Since the popularity of LSD, there have been many excellent articles explaining the mechanism of LSD and DVT: the first-mover advantage and potential risks of LidoFinance, and the qualitative changes that v2 will bring to Lido. The ability of SSV Network to capture value as the underlying architecture of LSD and its technical threshold. Frax Finance's innovation in the balance of Liquidity and profitability. The high capital utilization rate brought about by the high mortgage rate revolving loan of the LSD pledge certificate. Eigenlayer's Re-Staking brings a new source of ETH pledge income and also provides a guarantee for project security.
This article will start from another angle and propose a new direction for the LSD track. First of all, this article maps the current LSD projects (non-DVT and Re-Staking), and simply classifies the existing pledge mechanisms.
The market share is the ratio of Staked ETH in the picture project to all Staked ETH
ETH2.0 pledge data
The launch of ETH2.0 pledge has brought a stable and credible income source like national debt to the chain, and the current apr is 4.7%. Since the ETH2.0 staking rewards come from Gas fee, MEV and ZK certificates, etc., as long as ETH is still running, this reward must exist, and the rate of return will only be relatively reduced due to the increase in staking nodes. Therefore, in view of the dominance of ETH in all public chains, ETH2.0 pledge can be said to exist like a national debt. Therefore, we can learn from the mechanism of national debt and the scheme of absorbing deposits to provide the future development direction of LSD.
Current LSD Program
According to the characteristics of various LSD projects, this article summarizes the current 5 schemes of LSD:
1. Central hosting solutions provided by CEX such as Binance and Coinbase for users:
The centralized exchange collects user ETH, builds/entrusts a third-party component verification node, centralizes the operation node and pledges the user's ETH. Centralized operations can minimize the price difference earned by middlemen, but this requires the greatest trust of users. According to Binance's description, its apr is about 10%, which is very convenient and does not charge handling fees, and users can obtain BETH as a pledge certificate after staking. Relying on its own traffic advantages, exchanges can absorb a large number of centralized users, so Coinbase's cbETH occupies 14.87% of the ETH LSD market share, ranking second.
2. Rocket Pool's decentralized solution:
Rocket Pool executes the collection, pledge and distribution of ETH through smart contracts, and decentralizes the verification node service providers based on DVT technology, realizing the maximum degree of decentralization in the form of Pool Staking. Although Rocket Pool is also a hosting solution, the existence of smart contracts and DVT makes it more trustless. This is why $RPL soared after Kraken was banned. But the price of decentralization is a commission of 15% of the incentive amount. From this point of view, the APR of 4.30% is not so competitive. As a result, Rocket Pool took third place with a 5.61% market share of ETH LSD thanks to its decentralized rETH.
3.Lido Finance's pledge certificate ecology:
With its first-mover advantage, Lido Finance has cooperated with many DeFi projects and established a rich ecology of stETH. At present, stETH can be seen as the target financial service in all major DeFi protocols. A large number of accepted stETH will inevitably be the first choice of most pledge users, because this means a more flexible strategy.
For example, AAVE allows staking stETH to lend mainstream assets, and the mortgage rate can reach 90% under the E-mode mode. Currently, AAVE has a total of 991.91k stETH worth $1.63B mortgaged, accounting for 17.7% of the stETH circulation.
On CurveFinance, stETH- ETH can also be used to form LP and pledge LP Token to earn transaction fees, CRV incentives and LDO incentives. Currently, a total of 535.3k stETHs are formed into LPs on Curve, accounting for 6.2% of the circulation of stETH. This part of LPs can obtain a total annualized return of 4.9215%.
Users can also pledge stETH LP on Yearnfinance to obtain an annualized return of 4.52% after Curve completes the LP formation.
Therefore, although Lido Finance v1 is a relatively centralized choice of staking service providers, and there is a 10% service fee, it still cannot stop Lido's unrivaled market share.
4. The balance between Liquidity and profitability of Frax Finance:
Unlike previous schemes, Frax Finance establishes a scheme that balances Liquidity and profitability. Users pledge ETH to participate in the verification node and obtain frxETH as a certificate, but frxETH does not capture pledge rewards. All pledge rewards are issued to sfrxETH. Users need to pledge frxETH again to obtain sfrxETH.
Currently, a total of 108.23k frxETHs have been minted, and only 59.4k frxETHs have been further pledged in exchange for sfrxETH. Therefore, the staking rewards of 108.23k ETH are all distributed to sfrxETH, bringing 6.43% annualized income to sfrxETH.
Frax provides 5.604% APR to the frxETH pool by virtue of its domination rate in Curve, and a total of 39,197 frxETH constitute LPs in Curve.
The returns of frxETH and sfrxETH both far exceed Lido's 4.5% and RPL's 4.28%. As a result, a monthly increase of more than 33% in ETH pledges has been achieved, ranking fourth in ETH LSD TVL.
