LSD MAP2.0: Multi-dimensional interpretation of the development of the LSD track.

Original author: waynezhang.eth

After the last  LSDFi Map was released, most of our predicted products have already appeared, such as stablecoins supported by LST (R, TAI, USDL, etc.) and the Governance War (Pendle War) triggered by veToken. However, there are also many unexpected data and discoveries. This article will organize most of the LSD-related projects that can be searched and propose questions, thinking, and action guidelines.

First is the well-organized LSD MAP 2.0, as shown in the figure below. For detailed data and subjective evaluation, please refer to my personal organization Google Sheet.

Pattern

The LSD track has formed a preliminary pattern. If classified by hierarchy, DVT technology service providers such as SSV Network and Obol Labs can be regarded as L0. DVT technology can make validators more stable and secure in performing signature responsibilities. As the first project to issue tokens at the hierarchical level, SSV Network has a first-mover advantage in brand awareness.

Lido, Ankr, Coinbase and other LST issuers can be considered as L1. L1 is mainly commission-based, and users mainly benefit from ETH's POS income. After the upgrade in Shanghai, according to statistics, the number of L1 projects is far more than the following L2 level, exceeding the first version of MAP prediction, but investigation found that more than 20% are still in the testnet stage. According to Defilama data, Lido occupies 74.45% of the liquidity staking share. Lido and Rocket Pool account for about 82.5%, while LST issued by centralized exchanges such as Coinbase accounts for more than 12% of the liquidity staking ratio, leaving little room for other decentralized staking. Some participating projects in this level are multi-chain LST issuers sharing a piece of the pie, but in fact, Ethereum's LSD gameplay is slightly different from other public chains. Apart from Ankr, which has the advantage of being the first mover, no other outstanding projects have been seen yet.

TVL share chart (source: DeFillama, date: 2023.6.23) 

Fixed-income products designed based on LST, stablecoins, and yield aggregators occupy the L3 level, also known as LSDFi. In this level, the largest number of stablecoins based on LST are listed as collateral, almost all of which support other stablecoins and ETH/WETH. There are fewer lending and leverage projects, which directly leads to a temporary shortage of yield aggregation and structured strategy projects. The emergence and development of fixed-income products such as Yearn's yield pool, Shield's structured products using options, and Pendle will further promote the emergence of yield aggregation and structured strategy projects. Projects that use their own tokens to subsidize and increase the yield of collateral have experienced rapid declines in both token and TVL after the Shanghai upgrade.

A price trend chart for a certain APY project in Shanghai with over a thousand returns

The L2 layer shows the importance of the team, and some projects that entered the LSD track halfway achieved good results. After achieving results in some tracks such as fixed income, options, yield aggregation, stablecoins, and synthetic assets, it is also worth considering their possibility of entering LSDFi with products in the same track. With the market liquidity shortage, how many teams have seized the opportunity when ETH, as the TOP2 cryptocurrency, can still bring strong liquidity even in a bear market? As the cycle approaches and the bull market is in sight, with increased liquidity, can other income-generating assets learn from ETH and develop similar products?

某固收协议借助 LSD 产品实现 Token 10x 涨幅

A certain fixed income agreement achieved a 10x increase in Token value with the help of the LSD product.

This article uses products based on L2 as the definition of L3. StakeDAO, Equilibria, and Penpie, which triggered the Pendle War, all meet the definition based on L3. AcidTrip, which automatically reinvests 0xAcid, and gUSHer, which simplifies unshETH operations and increases profits, can be seen as the mainstream governance disputes caused by veToken. There is a lot of room for imagination in this level, not just limited to L2 tools and aggregated governance projects. For example, L3 for multiple L2 products and front-end aggregation strategies.

In Eigenlayer, individual ETH holders stake ETH and stETH to staking service providers, who then allocate node operators to participate in the Eigenlayer protocol and validate nodes directly or through delegation to other operators. Various middleware and data availability layers pay a certain reward (project tokens, fees, etc.) to earn profits. This actually utilizes the principle of ETH staking, but instead of producing LST, it allows for staking of LST (currently supporting rETH, stETH, cbETH), thus recording it at the L2 level.

