Original Title: "Our Stride Thesis"

Original Author: James Ho, Partner at Modular Capital

Translated by: 1912212.eth, Foresight News

Editor's note: On February 2nd of this year, Stride, a Cosmos ecosystem liquidity staking protocol, completed a $4 million strategic financing round with DBA as the lead investor and participation from 1confirmation, Road Capital, Modular Capital, Imperator, and Chorus One. The financing round aims to promote the development of Stride in the Celestia ecosystem. It is worth mentioning that on the same day, Stride's total TVL exceeded $100 million, reaching a historic high.

Content:

Stride is a staking protocol in the Cosmos ecosystem, currently occupying over 90% of the market share with a TVL of over $60 million. It supports Cosmos chains, including ATOM (Cosmos Hub), OSMO (Osmosis), INJ (Injective), JUNO (Juno), and more.

In the Cosmos ecosystem, the popularity of staking is still in its early stages. 41% of ETH staking on Ethereum is completed through staking service providers such as Lido, Rocketpool, Frax, Coinbase, etc. In contrast, only 2% of the total ATOM and 7% of the total OSMO participate in staking, providing ample opportunities for further development.

The liquidity staking token (LST) is very attractive to users because it can improve the capital efficiency of collateral assets. By issuing staking tokens (stOSMO, stATOM), Stride allows users to freely use assets in DeFi while earning staking rewards. In addition, most staking assets on Cosmos chains have a redemption period of 14-30 days, and users need to wait a long time to release their collateral. However, in Stride, LST allows users to immediately sell their staking tokens at a certain market slippage.

As a category, liquidity collateral has strong network effects and often presents a winner-takes-all situation. Due to Lido providing deep liquidity for its stETH, Lido's share of LSTs on Ethereum is close to 80%, which makes more users prefer to use Lido instead of competitors. Considering that Stride has 90% share in the Cosmos ecosystem and is constantly growing, we expect similar network effects to come into play in Stride.

Stride plans to support liquidity staking pairs for new Cosmos chains such as Celestia (TIA) and dYdX (note: TIA and DYDX are already supported). The combined market value of these chains exceeds $10 billion, greatly expanding Stride's market size within the Cosmos ecosystem.

With the increase of capital in the Cosmos ecosystem market, reaching 20 to 50 billion US dollars (currently 5 to 6 billion US dollars), Stride is expected to generate fee revenue of 20 to 70 million US dollars. Assuming a mortgage penetration rate of 15-30%, Stride continues to maintain a 90% market share. Applying a multiple of 50 to this number, Stride's market value may reach over 100 million to 3 billion US dollars.

PoS

Proof of Stake (PoS) is a consensus mechanism used to determine how transactions are processed and new blocks are created. Ethereum has historically used Proof of Work (PoW) to ensure the security of its chain, in which miners use computing resources such as GPUs and electricity to guess a random encrypted hexadecimal number. This is also the security model currently used by Bitcoin.

After years of planning, Ethereum completed its merge in September 2022, transitioning from PoW to PoS. There are many reasons why most public chains are transitioning from PoW to PoS, including security and anti-witch attack models.

· Energy Consumption: PoW ensures security by consuming real-world resources (computing power and electricity), while PoS ensures security through the value of native network assets (ETH, SOL, AVAX, ATOM). This reduces the energy consumption of PoS networks by 99.9% compared to PoW networks.

· Network Consensus: PoW ensures security through economic incentives. The network issues new tokens and rewards miners in exchange for their consumption of real-world resources (which require money to purchase). However, miners typically immediately sell the newly issued tokens (such as BTC) to recover the cost of operating mining facilities. In PoS, the network is secured by owners (people who hold and purchase native network tokens). The principle of this mechanism is that it creates consistency among network owners, who have an incentive to ensure the security of the network.

