Arbitrum is the leading Layer 2 (L2) network for Ethereum liquid staking tokens (LSTs), a type of derivative that unlocks liquidity in a previously illiquid Ethereum staking market.

LSTs allow holders to use staked Ethereum across DeFi protocols while still earning yield on the underlying staked ETH. The Ethereum LST market boasts an impressive size of approximately $28B.

This article will dive into three popular LSTs on Arbitrum: wstETH, rETH, and cbETH, with market capitalizations of approximately $22B, $1.4B, and $500M, respectively. We’ll cover their origins, token characteristics, adoption trends, and roadmaps of future planned developments.

Lido and wstETH

Origin Story

Lido, a liquid staking solution, was founded by Konstantin Lomashuk, Vasiliy Shapovalov, and Jordan Fish.

Lomashuk and Shapovalov are staking industry veterans. Before Lido, Lomashuk founded P2P Validator, a non-custodial staking service provider (now one of the main validators in Lido’s network), where Shapovalov was CTO. Lomashuk was also the CEO and co-founder of Satoshi Fund, a blockchain investment fund.

Fish, known in the crypto community as “CryptoCobain” or “Cobie”, is a cryptocurrency investor, trader, and influencer. With a background in computer science, he worked in roles from head of technology to head of growth in various cryptocurrency companies. He now co-hosts the crypto podcast UpOnly: Chats with Crypto Experts, with Brian Krogsgard.

In December 2020, Lido launched on Ethereum mainnet, only a few weeks after Phase 0 of Ethereum 2.0 commenced and Ethereum started to transition its consensus mechanism from proof-of-work to proof-of-stake. Although Ethereum is Lido’s primary focus, Lido’s LSTs are also available on Arbitrum, Polygon, Polkadot, Kusama, and Solana blockchains.

Token Characteristics: wstETH

Lido’s staked ETH token is stETH, an ERC20 interest-bearing derivative token.  In order to make stETH compatible across DeFi applications and protocols, it is wrapped into the wstETH token. wstETH (and stETH) uses the aToken model, one of two token models adopted by liquid staking tokens.

The aToken model was pioneered by the decentralized lending protocol Aave. Tokens that use this model rebase daily, meaning that the value of the token in a token holder’s account is adjusted daily to reflect their share of staking rewards minus penalties.

While the rebasable nature of aTokens enhances the UI/UX experience for token holders, it poses compatibility issues with DeFi dApps and protocols that require a constant balance mechanism.

To address compatibility issues, rebasable tokens are wrapped. This involves locking stETH, Lido’s staked ETH token,  in the wstETH contract, and minting wstETH based on a share bookkeeping system. Unwrapping wstETH involves burning it, and unlocking the corresponding amount of stETH.

Adoption and Growth Trends: stETH/wstETH

Lido is the leading solution for liquid staking on Ethereum, with $24B in total-value-locked (TVL), capturing 74% of the market share. With approximately 9M ETH deposited on the Lido network, LIDO captures a 31.92% share of all deposited ETH (29M ETH in total is deposited on Ethereum).

Source: Lido Finance Extended

The supply of stETH continues to grow, propelled by traders seeking a dependable and consistent source of yield. While ETH was once the preferred asset on lending platforms, stETH is now the leader. Its appeal lies in the ability to leverage stETH positions, offering more attractive returns compared to providing liquidity through stETH-ETH pairs on decentralized exchanges (DEXs).

stETH’s dominance in demand over ETH becomes evident in usage statistics following the Terra Luna collapse in May 2022. After the crash, the growth in new addresses utilizing ETH + WETH (wrapped ETH) slowed down. In contrast, demand for stETH + wstETH surged, increasing by 142%.

Source: Glassnode Insights

Although the lion’s share of demand for stETH is on Ethereum mainnet, with 97% of stETH collateral locked on the network, Arbitrum is the clear leader amongst Layer 2 networks, home to approximately 60k in stETH collateral – twice the amount on Optimism.

On Arbitrum, wstETH has found significant adoption on Aave’s lending protocol, with 41% of collateral locked on Aave, followed by Radiant, Pendle, Balancer, and Silo.

Source: Arbitrum ETH-LST Dominance

Roadmap

Lido, with a market capitalization on Arbitrum of approximately $287M, successfully leveraged its first-mover advantage to establish a dominant position in the market.

