By Momir, IOSG Ventures
This article is the original content of IOSG. It is only for industry learning and communication, and does not constitute any investment reference. If you need to quote, please indicate the source. For reprinting, please contact the IOSG team for authorization and reprinting instructions.
Market opportunities
Is liquid staking a winner-take-all market?
If centralized exchanges dominate the ETH staking market, it would defeat Ethereum’s goal of building a decentralized network. As shown in the figure below, Lido is the leading project in the field of ETH staking, occupying about 30% of the market share.
Still, there are voices in the community that limit Lido's market share. For example, Vitalik believes that staking projects (including centralized and decentralized ones) should self-limit the amount of staking they control, and he suggested 15% as their upper threshold.
Without ideological (decentralized) concerns, this could be a winner-take-all type of market due to liquidity, composability, network effects, specialization, and revenue maximization.
How much market share can Lido occupy?
The main arguments for and against limiting the market share of individual projects are summarized below:
Summarize:
1: Lido will not impose any self-limiting measures.
2: IMO thinks Lido fork is inevitable, but how much market such a fork can occupy is hard to predict, it depends on many factors. Such as LDO’s governance actions, timing, governance innovations from forks, etc.
3: Due to competition from decentralized and centralized players, and pressure from the community, Lido is expected to capture 50% of the staking market in the best case.
4: The most realistic scenario is that Lido maintains the status quo and occupies about 30% of the market share. Part of the reason why many Lido depositors choose Lido is for mining rewards, and there may also be a non-negligible part of ETH staked on leverage. These two types of users may give priority to withdrawals after the withdrawal function is enabled.
5: At the same time, when the withdrawal function is enabled, we also expect the inflow of new depositors. The rationale is that in this case, the trading of ETH LSD (Liquid Collateral Derivatives) should be closer to the anchor value, and there will be less concern about the market liquidity of LSD, because users can convert back to ETH within 27 hours.
Therefore, the withdrawal function will:
- Allow speculators (yield farmers, leveraged users) to withdraw their deposits, but can increase overall market confidence and make staking more attractive.
- Make the dominant LSD lose some advantage over other solutions due to the lower opportunity cost of staking.
- CEX has the potential to offer products that allow instant withdrawals (without waiting for 27 hours), thereby winning users over convenience.
Using the following formula we can roughly calculate the market's implied expectations.
*(1/aave_earn * stETH_discount) 365
Current pricing for stETH suggests that withdrawals will not be enabled until about 460 days later.
Rapidly growing market
Among the POS chains, Ethereum currently has the lowest pledge rate. This is most likely due to the following reasons:
It is not possible to directly pledge at the protocol level, and users need to accept the additional risks brought by smart contracts or escrow solutions
Staked Ethereum cannot be redeemed
Ethereum is a more mainstream asset with a more decentralized community than any other POS token, but also more attention from speculators such as hedge funds
Over time, as new smart contracts are battle-tested, and as withdrawals become more certain, we can expect a larger share of ETH to be staked. However, I would be surprised to see over 50% of ETH staked.
The decision-making thinking of ETH holders is as follows: should I invest? If yes, should I use a validator node pool? If yes, should I choose the decentralized version? If yes, should I choose Lido?
The Importance of Liquidity in LSD
Some point to the network effects of the integration of the most liquid staking Derivatives, stETH, with major DeFi protocols, potentially allowing Lido to win all the market.
For example, if you want access to liquid collateralized Derivatives, you might choose to:
With the best market liquidity and easy exit
Deepest liquidity makes LSD a collateral in many DeFi protocols, offering more use cases for its holders
More use cases will make such tokens more liquid
As mentioned earlier, liquidity is even more important at this moment when withdrawals are not possible due to the higher opportunity cost.
But in general, how interested are users in participating in re-staking? Or the simpler question, are users interested in using ETH in on-chain applications?
We have experienced major bull markets driven by DeFi, NFT, and gaming projects distributing massive incentives to attract new users. However, despite all these use cases and incentives, only a fraction of ETH is used in smart contracts.
According to Nansen, in October 2021, there will be approximately 4.5 million wETH in use (to participate in the on-chain economy, users must wrap their ETH), which is less than 4% of the total ETH supply.
Another thing, not so worrisome but worth pointing out here: not all DeFi protocols support rebase tokens, which is why Lido essentially has two standards: stETH and wrapped stETH (the latter is usually priced higher, Because it generates rewards that can be unlocked when unwrap).