Overall

【1】L0 is the most technically challenging, but attention should be paid to the actual utility of the token.

【2】L1 leaders emerge, except for internal or systemic risks, time and space conditions no longer allow for new TOP3, but there will be new rising stars.

【3】A large part of L2 does not have a moat, which tests the team and BD capabilities more. The more foundational DeFi strategy projects based on LST, the more prosperous L2 becomes.

【4】L3 market value/liquidity is limited by the development level of L2 products and has a lot of room for imagination, requiring some time to develop.

DATA & TRENDS

质押率

translates to

Pledge Rate

in English.

Before the upgrade in Shanghai, the predicted result was that after the first wave of launch, the second wave of pledge rate would rebound. However, the actual result was not as expected. After the upgrade in Shanghai, the two largest waves of contact with pledge were to receive pledge rewards and then continue to pledge, and to release the principal (mainly from CEX) for pledge. After that, the pledge rate began to steadily rise, and in mid-May, the pledge amount exceeded 20M, and in June, it exceeded 16%.

ETH Staking and Unstaking/Staking Total Chart (Source: Nansen, Date: June 23, 2023) 

Regarding the comparison of ETH staking rates with other public chains in the market, the author strongly advocates for staking. In MAP 1.0, the author also predicted that stability would be around 25%, with the following reasons and judgments:

Reason 1: Decentralization of ETH

The dispersion of ETH chips is different from that of some high-staking "VC chains" and "consortium chains". Many tokens on these chains have to be staked, with a large number of tokens in circulation but few players, and selling off can lead to a collapse.

ETH whales holding coins (with exchange and bridge addresses) and address quantity change chart (source: Feixiaohao, date: June 23, 2023) 

Reason 2: Practicality

Reason Three: External Scalability

The emergence and prosperity of L2, as well as the arrival of the era of multi-chain, will make ETH a mainstream asset in multiple ecosystems, further diversifying tokens and reducing the trend of concentration in Ethereum staking. Of course, we will see in the next section an analysis of the protocol for cross-chain staking of Ethereum, which will further explore the impact of cross-chain staking on the LSD ecosystem.

Reason 4: Compliance

As we all know, cryptocurrencies are the focus of traditional finance and regulatory authorities in various countries. In many ETFs, ETH has the second largest share after BTC, and in secondary funds, ETH generally ranks in the top 5 in terms of share. With the increase of encrypted ETFs/secondary funds, some people have proposed that secondary funds and ETFs will take a step further in pledging tokens, but compliance issues are difficult to solve. Even if they use pledging to increase returns, it is safer to directly seek StakeFish for security and lower legal risks.

The price factor may also affect the pledge rate. During the upcoming halving cycle in a year, if it ignites bullish sentiment and altcoins rise, it remains to be seen whether many ETH pledgers will choose to sell their ETH for profit and buy new hot coins. Further observation is needed for this trend.

Pledged ETH purchase price distribution chart (source: Nansen, date: June 23, 2023) 

LSDFi undoubtedly promotes the increase of the staking rate. The LST generated by staking can enter multiple projects to earn multiple profits and reduce opportunity costs, and even earn excess profits. However, there are currently no L2 projects that can support a large amount of ETH, and many LSTs in L1 are not yet used in L2. Therefore, the author believes that L2 still has huge investment opportunities.

Centralized Staking vs Decentralized Staking

According to Nansen's data, the decentralized staking platform has a collateralization ratio of less than 40%, with CEX accounting for approximately 20%, and the vast majority of ETH being used for node staking and Solo Staking. After the Shanghai upgrade, the CEX had the highest percentage of capital withdrawal, reaching 57.74%. Due to Lido's share of the total staked ETH being 31.8%, there is a risk of centralization in decentralized platforms. To address this, there are projects in L2 that balance the distribution of LST tokens to incentivize participants to earn rewards by staking on smaller platforms.

