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HashKey Capital, one of the largest and most prominent crypto funds based in Asia, has published the results of its annual report on DeFi’s Liquid Staking Derivatives market. Among the findings, it revealed that the LSD market soared to over $22 billion in total value locked this year, while the total market capitalization of all LSD projects topped $18 billion.

Although the wider crypto market has struggled to shake off the bear market sentiment that overwhelmed the industry in 2022, there has been a huge surge in the growth of LSD markets since the launch of Ethereum’s Shanghai Upgrade in April 2023. The LSD market’s TVL grew by more than 15% in the two months following that milestone.

Ethereum’s Shanghai Upgrade was the biggest change to DeFi’s most dominant network since it underwent the Merge in 2022, moving to a proof-of-stake consensus mechanism. With Shanghai, Ethereum benefited from significant changes in the EVM object format, the introduction of Beacon Chain withdrawals and L2 fee reductions.

HashKey Capital’s LSD report was led by senior researcher Henrique Centieiro, who set out to assess the status of this segment of the DeFi market, estimate its future growth, examine current market trends and identify its main players. HashKey’s Research team, led by Jupiter Zheng suggest an extremely promising future for LSD investors.

The report produced several interesting insights into the LSD market, noting that Ethereum staking is now a $100 billion-plus opportunity, with long-term potential to grow into a $1 trillion sector. This potential is evidenced by the fact Ethereum users are now staking an astonishing $140 million worth of Ether on the main chain each day, with over $3 billion in TVL added since April’s upgrade. At the same time, HashKey found that the average monthly staking inflow for ETH more than quadrupled in value since Shanghai was launched.

Even more exciting is that all the evidence points towards an acceleration of this trend. Zheng’s team estimates the percentage of staked ETH will double in the coming years to account for 45% of the cryptocurrency’s total circulating supply, representing hundreds of billions of dollars. At the time of writing, ETH had a total market cap of more than $226.2 billion.

According to Henrique, the growing interest in ETH staking will generate rapid growth LSDs, taking market share from native staking and centralized exchange staking as investors chase its higher reward potential. However, the report notes that LSD is still a young and nascent market, and believes emerging protocols will grab a much larger market share from the more established protocols that are currently dominant. The report identified Rocket Pool as the fastest-growing LSD protocol in recent months, taking market share away from better-known players such as Coinbase’s cbETH. According to the report’s authors, this trend highlights the high regard that much of the DeFi community has for decentralization.

As more investors join the market, HashKey warns that staking yields will be reduced. However, LSD composability with DeFi means there are still further opportunities for investors to boost their total yields.

Validator networks are likely to become even more democratized and decentralized in future through the introduction of new innovations such as Distributed Validator Technology. This will result in a flood of new opportunities for developers, investors and crypto users alike, HashKey said.

The report also forecasts LSDfi to grow in importance within the LSD sector by sourcing fresh liquidity, promoting decentralization, sharing security and boosting yields. Eventually, it will flip decentralized exchanges in terms of TVL and grow to become the most dominant sector of DeFI, HashKey believes.

“In the future, any rational actor with have 100% of his or her ETH staked in LSDs,” Henrique said in a statement. “Further implementation of the EIP-4337 standard allows fees to be paid with ERC-20 tokens, effectively making the strategy of holding ETH redundant.”

HashKey Capital’s full report on LSD staking is available to download here.

About HashKey Capital

HashKey Capital is an asset manager investing exclusively in blockchain technology and digital assets, managing over US$1 billion in client assets since its inception. As one of the largest crypto funds based in Asia and known for being Ethereum's earliest corporate investor in the region, its mission is to bridge crypto to the mainstream while connecting Web2 and Web3. HashKey Capital operates in Hong Kong and Singapore, with strong connection in Japan and the U.S., and has invested in over 200 projects from public chains, protocols, DeFi, CeFi, Web3 infrastructure, NFT to Metaverse since 2015.

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