5. Stader's Cross-chain pledge
As the big brother of the LSD sector, Stader ranked fourth in the TVL of the total LSD project before ETHX was launched. Stader supports Multichain PoS pledge, currently supports Polygon, Hedera, Fantom, BNB, Near, Terra 2.0. Will be listing ETH soon, and plan to list Avalanche and Solana.
The special feature of Stader is that it allows users to stake Matic on the ETH network to obtain MaticX. If ETHX can also use this solution, it will be possible to allow the ETH crossed to other chains to flow back to the ETH network, which is equivalent to opening up a new battlefield for ETH LSD market share competition.
National debt mechanism
National debt is endorsed by national credit, which provides long-term and stable income. Countries attract funds to purchase national debt through corresponding mechanisms, and establish a derivative market based on national debt to expand the use of national debt. The ETH2.0 pledge is also similar, with the operation of the ETH public chain as an endorsement, giving stable income based on the activity on the chain. The LSD project uses various mechanisms to attract ETH in the market to pledge, and establishes a corresponding Derivative markets to expand the usage scenarios of its pledged certificates. Therefore, understanding the national debt will help us find the potential direction of the LSD track.
Current national debt mechanism and deposit absorption methods: 1. With different maturity dates 2. Establish a national debt redemption mechanism to liberate the Liquidity of national debt 3. Introduce a variety of sales platforms 4. Provide repurchase and reverse repurchase, introduce financial lending programs 5. Establish Improve the treasury bond Derivatives
What LSD projects can learn from national debt:
• Government bonds have different maturity dates, and government bonds with different maturity dates correspond to different yields. Generally, the longer the maturity time, the higher the yield, because it bears a greater opportunity cost. But there are also cases where U.S. Treasury yields are inverted. Based on the amount of national debt with different maturity dates, the country can formulate corresponding policies in advance to adjust the use of funds.
• Generally, in order to expand the sales volume of government bonds, multiple channels are allowed to be sold. Such as bank outlets, mobile banking, telephone purchases, post office counters, consignment sales of financial institutions, etc.
• In addition, derivative functions such as repurchase and reverse repurchase, as well as Derivatives such as debt-based, capital-guaranteed and floating-income wealth management, can further expand the use scenarios of national debt and increase market demand for national debt.
LSD can learn from the program
Based on the above-mentioned national debt mechanism, we can get two solutions that LSD can learn from:
1. Zero Coupon Bonds and Bond Coupons with a Maturity Date
Everyone knows that after the Shanghai upgrade, verification nodes are allowed to withdraw, and users can withdraw previously pledged ETH, but only 16 nodes can withdraw from each block, and the pledged ETH can be withdrawn. Relative nodes can enter, this is to ensure the stable operation of the network. The establishment of the maturity date of the ETH pledge can help maintain the stability of the ETH network, like national debt, you can intuitively understand how much ETH will be withdrawn at different times in the future, and take countermeasures against it.
In addition, after the maturity date is established, there will be a richer LSD derivative strategy. Zero-interest bonds and bond coupons are one of them:
Taking Pendle Finance as an example, it can use ETH pledge certificates such as stETH to generate: the token representing the local currency of the certificate - PT and the token representing the income of the certificate - YT, and they all have an expiration date. Only after the expiry date, PT tokens can be exchanged for a complete native currency, and YT tokens can retrieve the income generated by a native currency during this period.
The difference in the maturity date means the difference in the pt discount of the local currency token. A longer maturity date means a higher discount, so the discount will be reduced as the maturity date approaches. At the same time, it also means that the intrinsic value of the income token is different. A longer maturity date represents more income, so the price will decrease as the maturity date approaches.
Based on PT and YT, users can build investment strategies around LSD certificates:
• Buy discounted PT and wait for the expiration date to obtain an equal amount of ETH pledge certificate, which is equivalent to long the certificate
• Sell/stake YT to lock in future staking rewards, which is equivalent to shorting staking rewards
• Buy discounted YT, and wait until the maturity date to get the full amount of pledge rewards, which is equivalent to long pledge rewards.
• Form LPs with PT and ETH pledged certificates, and obtain various stable benefits such as PT's value return over time, LP handling fees, pledge rewards for ETH pledged certificates, and LP pledge incentives.
• Portfolio strategies: Maturity offers multiple investment strategies for ETH staking.
When the DeFi protocol can directly connect to the ETH pledge certificate agreement with an expiration date similar to Pendle, such as seamlessly pledging ETH and setting the expiration date when borrowing, it can increase user deposits and increase the amount of ETH pledged, that is, guarantee ETH The safety of operation increases user income. This is equivalent to adding multiple channels of participation for ETH2.0 staking.
