The economics of liquid staking derivatives: Basis determinants and price discovery

45 Pages Posted: 9 Aug 2022 Last revised: 17 Feb 2023

Date Written: February 17, 2023

Abstract

This paper provides a first economic analysis of liquid staking tokens, which are derivatives representing a share of staked tokens in proof-of-stake blockchains. There is substantial time-variation in the "liquid staking basis", i.e., the price difference between a derivative staking token and its underlying cryptocurrency. We find evidence that limits to arbitrage and behavioral factors influence this basis. The liquid staking basis is wider when the cryptocurrencies' returns are more volatile and when secondary market liquidity is low. In contrast, it is smaller on weekdays and when investors pay more attention to liquid staking. Furthermore, liquid staking tokens contribute a small but overall growing amount to price discovery in the underlying cryptocurrencies.

Keywords: Staking, Proof-of-stake, Cryptocurrency, Liquidity, Price discovery

JEL Classification: G12, G13, G15, G23

Suggested Citation

Scharnowski, Stefan and Jahanshahloo, Hossein, The economics of liquid staking derivatives: Basis determinants and price discovery (February 17, 2023). Available at SSRN: https://ssrn.com/abstract=4180341 or http://dx.doi.org/10.2139/ssrn.4180341

Stefan Scharnowski (Contact Author)

University of Mannheim ( email )

Mannheim, 68161
Germany

Hossein Jahanshahloo

Cardiff University ( email )

Aberconway Building
Colum Drive
Cardiff, Wales CF10 3EU
United Kingdom

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