The cryptocurrency exchange BIT (bit.com) launched the LsETH/USDT trading pair for the first time. It is the second centralized exchange to launch LsETH besides Coinbase, and the only exchange to support the LsETH/USDT trading pair. Coinbase currently supports LsETH/USD and LsETH/ETH trading pairs.
BIT Exchange has recently attracted wide attention with a series of measures in the market. The launch of small-currency options products, the introduction of financial innovation products Square Options, the launch of the Eigenlayer points spot trading market, and the first launch of the LsETH/USDT trading pair are all manifestations of its response to user needs, active financial innovation, and rapid feedback on market changes.
The launch of LsETH means that investors can more conveniently participate in the staking activities of the Ethereum network, while also providing a simpler and more efficient option for users who wish to gain income through staking.
Ethereum ETF vs Ethereum Collateralized ETF
In this round of bull market started by Bitcoin inscription and led by Bitcoin ETF, ETH's performance has always been unsatisfactory. On May 21, 2024, affected by the news that the SEC may approve the spot Ethereum ETF, the price of Ethereum rose, soaring from around US$3,150 to more than US$3,600 within 3 hours, and hit the highest price of 2024 of US$3,942.24 in the following days.
Due to regulatory uncertainty and the SEC’s stance on staking activities in such funds, the SEC’s current application for a spot Ethereum ETF has excluded staking functionality.
However, on June 17, Canada’s Purpose Investments announced that it would convert its Ethereum Capital Corporation into a collateralized Ethereum ETF. The conversion shows that Canada is taking the lead in embracing Ethereum collateralization after the U.S. Securities and Exchange Commission expressed uneasiness about the concept.
On June 13, cryptocurrency derivatives trader Gordon Grant said in an interview with The Block that for institutional investors, the attractiveness of spot Ethereum exchange-traded funds (ETFs) may be weakened due to the lack of support for staking functions, and institutional funds may wait until staking is approved before investing in such funds.
Grant noted that unlike Bitcoin, holding Ethereum directly may have more meaningful performance advantages for institutional investors than a spot Ethereum ETF. Until the staking function of a spot Ethereum ETF is enabled, institutional traders will use on-chain solutions.
Grant is not the first to make this claim. In a recent report, JPMorgan Chase said that the lack of staking functionality in approved spot Ethereum ETFs makes these products less attractive as investment products. The analysts believe that since ETFs have removed staking features from their applications, this makes them "less attractive than platforms that offer staking yields."
JPMorgan Chase expects spot Ethereum ETFs to attract up to $3 billion in net inflows over the rest of the year. If staking is allowed, that figure could rise to $6 billion.
The compliance pain of cryptocurrency staking
Cryptocurrency staking refers to staking digital assets to help protect the blockchain or provide services such as verification, thereby contributing to the system and obtaining corresponding returns.
In August 2022, the U.S. Securities and Exchange Commission (SEC) launched an investigation into the cryptocurrency staking services provided by Coinbase. The services involved included Coinbase's staking program, asset listing process, asset classification and stablecoin products.
In February 2023, the SEC conducted an investigation into Kraken, noting that investors would lose control of their tokens and assume the risks associated with these platforms when providing tokens to Kraken's "staking as a service" platform, with almost no protection. At the same time, Kraken announced the termination of its staking as a service program for US users. SEC Chairman Gary Gensler stated that staking as a service providers must be registered and provide full, fair and truthful disclosure and investor protection.
On July 15, 2023, Coinbase announced that users in California, New Jersey, South Carolina, and Wisconsin in the United States will temporarily be unable to use its staking services.
So why is the SEC so strict in its scrutiny of cryptocurrency staking services? The root cause is that, in addition to native staking, the staking services provided by centralized exchanges and staking service providers often have a lower threshold and cannot distinguish whether there is black money; these institutions may also have black box operations, and users do not know the specific flow of funds, and it is more likely to absorb deposits and generate interest. In addition, it is impossible to verify whether the encrypted assets are actually pledged to the network, not to mention whether the network security is guaranteed.
This opacity and potential high risk prompted the SEC to conduct strict scrutiny on these staking services to ensure that investors’ interests are not harmed and to promote the healthy development of the industry. By requiring staking service providers to register and make full disclosures, the SEC hopes to increase market transparency, protect investors, and prevent money laundering and other illegal activities.
