Guide:
As the Shanghai upgrade is approaching, we believe that it is necessary to re-evaluate the future development of the LSD track and its impact on the entire chain ecology based on the latest data changes. This article provides an overview of the LSD track from four parts: the overall growth space of the industry after Shanghai’s upgrade, the comparison of 4 pledge solutions and different LSD protocols, the positioning of the DVT track, and the impact of LSD assets on other ecosystems on the chain.
Summary:
The increase in the pledge rate of Ethereum will lead to an increase in the overall agreement fee of the LSD track. In the long run, the Davis double-click on the LSD track is not over yet. The current pledge rate of Ethereum is 14.56%. Since the pledge rate of other POS public chains mostly exceeds 60%, there is a greater growth expectation for the increase of the pledge rate of Ethereum. Assuming that the cost of the LSD track remains unchanged, we estimate that when the pledge rate of Ethereum rises to 29%, 44%, and 58%, the corresponding LSD track protocol fees will increase by 1.31 times, 1.55 times, and 1.76 times, respectively. From the perspective of P/F valuation, the current P/F of LDO , the leading target of the LSD track, is 3.89 times. Compared with the valuation levels of the old Defi protocol UNI 7.12 times and AAVV 10.35 times, there is still a lot of room for improvement.
After the Shanghai upgrade, the relative market share of the LSD protocol may change. In the medium term, focus on the track leader Lido and the high-yield LSD protocol represented by Frax, and in the short term, focus on the Rocket pool Atlas upgrade. After the Shanghai upgrade, the exit of early nodes and the enhancement of users' willingness to pledge will provide conditions for the LSD protocol to compete with each other. At present, Lido has a long-standing experience in the multi-dimensional aspects of popularity, capital scale, security, yield, Liquidity, and combination. However, latecomers such as Frax realized the combination with Curve ecology through the design of self-sustained CVX and dual currency model, so that it has a pledge rate of return much higher than similar pledge products, and successfully completed the product cold Start-up and early growth. With the launch and popularization of income aggregation products in the future, the growth of high-yield products such as Frax is expected to further accelerate. It should be pointed out that the high rate of return of Frax will continue to decrease with the increase of its TVL. According to the current situation, when its ETH pledge amount reaches 200,000, the pledge rate of return will drop to 6%; the recent Atlas of Rocket pool The upgrade is worthy of attention. The minimum number of ETH pledges for node operators has been reduced from 16 to 8. While improving the protocol capacity, it has also enhanced node incentives, which is expected to bring a large increase in its TVL.
Currently, DVT products represented by SSV, Obol, and Diva are positioned as an important infrastructure for Ethereum staking. DVT products are designed to ensure the stability of Ethereum verification blocks while improving the degree of decentralization of the network, which can reduce the operating costs of the node operation and maintenance team and reduce security risks. The development of SSV focuses on the construction of the operator network, and its tokens are used as the means of payment and governance certificates of the network to capture the protocol value; the development of Obol focuses on the adaptability of middleware, and the goal of Diva is to combine the two modes of LSD and DVT Create a one-stop product, currently in the early stages of development.
Ethereum staking may give birth to lsdETH with a scale of 100 billion. While restructuring or impacting the income structure of traditional Defi agreements, the second-tier products built around this new asset class may become a new α in the market. The Liquidity construction of lsdETH/ ETH may bring new business increments to DEXs such as Curve and Balancer. Compared with Curve, the marginal change of Balancer is greater at present; Risk-free rate of return, the emergence of this rate of return will increase the Liquidity cost on the chain, which will be negative for deposit pool-type lending products, and the CDP model lending will be relatively less affected. At the same time, products such as re-pledging, income aggregation, separation of principal and interest, and leverage agreement built around this interest-bearing asset in the future will benefit from the huge scale of the underlying assets and obtain a high business ceiling, which is worthy of continuous follow-up research.
