Liquid Staking Providers Buck Bear Market With Hefty Inflows

This has been a rough year for DeFi, with large sums of capital being withdrawn from most of the sector’s top protocols.

Even so, liquid staking providers are among the few DeFi projects to post consistent growth.

Recent Losses

Leading liquid staking provider Lido has continued to absorb deposits despite suffering a heavy drop in total value locked (TVL) ETH’s recent losses amid, according to DeFi Llama. Lido took in more than $3.2B across six individual days during February and March. By contrast, just 15 daily outflows have been posted since the start of March.

It’s not alone. Rival liquid staking provider, Rocket Pool, has also enjoyed consistent inflows during 2022, posting withdrawals for just three days of the year so far.

So why are these projects, which help Ethereum stakers participate in processing its blockchain, bucking the downturn? It all has to do with Ethereum’s shift to Proof-of-Stake from Proof-Work transaction validation.

It’s Called Incompossibility, It’s a Big Problem, and Liquid Staking Protocols Can Solve It

The shift, expected in the third quarter, is poised to drive a significant increase in rewards for stakers as miners are booted from the network. But withdrawal functionality isn’t live yet on the Proof-of-Stake Eth2 Beacon Chain. That means liquid staking protocols are the only way for ETH stakers to exit their positions for the time being.

Lido capital flows in 2022. Source: DeFi Llama

Users have withdrawn billions from the DeFi protocols since April as the crypto markets suffered heavy drawdowns due to rising interest rates and investors fleeing risky assets. The collapse of Terra Classic and UST didn’t help either. Now the Federal Reserve’s policy of quantitative tightening has spurred even more investors to withdraw capital from DeFi’s top protocols.

Whipsawed

Even blue chip MakerDAO is being whipsawed. It has shed $3B in the past two months despite reclaiming its position as the largest DeFi protocol. More than $2B was removed from MakerDAO in a single day on April 1. The fallout from the Terra fiasco further impacted Maker during May, with investors pulling $540M from the protocol on May 8 and 9.

MakerDAO capital flows in 2022. Source: DeFi Llama

Convex Finance, a yield protocol for Curve liquidity providers, posted declining TVL in 2022 that was exacerbated by significant outflows during 2022.

The protocol lost more than half a billion or more on nine days this year, including five days when between $1B and $2B were withdrawn from the protocol. By contrast, its largest daily inflow was $396M on January 2.

Drawdowns

Other top protocols that have posted significant outflows during 2022 include Compound, QuickSwap, Alpaca Finance, and Aave v2.

While Aave v2 has posted some sizable drawdowns in recent months, with the recent cessation of its yield farming incentives likely a contributing factor, its v3 iteration has climbed through the TVL ranks and is now the 13th-largest protocol.

Aave v3 has only posted a dozen daily outflows since launching in mid-March. Nearly two-thirds of its $1.5B TVL was deposited on April 21, and the protocol is currently enjoying a streak of 12 consecutive daily inflows totaling more than $500M across six chains.

Aave v3 capital flows. Source: DeFi Llama

Solana’s top protocol, Solendhas also received significant inflows despite its TVL dropping 21% over the past month.

Solend has produced six days where deposits exceeded $100M since February, plus two days of inflows greater than $60M. By contrast, the protocol has produced just four days of outflows greater than $20M since February, with the largest being a $27M withdrawal on May 25.

The Ethereum-based liquidity management protocol, Arrakis Finance, is among the few protocols to post significant growth in spite of the bearish market conditions, with its TVL growing 108% over the past 30 days. More than $580M has been deposited onto Arrakis since May 20.

Arrakis Finance capital flows in 2022. Source: DeFi Llama