2. Establish a sound LSD pledge certificate Derivatives(LSD Layer 2)
In fact, protocols such as Lido and Rocket Pool directly participate in the pledge of ETH , which can be regarded as the first layer protocol. However, DVT protocols such as SSV provide verification node operation in a decentralized form and belong to the zeroth layer. Protocols based on pledge certificates such as Lido can be regarded as the second layer, namely Layer2. For example, the aforementioned Pendle, as well as Aura, Curve, YFI, AAVE , etc. In the current LSD sector, Layer 1 is already very introverted, while Layer 2 has just begun.
Based on the above-mentioned maturity dates and zero-coupon bonds and bond coupons, we will be able to establish more complex strategies and products and initiate Layer 2 involution. In the traditional bond market, principal-guaranteed floating-income funds occupy a large market share. In the second half of 2022, the issuance share of capital-guaranteed funds accounted for 19.05% of the total funds under the new law, and the highest month accounted for 63.88%. However, this type of fund is very rare on the chain, so this will be a new opportunity based on the ETH LDS trillion market.
Essentially, a principal-guaranteed floating-income fund is to spend a part of the money to buy zero-coupon bonds equal to the principal, and will receive the same amount of principal after the zero-coupon bonds mature. The remaining funds after purchasing zero-coupon bonds can be used for high-leverage/high-yield investments to achieve capital-guaranteed floating returns.
Of course, there are many high-leverage investments, but options are a commonly used high-leverage trading method in traditional markets. Since a high return rate is often accompanied by a high loss rate, this type of operation usually requires certain subjective judgments. Compared with the high returns of subjective transactions, in order to ensure transparency on the chain, it may be necessary to sacrifice part of the returns, and it is more appropriate to use relatively low-risk and high-certainty option strategies. For example, the butterfly strategy will be more controllable than the straddle, and the butterfly strategy will be a good choice when using options as a way to add value. However, under the condition of sacrificing a certain degree of decentralization, subjective transactions will bring users a higher rate of return, and may also be accepted by users.
LSD is a trillion-dollar market. After Layer1's Lido, Rocket Pool and many other protocols compete for market share, there are also Layer0's DVT protocol and Re-Staking's EigenLayer to explore other layers of the market. The Layer2 pledge certificate Derivatives is still in its early stages and has greater potential. Whether it is zero-coupon bonds and bond coupons with a maturity date, or a capital-guaranteed floating income fund, or the LSD index made by YFI , they are all providing richer investment strategies and magnifying the utilization rate and yield of funds. I believe that There will be more interesting projects coming up. In the future, there will definitely be DAOs who choose subjective high-risk strategies to achieve high returns on capital-guaranteed floating-income funds. And capital-guaranteed floating-income funds are just throwing bricks to attract ideas, and there must be more brilliant plans.
Looking forward to the development of LSD Layer 2, which will be a trillion market on top of a trillion market.
Future Outlook--Cryptopia
Based on LSD to ETH2.0, we talked about national debt, which reminds us of the future development of Crypto and the country. Let us first look at some related definitions:
“Cyberstates are online communities with highly aligned goals, the ability to take collective action, crowdfund territories around the world, and ultimately gain diplomatic recognition from established nations.” – Balaji Srinivasan
"Network nation is a social network with moral innovation, national consciousness and recognized founder; its collective action, individual members are civilized and humble; it integrates cryptocurrency, establishes government based on consensus, and power is controlled by social intelligence Contract restrictions; the islands from crowdfunding are its real territory, and the capital is virtual; its population, income and real estate size are verified through an on-chain census, making it enough to win a certain degree of diplomatic recognition." - Vitalik Buterin
With the development of human civilization and society, following the industrial revolution and the information revolution, the development of the Internet has brought great impact and changes to people's lives. In the most primitive African tribes, people can also have a smartphone to access network. The revolution of the Internet has realized the interconnection of human information and greatly improved the efficiency of information transmission. With these infrastructures, the revolution of Bitcoin and blockchain has brought about the interconnection of human values and greatly improved the Efficiency of value exchange. The vigorous development of the ETH ecology has once again brought innovation in value applications and laid the foundation for the future "national" ideology.
Let's imagine what kind of world it will be in the future: Through the Internet, people transcend race, language, country, and geographical restrictions, and establish a community (as DAO) through consensus; people's value is stored on BTC , and the real go Centralized, open and transparent, non-tamperable, the most fair and equitable currency; people's transactions no longer need "legal currency", and the most efficient transactions can be realized anywhere in the world directly through cryptocurrency; social rules, rights and Obligations are executed through the ETH smart contract without human intervention; people can choose the social organization they want to join through their own values and preferred ideology, and escape from the coercion of the original political grand narrative; Civilization is the first step towards silicon-based civilization, let us wait and see the revolution of AI.