risk:
Regulatory risk, macroeconomic risk, technology upgrade less than expected risk
1. The overall space of the LSD track
The increase in the pledge rate of Ethereum has promoted the increase in the income of miners, which has brought about an overall increase in the income of the LSD track. In the long run, the valuation of the track income is still in the double-up range. The current pledge rate of Ethereum is 14.56%. Since the pledge rate of other POS public chains mostly exceeds 60%, there is a greater growth expectation for the increase of the pledge rate of Ethereum. The figure below estimates that when the Ethereum pledge rate doubles, doubles, and triples to 29.12%, 43.68%, and 58.24%, the corresponding LSD track protocol fee increases are 1.31 times, 1.55 times, and 1.76 times, respectively. The calculation method, assumptions and process are as follows:
The execution layer reward is determined by the Priority fee. Due to the balance setting of the Ethereum fee mechanism, it is assumed that the execution layer reward remains unchanged (a conservative estimate, when the network Gas fluctuates, the execution layer reward will rise sharply, such as USDC unanchored on March 10 The event led to a surge in transactions on the chain, and the rewards of the execution layer of Ethereum increased by 4–6 times as usual); the rewards of the consensus layer are determined by the block rewards of Ethereum, the total block rewards are proportional to the square root of the total pledged amount, and the consensus layer APR is proportional to The square root of the total pledged amount is inversely proportional, and the specific calculation formula is base_reward = effective_balance * (base_reward_factor / (base_rewards_per_epoch * sqrt(sum(active_balance)))). Based on the current 14.56% pledge rate corresponding to consensus layer rewards and execution layer rewards, according to the above two conditions, it is estimated that the pledge rate reaches 2–4 times the current miner income. At the same time, assuming that the fee standard of the LSD agreement remains unchanged, the increase rate of miners' income with the pledge rate is the increase rate of the LSD agreement fee as follows:
Chart 1: Changes in miner income with pledge rate
It should be noted that the increase in the pledge rate of Ethereum is a gradual process. It is even possible to observe a decline in the pledge rate of Ethereum within 1–2 months after the Shanghai upgrade. Due to the restrictions on the entry and exit of Ethereum validator nodes, it can be judged that the change of the Ethereum pledge rate is a slow process. At present, the total number of verifiers on the Ethereum network is about 556,800, and 1,800 verifier nodes are admitted every day. After the upgrade in Shanghai, validator nodes are allowed to exit, and the number of exits per day is equal to the number of entries. Due to the withdrawal of early validators, it is possible to observe a slight drop in the pledge rate of Ethereum for a period of time after the upgrade in Shanghai. The basis for judgment It is: At present, about 10.87 million ETH in the beacon chain participate in the pledge through the lsd agreement and the centralized exchange, and have secondary market Liquidity, and there is basically no discount for various types of lsdeth/ ETH, so this part has been upgraded after Shanghai. The scale of redemption in the secondary market based on the redemption or profit demand is not large; the remaining about 6.95 million ETH is carried out by Staking pool or separate pledge. Due to the lack of secondary market Liquidity in this part, it is assumed that there will be 1/2 redemption after the Shanghai upgrade Back to the choice, a maximum of 57,600 pieces can be redeemed every day. Ethereum will face full-load redemption within 60 days after the upgrade in Shanghai; observing the current pledge data, the daily new pledge ratio is generally 1/3 of the maximum enterable pledge ratio. Therefore, if the new pledge ratio does not reach the maximum load after the Shanghai upgrade, based on the above assumptions, there will be a slight drop in the Ethereum pledge rate within 1-2 months; it will resume after the redemption demand based on rigid redemption and profit is cleared Growth, it may take 1–2 years for the Ethereum staking rate to double.
Source: https://ethereum.org/zh/developers/docs/consensus-mechanisms/pos/rewards-and-penalties/
2. Panoramic view of the LSD track
The LSD track can be expanded to Ethereum pledge solutions and their Derivatives, including four Ethereum pledge solutions competing for market share, DTV technology to ensure security while expanding decentralization, and the second layer born around the LSD protocol pledge certificate Yield-enhancing products and leveraged agreements and index products.
