# Background

## ETH staking

ETH staking is a public good for the Ethereum ecosystem. Any user with any amount of ETH can **help secure the network and earn rewards** in the process. (<https://ethereum.org/en/staking/>)

Ethereum transitioned from a Proof of Work (PoW) consensus algorithm to a Proof of Stake (PoS) consensus algorithm. This transition is known as Ethereum 2.0 and is widely regarded as a milestone in the cryptocurrency market. In Ethereum 2.0, stakers are able to participate in the network's consensus process by locking a certain amount of ETH and earning rewards from it. This locking process is called staking, hence Ethereum 2.0 is also known as "ETH staking".&#x20;

<figure><img src="/files/FZ60iVIDVki0FS8WHuEd" alt=""><figcaption></figcaption></figure>

## What is LSD

Liquid staking derivatives(LSDs) are a representation of a token holder’s staked assets. Liquid staking derivatives tokens confirm the staker’s participation in the staking pool, and this token can be used for lending, trading and collateral throughout the decentralized finance (DeFi) world.

In the context of Ethereum, LSD refers specifically to the derivatives of ETH staking, such as stETH.

## LSD Summer is coming

With the major transformation of Ethereum, the LSD ecosystem is gradually flourishing.&#x20;

Compared with directly holding ETH, LSD is a better asset choice with built-in interest from ETH staking (\~5%APY). And with the continuous improvement of the ecosystem, LSD can also be used in various application scenarios, unlocking liquidity levels similar to that of ETH.

Especially after Ethereum Shanghai Upgrade(2023.04.12), withdrawals were enabled. LSDs can be redeemed for the underlying ETH and any additional ETH from the staking yield.&#x20;

Currently, the LSD ecosystem has reached a scale of $16 billion (<https://defillama.com/lsd>), with numerous applications and projects. These applications and projects involve a wide range of fields, including decentralized trading, lending, art trading, games, and NFTs. The success of these projects and applications will further drive the prosperity of the LSD ecosystem and promote the development of blockchain technology.

## Issues

Current problems with LSD ecosystem include the following aspects:

* Limited Application Scenarios. Currently, LSD's application scenarios are mainly limited to some niche fields, which means that its market demand is relatively small, resulting in weak liquidity.&#x20;
* LSD liquidity is dispersed. There are a wide variety of LSD assets, and their liquidity is scattered in different exchanges. So high slippage often occurs during transactions.&#x20;
* Low APR. APR of Most LSD is around 5%. That’s not much higher than Ethereum’s benchmark interest rate for ETH staking, which means that the interest-bearing potential of LSD has not been realized.


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