ETH Staking Status (Source: Nansen, Date: June 23, 2023) 

There are also many platforms on L1 that use DVT technology to become more decentralized. However, from a rational perspective, the first priority for stakers is security, followed by profits. Lido and Rocket Pool's LST are almost applicable to all LSDFi projects at the L2 level, and there have been no security incidents so far. Lido relies on its dominant position in ETH staking to gain income and market share. As a vested interest, harming Ethereum after centralization would also harm its own fundamental interests. Of course, internal risks and external risks such as regulation are risks that every L1 platform needs to pay attention to.

Shanghai upgraded ETH principal/reward solution staking chart (source: Nansen, date: 2023.06.23) 

Therefore, the author continues to favor the top 3 leading positions in the industry. However, decentralization is a natural attribute of encryption, and diversification of L1 is an inevitable trend. Many L1 products have emerged that balance decentralization, security, and low barriers to entry. However, some high-quality products still cannot escape the token utility problem.

Yield

Without considering security factors, high yield and yield sustainability are the two most important factors related to LSD. Regarding high yield, pledgers need to rely on their own risk tolerance to participate. In the early stages of many L2 projects, LST direct pledging income can reach three digits under token subsidies, and LP can even reach four digits, but price fluctuations are inevitable when mining and selling. Currently, some projects adopt a points reward model and pledging to obtain airdrops to minimize the impact on user retention and token prices.

The pledger can refer to common DeFi gameplay like LEGO to increase yield, and consider the following methods:

1. Choose LST for scenarios with multiple usage or cooperation partners.

2. Increase capital efficiency through leverage.

3. Participate in L2 products (some L2 products have L3 for nested use).

4. Participate in new project IDOs or reward activities (low security, but high returns).

By using a two-layer nesting strategy, the staking yield can be increased to over 10%. Readers can design their own strategies based on their risk tolerance.

After conducting research, it was found that sustainable projects generally have one characteristic: low profitability. Many rely on their own token or other project tokens (such as Frax using Curve) for subsidies. If the profits from ETHLST are based on Ethereum staking rewards, where do the profits for L2 and L3 based on LST come from?

After conducting research, the conclusion is:

【1】Token Incentives: Self-Token Subsidies/Other Party Token Subsidies.

【2】Lending fees: Some stablecoins

【3】LP Liquidity Pool Fee

【4】Derivative Hedging

【5】Eigenlayer offers service providers fee subsidies for staking nodes.

【6】Product Trading Fees/Commissions

……

From the stability of income sources, we can basically judge the stability of L2/L3 returns. Only methods 【1】, 【4】, and 【6】 can meet the high-yield properties again, while methods 【4】 and 【6】 have strong uncertainties in operation. Therefore, method 【1】 is currently and will be the mainstream method for a long time in the future, but there are significant differences in details in specific use. However, if the project wants to survive in the long term, adopting method 【1】 requires excellent Tokenomics.

Personally, I believe that high-quality projects should combine real profits, application scenarios, and good Tokenomics. Currently, at the L2 level, there are real profit + veToken projects led by PENDLE, which basically meet the above conditions.

L2 的 LSD

translates to

L2's LSD

in English.

From the table, we can see that many projects have been deployed at the L2 layer, with Top3 decentralized staking LST: wstETH, rETH, and fraxETH being the statistics.

Top 3 decentralized LST staking amounts on different chains (source: blockchain explorer provided by coingecko)

From the overall perspective, Arbitrum has the highest number of projects, and the research shows that there are also the most L2 layer products established on Arbitrum. Although Optimism has a considerable number of LST, there are far fewer projects established solely for LST than the number of DeFi projects providing liquidity pools. The transaction fees on L2 are lower, and transactions can occur faster. The number of holders is also increasing, so there is reason to be optimistic about the development of L2 on Layer2. The earlier the deployment, the more opportunities there are to seize the liquidity of LST on L2.

用户分级

User ClassificationDifferent users have different needs for staking, but the basic elements include security, yield, degree of decentralization, token economics, UI/UX, and ease of use.