Chart 2: Panoramic view of the LSD track
2.1 Among the four pledge solutions, LSD has the highest market share and is expected to expand further
There are four types of Ethereum staking solutions, including individual staking, custody staking, Liquidity staking LSD and centralized exchange staking. Among them, LSD and centralized exchange pledge have achieved the vast majority of the market share due to the advantages of solving small capital participation, not requiring hardware infrastructure, and re-releasing Liquidity through pledge certificates. From the statistical caliber of the number of nodes, the current LSD market share accounts for 33.4%, CEX accounts for 27.5%, staking pool accounts for 16.6%, and independent pledge accounts for 22.5%.
Chart 3: The current proportion of various pledge solutions
Specifically, let’s look at the basic situation of the four pledge solutions:
Separate pledge: At least 32 Ethereum and a dedicated computer are required, and the network, power conditions and methods of operating nodes are required; users can obtain all pledge income and complete asset control; funds cannot be withdrawn before Shanghai upgrades, After Shanghai is upgraded, it can be restricted to exit.
Pledge custody: At least 32 Ethereum are required, no hardware facilities are required, users entrust ETH to node operators to obtain pledge income; during this process, users need to upload signature keys, allowing service providers to verify on behalf of users; funds are upgraded in Shanghai Unable to exit, restricted exit after Shanghai upgrade.
Liquidity staking LSD: 32 Ethereum and hardware infrastructure are not required, users entrust their custom Ethereum to the LSD protocol, and the LSD protocol matches the Ethereum entrusted by the user and chooses the node operator to host the pledge to obtain the pledge income; the user Usually, part of the income needs to be distributed to the LSD protocol and node operators; usually, the funds can be withdrawn from the secondary market at any time through the Liquidity of lsdETH or leveraged to enhance income; the current degree of centralization of this scheme is relatively high.
Centralized exchange pledge: 32 Ethereum and hardware infrastructure are not required, and even a chain wallet is not required. Users obtain most of the pledge income through the pledge service provided by centralized exchanges such as Coinbase, and a small portion of the proceeds are collected by the exchange. The operation difficulty of the program user is the lowest. Usually, the pledge can be rolled back in time or exited in the secondary market through the pledge certificate, and can also be leveraged through the lending agreement to increase the income; this scheme currently faces relatively high regulatory risks; this scheme is currently the most centralized.
Chart 4: Comparison of 4 pledge solutions
However, it should be noted that the centralized exchange pledge and LSD pledge solutions face the unresolved regulatory issues of the US SEC. There has been no authoritative explanation on whether the staking business is recognized as securities. The staking business of the Kraken exchange was cracked down by the SEC before, but it has not yet substantially affected LSD agreements such as Coinbase and Lido. The main reason is that Kraken did not disclose the whereabouts of user funds at the time. The black box operation, while promising a high rate of return far exceeding the Ethereum pledge, has led to regulatory attacks. But from the perspective of the Howie test, LSD protocols such as Kraken, Coinbase, and Lido all participate in staking by hosting user funds, and there is no essential difference. Therefore, the development of LSD business is currently facing uncertainties from US regulations.
From a product point of view, although the pledged Ethereum can be redeemed and withdrawn in the primary market after the Shanghai upgrade, the quantity is limited. According to the current pledge scale, 1,800 nodes can be withdrawn every day corresponding to 57,600 ETH. Due to the LSD protocol’s advantages in solving small funds to participate in the pledge, releasing the Liquidity of the pledge certificate, and the agreement can be combined to enhance the rate of return, it will still occupy a major market share after the upgrade in Shanghai. It is possible that shortly after the upgrade in Shanghai, the overall market share of the LSD protocol will passively increase due to the early redemption of ETH that was individually pledged or escrowed and pledged and the withdrawal of profits. From the perspective of LSD agreement competition, the factors that currently affect the development of each LSD agreement include popularity, yield, capital security, anchoring situation, degree of decentralization, and combination. This dimension can be combined to analyze the current mainstream LSD in the market Differences between agreements.