The graph below shows that some of the largest DeFi protocols do not support the stETH standard, which is why we can see Wrap's stETH being used in MakerDAO, Balancer, Euler, etc. Although Wrap and Unwrap is not a major obstacle, it does affect the user experience.
On the other hand, most stETH tokens are on AAVE and Curve.fi.
Using stETH
LDO vs ETH
To a large extent, LDO price is affected by Ethereum activity and ETH price
Ethereum is Lido's target market. More than 99% of Lido is locked on Ethereum
Lido's handling fee comes from Ethereum inflation rewards and transaction fees (Priority Fees)
Lido rewards equal to 5% of total staking rewards collected on Lido (90% distributed to stETH providers, 5% distributed to node operators)
Ethereum distributes 1700 ETH per day as staking rewards (roughly 0.5% of ETH supply), of which about 30% goes to Lido (according to their market share, assuming all else is equal)
While Lido is highly dependent on Ethereum fundamentals, we can see that even with value backed by ETH , Lido has experienced significant volatility. This may be due to the market repricing Lido's positioning in the Ethereum ecosystem and the estimated market size of the LSD vertical.
Ethereum Inflation Rewards
Since ETH inflation typically accounts for the majority of Lido's revenue, it's also important to understand its dynamics.
Using data points from https://ultrasound.money/, we estimate that a 1% increase in TVL reduces base reward APY by 0.41%.
Lido 30-day staking reward APY %
Benchmark against competitors
Quantitative comparison: In order to have a more established competitor as a baseline, we also added MakerDAO to the table, since in essence LSD is the most similar to a synthetic asset, of which stETH is a synthetic asset. I wouldn't be surprised if one day Lido decides to support the minting of synthetic stablecoins backed by staked ETH .
Token Health (Behavioral Finance/Market Psychology)
Note: This data lacks insight into the usage of LDO tokens on centralized exchanges
How to interpret these data?
Honest answer: Not sure.
Possible intuition - disposition effect, which refers to the phenomenon that investors tend to sell profitable tokens prematurely and hold losing tokens for a long time
directional comparison
Summarize
We estimate that pledged ETH will account for at most 50% of the total ETH
Due to challenges from the community and the emergence of competitors, we reasonably estimate that Lido's liquidity staking market share will be around 35%
After Lido opens liquid withdrawals, we expect leveraged traders and mining participants to withdraw ETH, although withdrawals in general should create an environment for increased staking interest. Smooth withdrawals also reduce the value proposition of LSD
Opening withdrawals could happen a year from now
Advantages
The number one project for ETH liquidity staking, first-mover advantage and solid moat
Compared with competing projects, Lido has advantages in security, liquidity, composability, network effects, and specialization/efficiency. Lido has a high probability of maintaining its status as the most important decentralized liquidity staking platform
historically uncensored record
Open and transparent roadmap, records of implementation and development according to the roadmap
Disadvantages of Lido
If Lido does not introduce certain restrictions, the cost of governance attacks will not be very high
There is a risk of validators manipulating the reward sharing mechanism by participating in LDO token wars
LDO tokens are not decentralized enough
A long bear market will result in low staking yields and a small amount of ETH staked
The significance of liquidity may be overestimated: many ETH holders are simply not interested in remortgaging and using on-chain assets; once withdrawals are enabled, LSD will lose some value proposition
The Lido fork is inevitable, and it is uncertain how much of a threat it is
Lido's target market size is largely determined by ETH market cap. Lido is an indirect bet on ETH, however, on a risk-adjusted basis, ETH may be a better investment option than Lido
Part.2 Investment and financing events
Web3 online education infrastructure DeSchool completes financing at $15 million valuation
*Infra
DeSchool, a Web3 online education infrastructure incubated by SeeDAO strategy, has completed its seed round of financing at the end of December 2022 with a valuation of US$15 million. Participating investors include Y2Z Venture, and individual investors include Zhu Jiawei, former COO of Huobi, and Hu Jiawei, founder of Plancker. Donghai, SeeDAO founder Tang Han, SeeDAO founder Baiyu, and UniPass founder Zhixian. The DeSchool Pro version has been launched in November 2022. Instructors can use this tool to issue SBT education vouchers to students who have completed courses, and Web3 organizations can also use this tool to simplify the community education process.
Web3 Twitter Marketing Platform Twity Completes $6.5 Million Funding Led by Wave Capital
*Infra
Twity, the Web3 Twitter marketing platform, has completed its A-round financing of US$1.5 million and signed an equity agreement of US$5 million with relevant institutions. A total of US$6.5 million in financing plans has been completed, led by Wave Capital. This round of financing will be used for the development and production of Twity's Web3 traffic aggregation platform to expand its influence.
