Author: @Web3Mario
Abstract: We know the saying "Buy the rumor, sell the news". In the previous October before the election, the author published the article "The New Value Cycle of DOGE: Political Traffic Potential and Musk's 'Government Efficiency Department' (D.O.G.E) Political Career", which received good response and expected results. The author also reaped a relatively generous investment return, and would like to thank everyone for their encouragement and support. Personally, I feel that there will be a lot of similar trading opportunities during the interregnum before Trump officially takes office, so I have decided to start a series of articles, "Buy the Rumor Series", to explore and analyze the current market hype points and extract some trading opportunities.
Last week, there was a very noteworthy phenomenon. With Trump's strong return, the market has already started to hype the potential resignation of Gary Gensler, the chairman of the U.S. SEC. You can see related articles on potential successors in most mainstream media. So in this article, we will analyze which cryptocurrency will benefit the most from the expected improvement in the regulatory environment. In conclusion, I believe the ETH Staking sector will be the direct beneficiary, and Lido, the leading project, may also break out of its current price predicament.
Review the regulatory dilemma faced by Lido: The Samuels v. Lido DAO Lawsuit
First, let's supplement some basic information. We know that Lido is the leading project in the ETH Staking sector, providing non-custodial technical services to help users participate in Ethereum PoS and earn rewards, while lowering the technical threshold and the 32 ETH capital threshold of Ethereum Native Staking. The project has raised a total of $170 million through three rounds of financing. After its launch in 2022, Lido has maintained a market share of around 30% for years, and as of now, according to Dune's data, Lido still maintains a 27% market share, without any obvious decline, indicating that Lido is still quite strong in terms of business demand.
The reason for Lido's current low price can be traced back to the end of 2023, when the price of its governance token LDO also reached its historical high, with a market capitalization of $4 billion. At that time, a lawsuit changed the entire price trend, which was the Samuels v. Lido DAO case, case number 3:23-cv-06492. On December 17, 2023, an individual named Andrew Samuels filed a lawsuit against Lido DAO in the U.S. District Court for the Northern District of California, alleging that the defendant Lido DAO and its associated venture capital firms had sold LDO tokens to the public without registration, in violation of the Securities Act of 1933. In addition, Lido DAO created a highly profitable business model by pooling users' Ethereum assets for staking, but did not register its LDO tokens with the U.S. Securities and Exchange Commission (SEC) as required. The plaintiff, Andrew Samuels, and other investors, believing in the potential of this business model, purchased LDO tokens and ultimately suffered economic losses, and therefore they are seeking legal compensation.
This case not only involved Lido DAO, but also included allegations against its major investors, including AH Capital Management LLC, Dragonfly Digital Management LLC, Lido DAO, Paradigm Operations LP, and Robot Ventures LP. According to the information on the progress of the entire case, these institutions respectively received summons from the court in January 2024, when the price of LDO was at its highest point. After that, the legal proceedings were limited between the lawyers of the investment institutions and Andrew Samuels' lawyer, so the impact did not spread.
Until the first motion hearing on March 28, 2024, the judgment of which was confirmed on April 10, 2024, and after amending some relevant clauses, the case was accepted.
Subsequently, on May 28, 2024, the legal team of Andrew Samuels unilaterally announced the initiation of a motion to declare Lido DAO in default. The reason for this operation was that the Lido DAO side believed that it did not operate in the form of a company, and therefore did not respond to the lawsuit. If it was ultimately declared in default, it would lead to some adverse judgments against Lido, such as not being able to defend itself. Based on the previous similar Ooki DAO case, the result for the defaulting party is unfavorable. The motion was approved by the court on June 27, and Lido DAO was required to respond within 14 days, after which Lido DAO had to hire Dolphin CL, LLC, a law firm based in Nevada, as its defense lawyer through a community proposal on July 2, 2024, and apply for a related budget of 20,000 DAI. At this point, the case has also become widely known to the community. After several rounds of arguments between the two parties, the case seemed to enter a calm period after September.
At the same time, another case also had a substantive impact on Lido, which was the SEC's lawsuit against ConsenSys Software Inc. on June 28, 2024, case number 24-civ-04578. Note that this date is the day after the judgment that Lido DAO has been fully informed of the lawsuit was handed down. In this lawsuit, the SEC believes that ConsenSys Software Inc. has engaged in the unregistered issuance and sale of securities through its service called MetaMask Staking, and has operated as an unregistered broker through MetaMask Staking and another service called MetaMask Swaps.
According to the SEC's complaint, since January 2023, ConsenSys has provided and sold thousands of unregistered securities on behalf of the liquidity staking providers Lido and Rocket Pool, which have created and issued liquidity staking tokens (called stETH and rETH) in exchange for staked assets. Although staked tokens are usually locked and cannot be traded or used during the staking period, liquidity staking tokens, as the name suggests, can be freely bought and sold. Investors in these staking programs provide funds to Lido and Rocket Pool in exchange for liquidity tokens. The SEC's complaint alleges that ConsenSys engaged in the unregistered issuance and sale of securities and acted as an unregistered broker in these transactions by participating in the distribution of the staking programs.