Lido is currently the largest LSD protocol in TVL, 13 times larger than the second-ranked Rocket pool. Lido currently screens operators through a whitelists mechanism to ensure the good operation of pledge nodes so as not to affect the yield or cause capital penalties; at the same time, Lido uses compound interest on the execution layer to maintain the annualized yield of its users' pledge at 4.5%-5 after pumping 10% At a high level of %, it is second only to Frax among the current mainstream LSD protocols, and surpasses other protocols such as Roceket pool, StakeWise, and Anrk. It should be noted that Lido will upgrade the V2 version in mid-May, introducing a pledge routing module, allowing anyone to create a pledge node and access DVT, aiming to ensure network stability and security while improving the degree of decentralization.
The uniqueness of Rocket pool is that there is no access permission for pledged nodes, and anyone can become a node operator in the network by creating a Minipool; currently node operators need to deposit 16 ETH(the remaining 16 ETH comes from user deposits) and also A minimum pledge of 1.6 ETH worth of RPL Token is required as confiscated funds; Rocket pool currently provides RPL subsidies to node operators on the platform to encourage node deployment. Rocket pool will upgrade its Atlas within one month. This upgrade is the most important upgrade since Rocket pool went online, and it will also have a major impact on its business development. The main contents of the upgrade are: 1. LEB16 — LEB8: the node Operators need to pledge at least 16 ETH to 8, which will greatly improve the current situation that the expansion of Rocket pool is restricted by the node side. Assuming that the total amount of ETH of the node operator remains unchanged, this improvement can theoretically make the TVL of the protocol double double, the deposit capacity tripled, and after the scalability of the node side is opened, the deposit amount of the dynamic deposit pool will become a leading indicator for observing the growth of Rocket pool TVL; LEB16 is 25% higher; 3. Launch tools so that Solo Staker does not need to exit the validator to complete the migration to the Rocket pool platform; 4. Optimize the dynamic deposit pool. When the ETH required by the minipool queue exceeds the upper limit of 5,000 ETH, the upper limit of the deposit pool will also be reduced. Then increase.
Frax Ether is characterized by its current high staking yield. The previous pledge rate of sfrxETH was maintained at 7% to 10%. The reason is that Frax built a dual-currency model of frxETH and sfrxETH. frxETH and ETH used Frax’s own CRV governance resources in the Curve group to obtain CRV income, and all pledged The income is distributed to sfrxETH; on the whole, the high rate of return of the Frax Ether system, which is different from other Liquidity mortgage products, comes from its additional layer of CRV rewards; the CRV rewards for the overall system’s income increase depend on Factors such as the proportion of the ETH gauge pool, the TVL of the Frax Ether system, and the price ratio of CRV/ ETH. According to the current situation, when the pledge amount of Frax Ether reaches 200,000 ETH, the pledge income of sfrxETH will drop to about 6%.
The above three mainstream LSD protocols have developed three main ETH pledge models, and the remaining small LSD protocols are mainly aimed at improving and fine-tuning some user pain points of the above three major protocols. For example, Stafi and Stader have improved the current Rocket pool node operators who need to pledge 16 ETH, low capital utilization efficiency and operators being forced to increase RPL risk exposure. The two only require node operators to pledge 4 ETH, and at the same time for Node operators provide solutions that do not increase exposure to protocol tokens. However, it should be noted that blindly reducing the proportion of ETH pledged by node operators may increase the risk of user fund loss, and unlike Rocket pool, Stafi is currently facing growth pressure on the user fund side.
Chart 5: Comparison of 3 major LSD protocols
At present, from the perspective of protocol valuation, whether it is FDV/Revenue or FDV/TVL, Lido is at a relatively low level, but LDO currently only has governance rights, while RPL and FXS have corresponding token empowerment. Enjoy the corresponding valuation premium.