Liquid Collective — Establishing the Industry Standard for Liquid Staking
Liquid Collective is a multi-chain liquidity staking protocol that aims to provide institutions with a non-custodial decentralized liquidity staking solution. Liquid Collective attaches great importance to compliance and security, requiring users and node operators to complete KYC/AML (anti-money laundering) certification.
The core component of Liquid Collective is the smart contract. Users can deposit any amount of ETH into the smart contract, without the 32 ETH limit. When the balance of the smart contract reaches 32 ETH, the ETH in the contract will be pledged to the node operator in a circular manner. Node operators include Coinbase Cloud and Figment, which run the verification node infrastructure on Liquid Collective and receive network rewards. Liquid Collective itself does not run verification nodes.
When users deposit ETH into the Liquid Collective protocol, they receive LsETH. LsETH (Liquid Staked ETH) is a token generated when staking Ether (ETH) through Liquid Collective's liquidity staking protocol. It represents the ownership certificate of the staked ETH and its accumulated network rewards, minus fees or penalties.
The total amount of LsETH will not change with the changes in the number of protocol-layer staking rewards and network penalties, but will be balanced by the "exchange rate" between LsETH and ETH. For example, when we stake 100 ETH through Liquid Collective and get 100 LsETH at a 1:1 ratio, and the staking reward is 20 ETH one month later, assuming that no network penalty fees are incurred in the middle, then the total amount of ETH at the protocol layer is 120. At this time, if you want to exchange 100 LsETH for 120 ETH, you need to multiply it by the "exchange rate" of 1.2. Similarly, at this time, according to the exchange rate of 1.2, only by staking 120 ETH can you get 100 LsETH. Here, the exchange rate is calculated by dividing the total balance of staked ETH by the total supply of LsETH. Every 24 hours, the oracle reports data from the consensus layer to the execution layer and reports the balance of staked tokens, accrued staking rewards, and penalty fees to be deducted to the Liquid Collective core contract to calculate the new exchange rate.
Exchange rate =
LsETH is based on the Ethereum ERC-20 token model, and its exchange rate fluctuates to reflect the value of accumulated rewards and penalties. The advantage of using the ERC20-based cToken contract is that user staking income, compound interest, etc. are fully automatic, without manual operation, minimizing Gas consumption. At the same time, since the exchange rate changes in real time, LsETH is actually no different from other tokens. Users can use LsETH for transactions, mortgage lending, and even re-stake it on Ethereum through EigenLayer.
Liquid Collective achieves non-custodial and decentralization on the basis of ensuring compliance, increasing the security of the Ethereum network. For institutions, using Liquid Collective's staking service can, on the one hand, cope with regulatory scrutiny and avoid sanctions screening; on the other hand, unlike other Ethereum staking services, Liquid Collective releases the liquidity of the pledged assets, and LsETH can be used for exchange and integrated with DeFi.
In Liquid Collective's view, the various liquidity staking products currently on the market are prone to fragmentation. Different protocols are competing for DeFi resources. LST tokens with different standards will limit liquidity and lack compliance and composability.
Therefore, Liquid Collective gathers major players in the DeFi ecosystem to establish an industry alliance for decentralized management. This alliance includes The Liquid Foundation, Alluvial, Coinbase, Figment, Kiln, Acala, Rome Blockchain Labs, Kraken, Staked, Bitcoin Suisse and other Web3 organizations, involving integrators, cross-chain builders, node operators, etc. For Liquid Collective, a decentralized and compliant liquidity staking solution is not the end point. The ultimate goal is to develop a liquidity staking standard for the industry based on this solution.
Conclusion
BIT Exchange is committed to providing users with more diverse trading options and more flexible trading pairs to meet the needs of different investors. By continuously launching new products and new trading pairs, BIT Exchange demonstrates its leading position in innovation and adapting to market needs.
Secondly, as a new type of staked ETH token, the launch of LsETH on the BIT exchange will not only help enhance the market visibility and liquidity of the product, but also provide investors with more investment opportunities and strategies.
Judging from the feedback from major financial institutions and the market, whether the ETH ETF can inject a shot in the arm for the current weak market depends largely on the staking function, especially whether the staking ETH ETF can obtain regulatory approval. In other words, compliant ETH staking services will be one of the keys to ETH's breakthrough in the market. For individual investors, holding LsETH is a simpler and more efficient option than directly holding ETH and performing complex on-chain staking operations. This not only simplifies the operation process, but also allows you to enjoy the income from ETH holdings and the additional returns from staking at the same time, which can be said to kill two birds with one stone.