Addressing some of the primary concerns voiced by users, Lido has created a plan to improve decentralization across its validator set and governance. This plan specifically aims to increase the diversity and size of its node operators, distribute the validator set across more geographies and jurisdictions, increase the robustness of its delegate set, and improve governance safeguards.

Rocket Pool and rETH

Origin Story

In December 2016, while Ethereum 2.0 was still in development, David Rugendyke, a computer scientist and cryptocurrency miner, started planting the seeds for Rocket Pool, a decentralized base layer protocol for Ethereum staking. Drawing inspiration from Vitalik’s Mauve Paper, a paper that introduced Ethereum 2.0, David started to work on building Rocket Pool.

In May 2017, David released an Alpha version of Rocket Pool. Since Ethereum 2.0 was still in development, Rocket Pool Alpha was built on dummy Ethereum 2.0 contracts. In the protocol’s inaugural Medium article, David introduced the three primary components of Rocket Pool: smart contracts, smart nodes, and minipools, writing: “all three integrate with each other to provide a network that can automatically scale and load balance itself across multiple cloud hosting providers in any region of the world.”

The RocketPool protocol launched on Ethereum mainnet on November 9, 2021, enabling users to participate in Ethereum staking by permissionlessly running an ETH node on Rocket Pool’s network, or by participating in liquid staking with the protocol’s native token, rETH.

Token Characteristics: rETH

Users receive rETH tokens when they deposit ETH into the Rocket Pool protocol.

The value of rETH represents the amount of ETH deposited into the Rocket Pool protocol plus staking rewards minus penalties. Its value is protected against node slashing and downtime by built-in insurance mechanisms in RPL, the protocol’s governance token.

rETH is based on the cToken model, pioneered by Compound, an algorithmic autonomous interest rate protocol. As a non-rebasable token, its value does not update daily, therefore unlike aTokens (discussed previously), rETH does not need to be wrapped. It is readily compatible to be used across the DeFi ecosystem.

Adoption and Growth: rETH

With a TVL of $2.85B on Ethereum mainnet and deposits of 1.1M ETH, rETH captures an 8.81% market share in liquid staking, and 3.5% of total staked ETH.

Although this is a markedly lower share than Lido’s 74%, rETH stands out with its unique differentiator of a strong focus on decentralization. Rocket Pool impressively has 3,486 node operators and 26,899 mini pools on its network.

Since the Atlas update, which scaled Rocket Pool by introducing 8 ETH Low Balance minipools, “LEB8”, reducing the minimum requirement for running a Rocket Pool node from 16 ETH, the supply of rETH has more than quadrupled. Over the last 12 months, rETH’s supply has increased from approximately 150k to 700k.

Source: rETH supply vs. time

Interestingly, in the first half of 2023, the supply of rETH grew three times faster than the supply of stETH!

Source: LSTs Circulating Supply

On Ethereum, the Curve rETH/ETH pool and Balancer rETH/ETH pool provide the main sources of liquidity backing rETH’s stability, which has maintained its strong peg to ETH since withdrawals were enabled on Ethereum with the Shanghai/Capella upgrade on April 12, 2023.

rETH’s adoption across DeFi is vast, supported by numerous platforms including Sommelier, Merkle, Convex Finance, Beefy, and Gamma, to name a few.

Roadmap

Rocket Pool with a market capitalization on Arbitrum of approximately $48M, operates with an ethos closely aligned with Ethereum's values, focusing on building a protocol that is non-custodial, permissionless, and trustless.

In Q2 2024, Rocket Pool plans to release its latest upgrade Saturn which will continue to scale the protocol by further reducing the cost to run a minipool and also by introducing Megapools. Megapools will allow for many validators to be controlled from a single smart contract, greatly reducing setup costs for validators in Rocket Pool’s network.

Coinbase’s cbETH

Origin Story

Coinbase, the leading US cryptocurrency exchange founded by Brian Armstrong in 2012, introduced its liquid staking token, cbETH (Coinbase wrapped staked ETH), on August 25, 2022. Shortly after, on September 15, 2022, Ethereum completed its transition to Ethereum 2.0, known as The Merge, shifting from a proof-of-work to a proof-of-stake algorithm.