Frax currently holds about 3.5 million CVX, the largest holder in CVXDAO
Chart 6: Valuation comparison of different LSD agreements
3. DVT products will become an important infrastructure for Ethereum pledge
Decentralization and security assurance are the spiritual core of Ethereum, on the basis of which Distributed Verification Technology (DVT) came into being. At present, various Ethereum pledge solutions are facing the contradiction between decentralization and stable operation of nodes. Represented by Lido and Rocket pool, in order to ensure that users' funds will not be lost due to node disconnection and failure, Lido currently uses a whitelists to screen qualified operators to ensure the effectiveness of block generation, traceability and security of funds This makes Lido currently have the problem of centralization; Rocket pool binds the interests of the two through the joint pledge of nodes and users, and further guarantees the safety of users' funds through the form of node mortgage RPL to confiscate inferior funds, but this is undoubtedly Increased the cost of operating nodes on the Rocket pool platform. At present, Rocket pool uses RPL to motivate nodes to balance, but this undoubtedly increases the protocol expenditure and limits the scalability of the protocol.
The DVT product enables an operator and a node to change from a one-to-one state to a many-to-one state through technical solutions such as fragmented verification of private keys and leader node rotation, and improves the security and robustness of the system from the perspective of the underlying network architecture. Stickiness also allows for a higher degree of decentralization.
The specific principles are as follows:
DVT consists of 4 key parts, distributed key generation DKG, Shamir key sharing of BLS signature, multi-party secure computing and IBFT consensus layer, as follows:
Distributed key generation DKG is the first step to realize DVT. Its function is to fragment a verifier's private key into 3n+1 shares, and multiple fragmented private keys correspond to multiple operators; DKG technology is the cornerstone of realizing DTV products . The private key sharing of BLS signature is complementary to DKG. Its purpose is to realize multi-party aggregate signature, that is, to be able to combine block fragmented signatures into a single signature. Because DKG allows private key fragments to be held by multiple parties, when signatures are required, multiple People's signatures are aggregated into one signature, and fragmented private keys and multi-party aggregated signatures constitute the skeleton of the entire DVT product. The role of multi-party secure computing (MPC) is to securely distribute the split keys among the various nodes to perform the verifier's responsibility to complete the verification of network information without rebuilding the verifier's key on a single device, eliminating the need for Risk of centralizing private keys during computation. Istanbul Byzantine Consensus IBFT will randomly select a validator among the DVT nodes as the leader node, responsible for block proposal and other work, if most nodes in a single cluster agree that the block is valid, it will be added to the blockchain; if the leader If the node is offline, the algorithm will reselect the leader node within 12 seconds to ensure the stability of the system.
To sum up, DVT distributes DKG fragmented verification keys to different operators, realizes multi-party aggregate signatures through BLS private key sharing, and uses multi-party security calculations to ensure data security. Finally, IBFT leader node rotation ensures that nodes will not generate blocks maliciously Or because the overall revenue is affected by the disconnection, it is finally possible to hand over a validator node to multiple operators instead of the current industry standard separate operation, thereby greatly improving the robustness of the overall system.
3.1 Comparison of DVT products currently on the market: SSV.Network, Obol Labs and Diva
SSV Network has built a DVT-based operator network, which is the fastest-growing product in the DVT track. It has received a donation of US$188,000 from the Ethereum Foundation and a US$100,000 LDO donation from Lido. SSV Network is currently the only subject of token issuance, and the main purpose of its Token SSV is the payment method and governance certificate of the network. Pledgers who participate in the pledge on the SSV network need to pay operating expenses to the node operator, and the specific expenses are determined by each operator based on operating costs and market competition; at the same time, operators currently need to pay 1/4 of their network revenue to the SSV treasury (charges The standard is determined by DAO), and the above payment links need to use SSV tokens. SSV plans to hold a community meeting on March 30 to discuss the launch time of the mainnet.
Obol Labs is committed to building a pledge middleware, Charon, so that any node can participate in the distributed validator operation of the DV cluster. Obol also received a $100,000 LDO token donation from Lido DAO, and completed a $12.5 million Series A round of financing led by Pantera Capital and Archetype, with participation from Coinbase, Nascent, Block Tower and other institutions. In terms of development progress, Obol is currently in the Bia public testnet stage. It is expected to launch the Circe testnet in June this year, and then complete the mainnet launch; in terms of development progress, it is slightly behind SSV.
