Bet tokens: what they are and how they work

Every year brings a new trend to the cryptocurrency market, with past years seeing DeFi, NFT and metaverse (among others) manage to gain the attention of millions of traders looking for the next big thing. Well, this year looks like it’s the turn of staking tokens to enjoy above-average returns, with some of the biggest of these – including Lido DAO (LDO) and Frax Share (FXS) – rising more than 100% in the last month or so.

This article will explain what staking tokens are, contextualizing their rise to eminence in recent months and explaining why investors have taken them so big. Basically, the whole phenomenon can be reduced to one primary cause: Ethereum, which in the transition to a proof-of-stake consensus mechanism last September generated a massive demand for staking services.

What are staking tokens? Which are the biggest?

By “staking token,” this article generally means any token native to a staking service or platform. It does not mean tokens that you can actually point (such as ethereum, cardan, solano, polka dots, etc.) and that are used to secure the network of the corresponding token.

In other words, staking tokens have some sort of utility for the staking platform that issues them, whether it’s this utility related to governance or paying transaction and service fees. As a result, here are the five largest betting tokens in the cryptocurrency market right now, sorted by market cap.

  1. Lido DAO (LDO): Market capitalization of $1.78 billion and a fully diluted valuation (max bid x price) of $2.13 billion. Launched in early 2021, LDO is the governance token of the Lido, so you need to vote on protocol updates and also on Lido DAO treasury uses.

  2. Frax Share (FXS): Market capitalization of $752.8 million and fully diluted valuation of $1.03 billion. Launched in late 2020, FXS is the native utility and governance token of Frax Finance, a decentralized stablecoin and DeFi platform that also offers Ethereum staking.

  3. Rocket Pool (RPL): Market capitalization and fully diluted valuation of $728.3 million. Launched in mid-2018, RPL is being used within the Rocket Pool platform to protect nodes and fund one of the two DAOs running the staking service.

  4. Ankr Network (ANKR): Market capitalization of $213.2 million and fully diluted valuation of $262.2 million. Launched in early 2019, ANKR has a variety of uses within the ANKR ecosystem, including paying for access to the various staking services managed by ANKR, as well as for governance and node protection.

  5. StakeWise (SWISE): Market capitalization of $29.7 million and fully diluted valuation of $151.3 million. Launched in April 2021, StakeWise is a service for staking Ethereum, with SWISE acting as a governance token for its DAO.

Why are staking tokens working so well in the cryptocurrency market right now?

The above tokens have performed particularly well over the past one or two months, beating overall market returns and beating the returns of many of the biggest cryptocurrencies, including bitcoin, ethereum, and cardano.

For example, LDO has increased by 119% in the last month, compared to 31% for the market as a whole and 39.5% for bitcoin. It’s a similar story with FXS, RPL, ANKR and SWISE, which have gained 140%, 92%, 70% and 105% respectively over the past 30 days.

Clearly, something is happening here, with staking tokens proving to be the best performing cryptocurrency class on the market during this time. As stated above, the basic explanation of this phenomenon is quite simple, with the growth of Ethereum staking being the main culprit.

Put simply, only the most technically savvy – and wealthy – can manage to run home by staking themselves, requiring as it makes the ability to run a full Ethereum node 24/7, as well as at least 32 ETH (equal to just over $50,000). Therefore, most investors interested in betting their ETH have turned to staking pools, with all five of the above tokens being native to those pools.

And yes, the market has really turned to these pools in a big way, with Lido becoming the largest DeFi application in the entire cryptocurrency ecosystem in terms of total locked value. In July 2022, its TVL was around $5.1 billion, but it has now risen to just over $8 billion, surpassing MakerDAO (which oversees various algorithmic stablecoins) in the process.

This increase came at a time of decline in TVLs for most other DeFi apps, indicating that the stake is getting very large. And there are numerous reasons why ETH would be in high demand.

Why demand for ETH stakes has grown so rapidly

First, despite a recent mini-rally, the market remains very much in recession, as bitcoin (for example) is still 66.5% below its all-time high of $69,044. Earnings are scarce right now, so those investors who still have tokens and want to do something with them have started betting Ethereum in greater numbers, as this can earn them a variety of rewards. Not only will they receive extra ETH as yield (at least once the Shanghai update ships in March), but the staking pools they use — including Lido, Frax, and Rocket Pool — all provide ETH derivatives in exchange for the actual ETH they bet.

This means that ETH stakers also have the ability to use the derivatives they receive – Frax ether (FRXETH), Lido staked ether (STETH) and Rocket Pool ETH (RETH) – to chase further profits. To a large extent, this involves using these ETH derivatives on other DeFi platforms as liquidity, something that draws its own returns.

Beyond that,
there’s most likely an interest in Ethereum and ETH themselves, since the network’s shift to proof-of-stake has created a narrative that could one day turn Bitcoin upside down. The Merge and other upgrades have also created a situation where, during periods of heavy usage, ETH effectively becomes deflationary, to the extent that its supply actually shrinks (this is due to on-chain consumption of transaction fees and reduced minting of new ETH after switching to PoS).

As such, it is questionable whether the narrative and sense of expectation around Ethereum is helping to make staking very popular, especially during an ongoing bear market. In turn, this has created significant demand for staking tokens, be it the problems of utility token governance and staking platforms, or ETH derivatives (or SOL, or AVAX, etc.) that issue in exchange for profits.

And with proof-of-staking set to become a bigger rather than smaller appointment within the cryptocurrency ecosystem in the months and years to come, expect staking tokens to increase mostly in value.

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