Cryptocurrency payment service provider Centbee completes $1 million financing
*DeFi
London-based Bitcoin payment service provider Centbee has completed a $1 million Pre-A round of financing, led by Calvin Ayre, founder of Bitcoin venture capital firm Ayre Ventures. Founded in 2017, Centbee has developed a cryptocurrency wallet based on the BSV network and supports Bitcoin transfers.
BNB Chain ecological game Magic Fantasy completes $3 million private placement financing
*GameFi
Magic Fantasy, the BNB Chain ecological Web3 game project, announced the completion of a $3 million private placement financing, with EasyCoins Venture participating. Magic Fantasy will use the new funds for user game development, AIGC, marketing, etc. Magic Fantasy is a free-to-play strategy card game where players share in the game's rewards through winning PvP seasons. At the same time, Magic Fantasy has integrated AIGC tools, and all in-game NFTs in the early stage will be generated by AIGC.
GameFi project "Open World: The Lost Land" completed a $2 million seed round of financing
*GameFi
The real-time tower defense strategy GameFi project "Open World: The Lost Land" has completed a $2 million seed round of financing. The specific financing information has not been disclosed. The game will be officially launched and tokens released in early 2023. It plans to adopt a dual-token economic model and launch an NFT pledge and rental system at the same time. The Alpha testing of the game has ended and it is currently in Beta testing.
H5 game Flappy Moonbird completed a $6 million financing led by LinkVC.
* chain game
This round of financing will be used for the development of the series of games and the construction of the game ecosystem. Flappy Moonbird is produced by Helix Table, a studio of French video game developer and publisher Voodoo, which has developed more than 100 casual games with over 10 million downloads and MAU. Flappy Moonbird received an angel round of financing participated by Moonbirds holders.
Investment company Cypher Capital has injected $10 million into TON to support its construction of blockchain infrastructure
*infrastructure
Cypher Capital, a multi-strategy cryptocurrency investment firm based in the UAE, has injected $10 million into The Open Network (TON), a Telegram Layer 1 proof-of-stake blockchain continuation project, to support its blockchain infrastructure. Bill Qian, chairman of Cypher Capital and a member of the board of directors of the TON Foundation, said that the new funds will promote the application of TON in the Middle East, Africa, Asia, Turkey and India markets.
Galaxy Digital to acquire Argo's mining farm for $65 million and provide it with a $35 million loan
* Mining enterprises
Bitcoin mining company Argo Blockchain has agreed to sell its Helios mine in Dickens, Texas, to Galaxy Digital for $65 million. In addition, Argo Blockchain will also borrow $35 million from Galaxy Digital using its mining equipment as collateral. Dollar. Argo will sign a two-year hosting agreement with Galaxy, so that Argo's mining machines can still continue to operate in the Helios mine.
Part.3 IOSG post-investment project progress
Decentralized leveraged trading platform gTrade launches on Arbitrum
* Layer2
The decentralized synthetic leverage trading protocol gTrade launched by Gains Network for cryptocurrencies, foreign exchange and stocks has been launched on Arbitrum. Users can use DAI for contract transactions, or they can choose to deposit DAI to provide liquidity to obtain income.
Gamma, an active liquidity management protocol on Uniswap V3, is now live on Arbitrum
* Layer2
Gamma, the active liquidity management and market-making protocol on Uniswap V3, has been launched on Arbitrum. While launching Arbitrum, Gamma will release new liquidity management and market-making strategies, as well as a series of structured LP products suitable for different risk tolerances.
Avalanche ecological trading protocol Trader Joe launched on Arbitrum
*Layer2
The Avalanche ecological trading protocol Trader Joe is now live on Arbitrum, introducing the centralized liquidity AMM"Liquidity Book" into the Arbitrum One ecosystem. Cross-chain 1INCH Resolver incentive plan between subnets on Avalanche mainnet
*DeFi
1INCH launched the 1INCH Resolver Incentive Program, which aims to compensate the gas fees paid by resolvers to meet users' Fusion orders. The plan will be launched on December 24, 2022, and a total of 10 million 1INCH tokens will be issued.
1INCH launches Fusion upgrade, allowing users to place orders with a pre-determined price and time frame
* DeFi
DEX aggregator 1INCH has launched a Fusion upgrade centered on the 1INCH Swap engine, aiming to provide cryptocurrency investors with cost-effective, secure and profitable Swap transactions. Among them, the Fusion mode in the 1INCH Swap engine will allow DeFi investors to place orders at a predetermined price and time frame without paying network fees. Additionally, the upgrade also includes network improvements such as updated staking contracts and token economics.