Diva is a new product of the DVT circuit. It has completed a US$3.5 million seed round of financing led by A&T Capital and participated by institutions such as Gnosis, Bankless, and OKX. It will combine LSD and DVT models to create Liquidity staking and Distributed verification one-stop product.
4. The development trend of the LSD track and its impact on the current mainstream track
After the upgrade in Shanghai, the pledged Ethereum on the Beacon Chain can be withdrawn, and the willingness of users to participate in the pledge has increased to promote the increase in the pledge rate, which has brought about the expansion of the scale of lsdETH, an interest-bearing asset. Therefore, in addition to the possibility of more and more Liquidity staking agreements in the future, Defi products around lsdETH, an asset, will also usher in a new growth curve.
Decentralized exchange: The Liquidity construction of lsdETH is the most important part of the lsd protocol. As a similar asset, lsdETH/ ETH is the best choice for Liquidity construction. It is Curve and its similar products. If there are more and more in the future The lsd protocol, the problems built around different types of lsdETH Liquidity may trigger a new round of Curve war. It should be pointed out that the current cost of building Liquidity in the Balancer ecology is lower than that of Curve. At the same time, because Balancer's basic market is smaller, from the perspective of marginal changes, the prosperity of lsdETH will have a higher impact on the Balancer ecology than Curve (Related protocols Aura, Convex, Balancer, Curve).
Lending agreement: The market demand for using lsdETH to increase leverage will promote the lending business based on this asset class. At present, there are two main needs for increasing leverage: one is to increase the income of revolving loans. This business is currently represented by AAVE, which mortgages stETH to lend ETH. The maximum LTV is 90%, and the maximum leverage can be 10 times regardless of intermediate fees; but this model There is a problem of high ETH lending interest rate (after the Shanghai upgrade, the interest rate of the AAVE ETH deposit pool may be equal to the interest rate of ETH Staking, which will make the borrowing rate of ETH in AAVE higher than the interest rate of Staking, making the current demand for revolving loans disappear ), the core reason is that the borrowing rate of ETH needs to cover the deposit cost of the depositor; in the future, the Stablecoin anchored to ETH may be minted in the form of CDP, and the user's deposit cost can be replaced by a more efficient Liquidity cost to enhance the composability between protocols At the same time, it can better meet the needs of users to increase leverage and enhance income (related protocols AAVE, Compound). The second is to mortgage lsdETH to lend Stablecoin to increase the overall risk exposure of the investment portfolio. It can also be operated through two modes of normal lending and CDP (related protocols Fraxlend, MakerDao).
Derivatives such as separation of principal and interest: lsdETH, as an interest-earning asset with a floating rate of return, can generate financial Derivatives such as separation of principal and interest and interest rate swaps. Principal and interest separation products can realize short future yield (sell interest tokens to buy principal tokens, low leverage ratio, usually used to lock in income in advance), long future yield (sell principal tokens to buy interest tokens) currency, high leverage ratio, usually meeting speculative needs) and enhanced returns. Before the outbreak of LSD, the underlying interest-earning assets of Derivatives such as separation of principal and interest were mainly concentrated in LPs of Stablecoin. Since the asset size of this part is smaller than that of lsdETH, and the yield is lower than that of lsdETH, there is still the problem of Liquidity segmentation. Therefore, the starting amount of the lsdETH asset will greatly promote the business development of principal and interest separation products (related agreements Pendle, Element, Sense).
Re-pledging: The concept of re-pledging was proposed by Eigenlayer. Eigenlayer is a protocol that modifies Ethereum on the base client side, allowing validators to re-mortgage their ETH stake in parallel to verify other protocols, such as oracles and data availability modules. It should be noted that Eigenlayer gives staked ETH a second rate of return but sacrifices the Liquidity of some tokens and requires users to bear additional AVS (Actively validated services) security, which adds a layer of risk of penalty to Restaked ETH.
Chart 7: List of downstream products based on lsdETH
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