Currently, the L0 level has fewer tokens issued due to late issuance and high technical barriers, and there are more early VC investments in L1 level. The L1 level has seen the emergence of leading players, and many whales and large holders have staked their ETH in L1 and participated in L2. The L2 level has attracted prospectors from all sides, but based on the L1 TVL and L2 TVL, taking Lido's stETH as an example, the total amount is 7.383M, and the LSDFi can count about 150K staked, indicating that there is still a large market space in L2.

(It is recommended to have more detailed data tracking. The data complexity here has been simplified during analysis.)

Each factor has different attraction/retention degrees for users with different amounts of funds. The author believes that the newcomers appearing in the L1 and L2 levels in the future will fully grasp each element.

【1】Security: team members and internal management, auditing, fund custody, etc.

【2】Yield: divided into high and low, persistent, diversified yield varieties.

【3】Decentralization level: Hosting method, DVT technology, Token concentration level.

【4】Token Economics: Can Utility and Supply-Demand Balance be Guaranteed, Even When Demand Exceeds Supply?

【5】UI/UX: Can it have clear and concise pages and how accessible is it for users?

The basic information of the project has been placed on Google Sheet, please configure according to your own risk preference.

As an industry practitioner in the encryption field, I will translate the following Chinese text into English without considering the context or industry-specific terms. English words and phrases, as well as capitalized English words and phrases, will not be translated or omitted, such as ZKS, STARK, and SCROLL. If there are English characters in the hyperlink, they will not be translated and will be returned directly. When there are only punctuation marks in the content, the punctuation marks will be returned as they are. HTML tags in the content, such as

, , , and

, will not be translated. If there are English characters in the HTML tags, they will be omitted and returned directly. The content in the hyperlink will be preserved and not translated. All Chinese characters will be translated.

As an example, the author has a relatively small amount of funds and pursues high returns with a personal strategy. They have only participated in one L1 leading/L1 newcomer project, with the remaining projects being L2 real income projects and L3 projects, and a small amount of participation in new project launches.

(This does not constitute financial advice)

Summary

The LSD project is all about LSD Summer, which is comparable to DeFi Summer. From the above analysis, it is impossible to compare directly, but Summer is achievable. Tracing back to the source, the entire LSD ecosystem is based on POS token coin standards, which also means that LSDFi users need to understand Web3, and most of them are on-chain projects. The tokens are not listed on exchanges, and the returns are coin-based, which means that only Web3 users with some experience participate in LSD, and the participants are only a small part of the Web3 user group. External users have limited access.

And the bear market has always been lacking in liquidity. During the DeFi Summer, there were no NFTs, GameFi, BRC20, etc. Now that liquidity has entered the crypto market, it must first be divided among various tracks. Although LSD is a hot sub-track in the DeFi track, it cannot obtain most of the DeFi liquidity. Therefore, in addition to hot speculation, the real summer may come together with the bull market.

Due to space limitations, some of the more impressive projects were not introduced. Some of them enriched their own products through strong cooperation, while others achieved impressive results by entering the LSD hot spot halfway. This directly proves the importance of the team. The L1 and L2 tracks, which are seriously homogenized, require not only technological innovation but also the efforts of project teams. With the upgrade of Cancun imminent and the bull market cycle approaching, whether new products can be designed or products can be designed for different assets may be a question that many projects need to consider.

Products that cross levels appear in each level, which may be a future trend. After seizing the share of this level, utilizing advantages to develop other levels is also a choice for business expansion. At the same time, expanding to Layer 2 still seems to be a suitable choice. Many projects are already in the planning and development stage, and we look forward to their appearance.

As a staker and investor, when faced with a variety of products, my personal recommendation is to first recognize your own risk preference, and then choose products with higher security (more attention, no security incidents, etc.) to build your strategy. Recently, there have been Rug projects and scam projects, so it is important to be vigilant.

Disclaimer: All projects mentioned in this article do not constitute investment advice, and I hold some project tokens, which creates a conflict of interest, and the analysis is subjective.

Original Link

Welcome to join the official BlockBeats community:

Telegram Subscription Group: https://t.me/theblockbeats

Telegram Discussion Group: https://t.me/BlockBeats_App

Official Twitter Account: https://twitter.com/BlockBeatsAsia