETH, and ankrETH.

It's essential to do your own research, but there's hope for a bull run in the near future.

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