Rally for ETH Staking Tokens in Advance of Shanghai Update

Rally for ETH Staking Tokens in Advance of Shanghai Update

 Published: January 11th, 2023

A number of liquid staking tokens are enjoying significant gains this week as the deadline for un-staking Ethereum approaches.

According to data from Cryptotracker, Rocket Pool (RPL) and Lido Finance (LDO) both saw notable gains in the first day of this week’s session.

LDO is the governance token behind Lido Finance, Ethereum’s biggest liquid-staking protocol, gained more than 17 per cent in the last 48 hours and was trading at around USD 1.87 at time of writing.

Intense buying and selling of LDO pushed its daily volumes up across numerous exchanges to hit USD 275 million, a 434 per cent leap over the previous day.

With a market cap just north of USD 1.5 billion, data from CoinGecko has LDO at 33th-place on its list of the largest cryptocurrencies.

Data from Coinglass shows that more than USD 1.6 million in LDO futures were liquidated between Sunday 8th January and Monday 9th January. The majority (ca. 65 per cent) came from blow-off short trades.

Last week (wc 2nd January 2023) was a rewarding one for Lido Finance. LDO became the number one decentralized application when ranked by total value locked (TVL), knocking DAI creator MakerDAO out of the top spot.

After posting a tremendous 74.6 per cent gain over the past seven days, LDO is also crypto’s largest weekly gainer. Bitcoin, by comparison, posted a paltry 3.7 per cent gain over the same period.

Rocket Pool’s liquid staking token RPL has also seen its price spike 14.1 per cent over the past 48 hours.

Ethereum transitioned to a proof-of-stake (PoS) consensus mechanism in September of last year.

The move to PoS eliminated the need for energy-intensive crypto mining almost overnight, replacing mining with a leaner and more network-responsive staking mechanism. In order to become a validator on the new Ethereum, users must first put up 32 ETH to demonstrate their ‘stake’ in the system.

Ethereum’s pre-PoS price wobble

Back in OCtober, when central bankers around the world were grappling with record inflation and its impact on their fiat currencies, Ethereum was dealing with an inverse dilemma.

Between the first and seventh of October, the supply of Ether (ETH) fell by more than 4,000 tokens. Data from blockchain analytics firm ultrasound.money showed that the price boost one would expect from a sudden drop in supply hadn't happened, and in fact the opposite was occurring. The price of ETH had fallen by close to 3.7 per cent to around USD 1,300.

Since the Ethereum blockchain’s paradigm shift from proof-of-work (PoW) to proof-of-stake (PoS) in September, this was the first ever period of deflation, where more ETH was burned than generated.

Transactions on Ethereum incur ‘gas’ fees, a cost levied in the validation process that’s designed to make the network less vulnerable to being overloaded with malicious requests. It's pure demand pricing, with gas fees rising in tandem with traffic rises on the Ethereum network.

Before PoS, validators (called ‘Miners’ on PoW networks) who processed ETH transactions pocketed the fees. However, to keep fees from skyrocketing at peak periods, Ethereum made a change to the blockchain last August that sees a portion of every gas fee automatically destroyed. That limits the supply of ETH in circulation and helps keep gas fees from running out of control, a common Ethereum user complaint.

After the blockchain flipped modes and began burning more Ether than it created, the total amount of ETH in circulation fell by more than 4,00 ETH. In early October the burn rate was still outpacing the rate of ETH creation. Average gas fees, meanwhile, shot up by more than 200 per cent and took more than a week to let up.

Interesting times for ETH investors

The shift from PoW to PoS has had unexpected effects on the Ethereum blockchain and ETH. Alongside the simultaneous loss of value and loss of supply seen this week, crypto traders have seen the price of perennial underperformer Ethereum Classic (ETC) spike in recent weeks.

At the time, analysts said former ETH miners were looking for alternative ways to make money and continue monetising their investments in expensive PoW mining kit. Ethereum Classic continues to operate under the traditional proof-of-work mining mechanism.

The week of 3rd September, ETC rose by close to 12 per cent in tandem with a rise in the ETH mining hashrate. That represented a surge of over 60 per cent in the past 90 days, rising from USD 21.39 posted in early June. On Proof-of-Work blockchain networks, the hashrate refers to the total computational power required to mine and validate transactions on a blockchain network.

The phrase ‘price follows hashrate’ has become common in crypto trading parlance as changes can signal trends in blockchain activity and transaction volume.

Over the previous 30 days, Ethereum Classic’s hashrate had jumped by 62 per cent. Looking at the past year, hashrate growth for ETC has been a whopping 104 per cent.

The higher the hashrate figure, the safer the blockchain is perceived to be, since high hash rates also tends to keep hackers at bay. The computational power needed to breach the Ethereum Classic network via a ‘51 per cent’ attack, for example, would be immense.

Back in August 2020, the blockhain was hit by a third 51 per cent attack. Hash rate at the time was a measly 2.90 TH/s. Since then, its skyrocketed by 1,600 per cent, creating a massive barrier for any bad actor seeking to break in.

When Ethereum move from a proof-of-work (PoW) to a proof-of-stake (PoS) system, it reduced its carbon footprint and improved its efficiency.

The mining hardware used by crypto mining companies for Ethereum became suddenly obsolete. Ethereum Classic and ETC got an early boost from the move, analysts believe, as miners shifted to a short-term alternative while they reconsidered their equipment investments.

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