Coinbase, as the largest centralized cryptocurrency exchange in the United States, has significant clout and reputation in the industry, specifically amongst retail and institutional users who prefer having a custodian for their assets.

cbETH is one of the latest liquid staking tokens to hit the market. As Coinbase explains in the cbETH whitepaper, it launched a liquid staking token out of necessity, referencing the risks to capital allocators of any one LST protocol exceeding consensus thresholds. Coinbase highlights its rationale, writing “it is necessary for the liquid staking market to have strong, competing solutions with differentiated qualities.”

cbETH was first minted on June 12 2022 at a 1:1 ratio to staked ETH. Since then, this ratio has fluctuated, as explained in the next section.

Token Characteristics: cbETH

cbETH represents staked ether on the Coinbase platform. When users stake Ethereum on Coinbase, they receive cbETH as a non-rebasing liquid derivative of their staked ETH.

Coinbase runs a provisioned set of validators. As a centralized provider, it retains custody of the keys that hold staked ether wrapped for cbETH. Additionally, cbETH is solely governed by Coinbase and does not have a DAO (decentralized autonomous organization) or similar governance mechanism.

cbETH, like rETH, is based on the cToken model which enables users to earn interest based on an exchange rate relative in value to the underlying asset (ETH). Tokens are minted or burned according to a floating conversion rate, which means that staking post-commission rewards, minus penalties, accrue passively.

Coinbase made a design decision to use the cToken model, versus the aToken model. The token’s whitepaper explains that although aTokens allow for a more elegant UX, the token’s value is maintained with a 1:1 mapping between the wrapped token and the underlying asset. They explain the cToken model is better for utility, efficiency, and composability since the token is ERC-20 compliant and doesn’t need to be wrapped.

cbETH Adoption and Growth

With a TVL of $542M and Ethereum deposits of 198k, cbETH captures a 1.59% market share in liquid staking tokens, and 0.6% of total staked ETH.

​Interestingly, out of the 1.3M cbETH in supply, only 198,000 are deployed in the DeFi ecosystem. While the number of cbETH holders has consistently risen since its inception, reaching around 46,000 holders today, the minting of cbETH has exhibited volatility.

Source: Coinbase-wrapped-staked-eth

Most cbETH liquidity is on Uniswap and Balancer, where cbETH trades in a mixed composable stable pool with wstETH and rETH. Composable stable pools create deeper liquidity and better prices. The pool helps provide deeper liquidity and minimizes arbitrage opportunities and slippage.

cbETH is already used widely across the DeFi ecosystem and can be found on protocols such as Convex Finance, Merkle, Beefy, Sommelier, and others.

Roadmap

As the most recently launched LST of the trio we’ve covered, much of Coinbase’s plans for cbETH are detailed in their whitepaper published in August of 2022.

In their whitepaper they detail their intentions of monitoring and supporting the Merge to ensure that cbETH is compatible with the new Ethereum network, as well as providing users clear guidance on how to migrate their cbETH. Their agenda further includes improving user experience with upgraded user interface and wallet functionality, providing users with more information and transparency on the performance and risks of cbETH, expanding the adoption with various DeFi protocols, and developing the cbETH community with educational as well as promotional initiatives.

Conclusion

Lido’s wstETH, Rocket Pool’s rETH, and Coinbase’s cbETH, are the three most popular liquid staking tokens (LSTs) available on Arbitrum. These LSTs contribute unique features to the ecosystem, attracting users and fostering growth.

While Lido’s wstETH is certainly the most popular in terms of raw numbers, some users may prefer the reward model or decentralization ethos of Rocketpool’s rETH. For users who don’t mind a centralized custodian and issuer, they may choose Coinbase due to their well-established reputation in the industry as a household name. As all three are doing arguably well, there is no definitive “right answer” as to any of them being better choices than the other.

The Open Dollar protocol will support wstETH and rETH from launch as collateral types to borrow our native stablecoin (OD) against. The decision whether or not to add support for cbETH or other LSTs in the future will be left to our DAO, which has recently launched ahead of mainnet.

We are proud to be building in the Arbitrum ecosystem, supporting these trusted liquid staking tokens, and innovating on the inefficiencies of traditional collateralized debt positions (CDPs).

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Open Dollar is a DeFi lending protocol built on Arbitrum for borrowing against liquid staking tokens while earning staking rewards and providing CDP liquidity with Non-Fungible Vaults (NFVs).

Try the Open Dollar App today and follow us on our socials.

Written by Rika Goldberg

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