In this lawsuit, the stETH certificates issued by Lido to participating users were explicitly described by the SEC as a form of security. At this point, Lido has officially entered a low tide period under regulatory pressure. In the previous description, the reason for sorting out the timeline of the case progress is to try to correspond with its price trend. That is to say, the core factor that has suppressed the price of LDO is the increased regulatory pressure and the impact of the lawsuit, which has triggered the risk aversion sentiment of institutional or retail investors, because if the judgment is unfavorable, it means that Lido DAO will face considerable fines, which will inevitably have a huge impact on the price of LDO.
Whether stETH is a security, and why Lido's future development is the most worth watching
From the above analysis, we can already identify that the reason for the low price of LDO is not due to underperformance of the business, but the uncertainty caused by regulatory pressure. We know that the core of the above two cases is to determine whether stETH is a security. Normally, to determine whether a certain asset can be recognized as a security, the so-called "Howey Test" needs to be gone through. In simple terms, the Howey Test is a standard used in U.S. law to determine whether a transaction or instrument constitutes a security. It originates from the 1946 U.S. Supreme Court ruling on the SEC v. W.J. Howey Co. case. This test is crucial to the definition of securities, especially in the crypto and blockchain space, where it is often used to evaluate whether tokens or other digital assets are subject to U.S. securities laws.
The Howey Test is mainly based on the following four criteria: 1. It is an investment of money 2. There is an expectation of profits from the investment 3. The investment of money is in a common enterprise 4. Any profit comes from the efforts of a promoter or third party If an asset meets all four of these criteria, it is likely to be considered a security under U.S. law. In the cases involving Lido, the key issue is whether the stETH certificates issued by Lido to users who participate in its staking service can be considered securities under the Howey Test. If stETH is determined to be a security, Lido may face significant regulatory risks and penalties.
In the ConsenSys case, the SEC has already explicitly stated that the stETH issued by Lido is a form of security. This means that Lido's future development is likely to be the most closely watched, as the outcome of the Samuels v. Lido DAO case will have a major impact on Lido's business model and the entire ETH staking sector. If the court ultimately rules that stETH is a security, it will not only affect Lido, but also have a ripple effect on other staking projects like Rocket Pool. This will undoubtedly bring huge uncertainty to the entire crypto staking ecosystem.
Therefore, the Samuels v. Lido DAO case is a key event that the crypto community should closely follow. The outcome of this case will not only determine the future development of Lido, but also have a significant impact on the regulatory environment for the entire crypto staking industry. Investors should pay close attention to the progress and results of this case, as it may bring about major changes in the crypto market landscape.
- Investment funds: Whether it involves investment of money or other valuable assets.
- Common enterprise: Whether the investment is into a common enterprise or project.
- Reasonable expectation of profits: Whether the investor has a reasonable expectation of profits from the efforts of others.
- Efforts of others: Whether the source of the profits is primarily dependent on the managerial efforts of the project developers or third parties.
If a transaction or instrument satisfies all of the above conditions, it may be considered a security and subject to regulation by the U.S. Securities and Exchange Commission (SEC). In the current regulatory environment that is unfavorable to cryptocurrencies, stETH has been classified as a security by the SEC. However, the crypto community holds the opposite view, with Coinbase arguing that ETH Staking does not meet the four elements of the Howey Test and therefore should not be treated as a securities transaction.
- No monetary investment: During the staking process, users maintain full ownership of their assets and do not entrust their funds to a third party, so there is no investment activity.
- No common enterprise: The staking process is completed through a decentralized network and smart contracts, and the service provider is not a joint venture with the user.
- No reasonable expectation of profits: Staking rewards are the labor income of blockchain validators, similar to wages, rather than the expected returns from an investment.
- Not dependent on the efforts of others: The institutions providing staking services only run open-source software and computing resources to perform validation, which is technical support rather than management, and the rewards are not based on their management efforts.
From this, we can see that there is still room for discussion on whether the certificates related to ETH Staking will be classified as securities, and it is largely influenced by the subjective judgment of the SEC. Finally, I would like to summarize why I think Lido's future development is the most worth watching:
1. The core factor of price suppression is regulatory pressure, and the subjective factor of the regulatory pressure it faces is high, and the current price is at a technical low point.
2. ETH has already been defined as a commodity, so the room for discussion on related views is greater compared to other areas, such as SOL.
3. The ETH ETF has already been approved, and the top-level resources mobilized to promote the ETF sales will inevitably be helpful, and here I will expand a little, because there are currently related rumors circulating, and this part of the trend-following information generally believes that the current capital inflow situation of the ETH ETF is not as good as that of the BTC ETF, and the reason for this is still in the differentiation, for most traditional capital, BTC as the standard of the entire cryptocurrency track is relatively easy to understand, while the attractiveness of the ETH ETF is not so great, if the ETH ETF can allow purchasers to obtain indirect staking income, it will significantly increase its attractiveness.
4. The legal costs of resolving related lawsuits are relatively small, as we know that in the Samuels v. Lido DAO case, the plaintiff was not the SEC, but an individual, so the dismissal of the lawsuit brought lower legal costs and relatively smaller impact compared to cases directly sued by the SEC.
In summary, I believe that during this lull period, as the possibility of changes in the regulatory environment heats up, Lido's future development is worth watching.