TreasureDAO 's proposal to reduce liquidity mining rewards has started voting
* GameFi
TreasureDAO's proposal to reduce liquidity mining rewards has started voting. The proposal proposes to reduce the rewards for MAGIC/ ETH pool liquidity providers on SushiSwap by 30% to reduce unnecessary inflation. Supporters of the proposal currently make up the vast majority.
Safe still has more than 32 million AirDrop tokens that have not been claimed, and SafeDAO proposes 4 solutions
* Digital asset management platform
The digital asset management platform Safe (formerly Gnosis Safe) forum stated that more than 32 million of the 50 million SAFE token AirDrop allocated to users have not yet been claimed. SafeDAO is discussing how to handle unclaimed user AirDrop. The plans currently under discussion include: 1. Distribute this part of the tokens to users who have received AirDrop in proportion, and consider adding a longer vesting period; 2. Use this part of the tokens to reward contributors to the encryption community; 3. Retain in In SafeDAO; 4. Mix the above three options, 15% of which will be used for the second AirDrop, 15% will be used as developer rewards, and 70% will be kept in SafeDAO.
OneKey launches built-in tool NFT PnL
*Hardware Wallet Company
The hardware wallet company OneKey tweeted that OneKey has launched the built-in tool NFT PnL in the wallet. Users can use the PnL tool to analyze their NFT transaction history and income, and can directly use the calculator in the PnL module to earn income from the sale of a single NFT. estimate.
LayerZero-based full-chain NFT platform Omni X has supported Moonbeam
*NFT
LayerZero-based full-chain NFT platform Omni X already supports Moonbeam, and will provide testnet transactions, cross-chain and Launchpad support in the public beta.
Celer Network Now Provides Cross-Chain Messaging Support for Layer 2 Network Protocol Milkomeda
*Cross-chain interoperability protocol
Celer Network, a cross-chain interoperability protocol, tweeted that Celer cross-chain messaging now supports Milkomeda, a layer-2 network protocol that provides EVM functionality for non-EVM compatible chains.
RPG chain game Illuvium 's mobile and desktop companion game Illuvium: Zero will start private testing on January 6, 2023
* chain game
RPG chain game Illuvium announced that its mobile and desktop companion game Illuvium: Zero will open private testing on January 6, 2023, when it will be open to all its landowners, and will be available on Android, Windows and MAC platforms.
LayerZero-based full-chain NFT platform Omni X has supported Moonbeam
*NFT
LayerZero-based full-chain NFT platform Omni X already supports Moonbeam, and will provide testnet transactions, cross-chain and Launchpad support in the public beta.
Celer Network Now Provides Cross-Chain Messaging Support for Layer 2 Network Protocol Milkomeda
*Cross-chain interoperability protocol
Celer Network, a cross-chain interoperability protocol, tweeted that Celer cross-chain messaging now supports Milkomeda, a layer-2 network protocol that provides EVM functionality for non-EVM compatible chains.
Taiko, the second layer network of Ethereum based on zkRollup, releases the first public testnet
* Layer2
Taiko, an Ethereum layer 2 network based on zkRollup, released its first public testnet, Snæfellsjökull. At present, the test network supports developers to deploy smart contracts, and opens transaction testing and L2 node operation and other functions to ordinary users.
Part.4 Industry Pulse
SushiSwap new token model proposal: including several major improvements such as LP, xSushi, burning and locking liquidity
*DEX
SushiSwap's new CEO Jared Gray announced a new token model proposal aimed at helping to provide long-term value to token holders and liquidity providers, including measures for liquidity providers (LP), xSushi, burning, locked liquidity and Release and other improvements, specifically:
1. LP: Can receive fee share from 0.05% exchange fee, and most of the fee will go to the pool that generates the most transaction volume. In addition, LPs can lock their liquidity to win enhanced emission-based rewards, but if canceled early, the rewards will also be lost; 2. xSushi: xSushi obtains emission-based rewards at the time-lock level (no fee sharing), The longer the lock time, the more rewards. Unlocking before expiration will lose all rewards; 3. Destruction: A variable percentage of the 0.05% exchange fee will be used to repurchase SUSHI and destroy it. This percentage is based on the total timelock level change. If LP or xSushi cancels the lock before the time lock expires, the reward will be confiscated and destroyed; 4. Locked liquidity: a part of the 0.05% exchange fee will be used to lock liquidity to obtain price support; 5. A Nominal 1-3% APY, used to balance purchases, burns, and locks.
