LDO, SWISE, RPL Tokens soar on Ethereum's Shanghai upgrade

Key points:

• While BTC and ETH remain grounded, governance tokens of the liquidity-staking platforms are gaining in price. 
• LDO has gained 19 percent in the past seven days, SWISE token is up more than 70% in a week, while Rocket Pool’s RPL is up nearly 10%.
• The rally comes after Ethereum developers announced that the network's next hard fork Shanghai, will include a code that will allow the withdrawal of Ether staked on the Beacon chain since December 2020.
• Ether accounts for more than 40% of total Ether deposits pledged via the liquid staking protocol at more than 15.7 million at press time.
• This explains the positive price action of liquidity-backed governance tokens prior to the Shanghai upgrade.

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Top Liquid Staking Governance Tokens. Source - Coingecko

There are rarely dull moments in the crypto market.

While Bitcoin (BTC) and Ether (ETH) remain grounded, governance tokens of the liquidity-staking platforms that allow users to keep their tokens secure while locked on the blockchain network, are gaining in price. 

Lido DAO, the governance token of the Lido decentralized autonomous organization (DAO), has gained 19 percent in the past seven days, with prices hitting a 1.5-month high of $1.30 earlier Tuesday, according to data source Coingecko. StakeWise’s Liquid Staking Protocol’s SWISE token is up more than 70% in a week, while Rocket Pool’s RPL is up nearly 10%.

The rally comes after Ethereum developers announced on Dec. 8 that the network's next hard fork, or backward-incompatible upgrade, will take place in March. The upgrade, called Shanghai, will include a code that will allow the withdrawal of Ether staked on the beacon chain since December 2020, eventually providing participants with a timetable for claiming Ether.

“Liquid staking derivatives [tokens] have seen a decent uptrend lately. This is thanks to an upgrade expected in Shanghai in a few months that will allow withdrawals from staked ETH,” wrote pseudonymous analyst CroissantEth ​said on Twitter. “With the withdrawal feature enabled, many believe more users will invest their ETH.”

Staking refers to locking coins in a cryptocurrency wallet to support the operation of the blockchain in exchange for rewards. The process is roughly similar to investing in fixed-income securities such as bonds.

However, staking can tie up wealth in the long run. The Liquid staking protocol removes opportunity cost by issuing derivative tokens that represent rights to lock up tokens and earn rewards. These derivative tokens can be used elsewhere to generate additional income.

According to Dune Analytics, Ether accounts for more than 40% of total Ether deposits pledged via the liquid staking protocol at more than 15.7 million at press time. This explains the positive price action of liquidity-backed governance tokens prior to the Shanghai upgrade.

Blockchains staking ratio. Source - Messari 

According to Messari, ether’s collateralization ratio is 14%, the lowest among layer 1 tokens. Therefore, there are a lot of scopes for the ETH collateralization ratio (the amount of Ether pledged relative to the total cryptocurrency supply) and the adoption of liquid staking protocols.

As highlighted by Binance Labs’ David Alexander, activity on liquidity staking protocols has increased in recent weeks.

With a total value of $5.9 billion, Lido has surpassed MakerDAO and AAVE to become the world's largest decentralized finance (DeFi) protocol, according to data source Defi Llama.

Shorts stacked in LDO

Still, some traders appear to be skeptical of LDO's long-term gains. This is reflected in the extremely negative funding rates or costs of taking long bullish or short bearish positions in LDO-linked perpetual futures contracts.

The chart shows that the leverage is skewed on the bearish side. Source - Coinglass 

Negative funding rates indicate a bearish bias towards leverage. This opens the door to a short squeeze — an excessive rise in price triggered by the unwinding of short positions.

“Shorts have piled up (in LDO) after hoping early investors to sell (according to on-chain evidence),” crypto hedge fund Ouroboros Capital told. “However, it is also possible that shorts get crushed, giving them another leg, as these on-chain sellers just closed their perp shorts/spot longs.”