Moody's/Amberdata Sector In-depth: Liquid staking tokens may enhance investors' liquidity and yield

Staking is a pledge of capital to a blockchain by owners of a specific cryptocurrency. In a “proof-of-stake” consensus mechanism, stakers enhance the security of the associated blockchain network by having a vested financial interest in it and participating in validating transactions, and they can also get a return on their investment. Following the Ethereum blockchain's transition to a proof-of-stake consensus mechanism powered by staking of ETH, its native token, the dollar value of ETH staking has grown to more than one third of the total value locked in the decentralized finance (DeFi) ecosystem. There are now many investment possibilities for institutional and retail investors that interact with ETH and their staking derivatives. In our view, growth of the ETH staking market also poses multiple risks related to the complex technology stack that powers staking applications. Market and liquidity fluctuations could also have widespread repercussions in digital finance markets given the high interconnectedness between staking and the broader DeFi ecosystem.

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