The Ethereum Foundation issued a document summarizing the research and development of each team in 2022
*foundation
The Ethereum Foundation issued a document summarizing the research and development of each team in 2022, which mentioned that the consensus R&D team will switch the consensus mechanism of the Ethereum mainnet to Proof of Stake (PoS) this year, and has been solving urgent problems in the MEV field. Withdrawal functionality, continued refinement of the EIP-4844 consensus layer specification, and other post-merger research topics. The cryptography team contributed to post-quantum signature schemes standardized by NIST (National Institute of Standards and Technology), and in the future, scalability may be improved through better aggregation techniques or different hardness assumptions. Also contains updates from Fe-lang, Formal Verification, Geth, Javascript team, Ipsilon, Portal, Privacy and Extension Exploration, Protocol Support and more.
Stacks plans to release sBTC, a trustless two-way bitcoin-pegged token
*Smart contract platform
The smart contract platform Stacks released two papers aimed at supporting BTC in and out of the Bitcoin layer. The first paper proposed sBTC as a trustless two-way Bitcoin pegged token, similar to WBTC or L- BTC, but without a custodian or Union. The second paper proposes a Nakamoto version of the Stacks layer, bringing Bitcoin's finality, greater speed, and a trustless Bitcoin peg to Stacks. The Stacks layer will have bitcoin writes and transactions will be secured by 100% of the BTC hash power.
VVS Finance, an automated market maker project on the Cronos chain, launches Web3 game VVSgotchi
*Market Maker
VVS Finance, an automated market maker project on the Cronos chain, has announced the launch of the Web3 game VVSgotchi as an extension of VVS Finance's Miner Mole NFT project. VVSgotchi provides users with various tasks and competitions, and will also provide users with the opportunity to win Miner Mole NFT. VVS Finance launched the VVS Miner Mole series in August this year, which contains 10,000 utility-enabled PFPs (Personal Profile Pictures). Each Miner Mole represents a membership pass that grants exclusive privileges on the VVS Finance platform.
SuiWorld, MoveBit and others jointly launched the Move Ecological Accelerator Move Accelerator
*Ecological Accelerator
SuiWorld, an Asia-Pacific community focusing on Sui ecology, launched Move Accelerator. Other co-sponsor members include MoveBit, TigerVC DAO, OKX Ventures, Bybit Web3 & Mirana Ventures, MEXC Ventures, BKEX Ventures, Bixin Ventures, A&T Capital, Foresight Ventures, Mars DAO, AptosGlobal. Move Accelerator promises full support from fundraising to technology, community, token listing and branding.
The first Alpha version of Axie Infinity: Homeland is now live
*chain game
The chain game Axie Infinity officially stated that the first Alpha version of Axie Infinity: Homeland is now online. Landholders can experience it through Mavis Hub on Windows and Mac. Non-landholders can participate after purchasing land. Alpha to the roadmap, the development of Homeland lasts for 5 years and is divided into 4 phases. The release of the Alpha version marks the official start of the first phase and Alpha Season 0, which is expected to last for one month.
DeGods, the Solana ecological NFT project, will be bridged to Ethereum in the first quarter of 2023
*NFT
DeGods, the Solana ecological NFT project, said that it will be bridged to Ethereum in the first quarter of 2023, and details will be released after it is ready and tested. In addition, DeGods will announce the third season (Season III) roadmap in January next year.
Italian Parliament Approves 2023 Budget Bill Imposing 26% Capital Gains Tax on Cryptocurrencies
*Policy Supervision
A 26 percent capital gains tax will be imposed on cryptocurrencies under a 387-page 2023 budget bill approved by the Italian parliament. The budget bill legitimizes cryptoassets by defining them as “digital representations of value or rights that can be transmitted and stored electronically using distributed ledger technology or similar technology.” The tax policy aims to tax cryptocurrency trading profits above 2,000 euros.
Türkiye's Central Bank Executes First Payment Test Transaction on Digital Turkish Lira Network
*Policy Supervision
The Central Bank of Turkey (CBRT) has announced the successful execution of the first payment transaction on the Digital Turkish Lira Network within the scope of the first phase of studies of the Digital Turkish Lira Project under the Bank's leadership. The Central Bank of Turkey will continue limited closed-loop pilot testing with technology stakeholders in the first quarter of 2023 and will also expand the Digital Turkish Lira Collaborative Platform in 2023 to involve selected banks and fintech companies and will announce Advanced phase of pilot study to further broaden participation.
