Rocket Pool thinks Atlas upgrade might push reth toward its notional value

With Ethereum withdrawals around the corner, all eyes are currently on liquid staking derivative tokens, otherwise known as LSDs.

One LSD in particular currently stands out from the rest, and what's most unusual is that it’s currently trading above its notional value — a rare event when it comes to LSDs. Called reth, it's run by Rocket Pool, an arguably more decentralized version of Lido Finance (for now at least).

Reth is a bit different from other LSDs. Instead of minting new tokens to account for staking rewards, each reth slowly becomes backed by a greater amount of ether. When Ethereum withdrawals open up, each reth will be redeemable for this underlying asset.

Currently, there's 1.058 ether backing each reth token. You would imagine its market price would then be around 5.8% higher than the price of ether. Yet currently reth is trading 7.2% higher than the price of ether, according to CoinGecko. This means its trading at a 1.3% premium. So traders are paying more for a derivative of ether than they would get by buying the underlying asset itself.

Massive demand for reth

Darren Langley, general manager of Rocket Pool, put it down to supply and demand — with the former outweighing the latter. “So there's a massive demand for reth," he said. "People see reth as more decentralized, healthier for Ethereum.”

Langley added that it’s generally more tax efficient because it’s not a rebasing token — unlike its rivals — so it lends itself toward capital gains tax over income tax. Plus, it’s hitting critical mass with integrations, such as with MakerDAO and MetaMask, he added, explaining where the demand is coming from.

On the flip side, Rocket Pool isn’t expanding as quickly as perhaps it should. As a decentralized liquid staking protocol, it requires individual node operators to pony up 16 ETH and at least 1.6 ETH of the project’s native token RPL. This means it's limited by how many individual parties are willing to get involved and have the funds to do so. This is reducing how much ether can be staked through the protocol and therefore how much reth can be created, limiting its supply.

With the increased demand and sluggish supply, this has led to a premium in its price, Langley said.

Tweaking the requirements

With the imbalance proving to be a point of friction, Rocket Pool intends to lower the barriers to entry, hoping to boost supply. Its upcoming Atlas upgrade, designed to prepare the protocol for staking withdrawals, will lower the 16 ETH requirement to 8 ETH and make it easier for solo stakers to migrate to Rocket Pool. The idea is that this should boost the number of node validators, meaning that Rocket Pool can support a greater amount of staked ETH.

The upgrade is currently scheduled for late March or early April, aimed to be as close to Ethereum's Shanghai upgrade as possible. If it comes out before Shanghai, it could increase the supply of reth, which could decrease its premium, Langley said. “Once we release Atlas, the premium will probably disappear for a little bit and it will just kind of neutralize back to the notional value.”

That said, once Shanghai is in place, Langley expects to see a large increase in demand for LSDs, which could cause the premium to come back. “We are actually expecting a lot of demand post-Shanghai,” he said.