· Emissions Reduction: In a PoW network, it costs $1 of emissions to obtain $1 of security (in real-world expenditure). This requires the network to continuously have a significant amount of new issuance. In PoS, validators do not have significant real-world expenditures, instead they only need a certain percentage of issuance (usually within the range of 3-10%) to compensate for the illiquidity of their staked assets. This means that the network spends $0.03-$0.10 for $1 of economic security, which is a more economically sustainable long-term model. After transitioning to PoS, Ethereum has reduced the tokens issued annually to ensure the security of its network by over 80%.

Currently, almost all major public chains calculated by TVL use PoS to ensure network security, including Ethereum, Solana, Avalanche, Polkadot, and Cosmos Hub.

Liquidity Collateral Concept

Liquidity staking is a very large category in the DeFi field, with the biggest success case being Lido. Lido has now become the largest protocol in the entire cryptocurrency industry, with a total locked value (TVL) of over $20 billion, accounting for nearly one-third of all Ethereum staking. Lido earns over $80 million in fees annually.

In simple terms, Lido places ETH into a smart contract and then distributes these ETH to a group of node operators who stake on behalf of the protocol. These node operators include Figment, Stakefish, Everestake, and Blockdaemon.

After depositing ETH into the Lido protocol, users will receive stETH. stETH represents the ETH that the user has staked in the Lido protocol, including the value of the initial deposit and ongoing staking rewards. stETH has the following uses:

· Lending: If a user wants to use it as collateral to borrow assets (such as USDC stablecoin), they can deposit stETH into lending protocols such as Aave.

· AMM Liquidity: If users want to provide liquidity and earn fees, they can deposit stETH into trading protocols such as Uniswap and Curve. The wstETH/ETH pool on Curve earns a 2% fee annually, which is additional income on top of the 3-4% ETH staking rewards on Lido.

· Yield Hedging: Users can deposit stETH into Pendle (a yield DeFi native tool) to lock in their staking yield for a period of time.

· Selling on the open market: Typically, users need to unstake ETH through Lido, which depends on the Ethereum exit queue and may take several days to weeks. If users do not want to wait, they can sell stETH on the open market. Selling 1000 stETH (over $2 million) will result in approximately 10-15 basis points of slippage.

Just like many other things in DeFi, any DeFi protocol that wishes to support stETH can integrate and adopt stETH (just like Aave, Uniswap, Curve, and Pendle have already done). Each protocol that supports stETH creates additional utility and demand for users who provide liquidity.

Lido has achieved an FDV of over 20 billion USD (ranked among the top 35 tokens by market capitalization) by locking up assets worth over 20 billion USD and earning over 80 million USD in annual fees (of which over 40 million USD belongs to Lido DAO). It is worth noting that the liquidity staking market often has a "winner takes all" situation. Lido holds nearly 80% of the LST market on Ethereum, while the second largest player, Rocket Pool, stakes ETH less than 10 times that of Lido (Rocket Pool is worth 2 billion USD, while Lido is worth 18 billion USD).

These network effects are driven by several factors:

· Lido stETH liquidity depth compared to other LSTs: On Curve (the main DEX for stable assets), the TVL of the stETH/ETH pool is $220 million with a liquidity yield of 2% APY. In comparison, the TVL of the rETH/ETH pool is $8 million. The increase in stETH liquidity depth means that stETH holders can exit their positions with less slippage and market impact compared to rETH holders, which is one of the key value propositions of any given LST.

· Security and Lindy Effect: Users only receive a low annual yield (3-4%) for staking assets. This means that security is important on the level of the protocol not being attacked by hackers (such as issuing and redeeming stETH for ETH incorrectly), and users value the most established and secure liquid staking protocol.

pStake and Quicksilver each hold a 4% share.

Please note that Lido once had approximately 100% of the staked assets in the Cosmos ecosystem, and its LUNA's LST had nearly $10 billion TVL at its peak on April 6, 2022. However, on May 10, 2022, LUNA began a death spiral and trended towards 0 due to its stablecoin UST becoming unpegged and LUNA being infinitely minted. Subsequently, Lido ceased support for Terra and focused solely on Ethereum, and currently does not have any LST in the Cosmos ecosystem nor any known plans.

In the Cosmos ecosystem, the staking penetration rate is still in its early stages, with a penetration rate of 2% for ATOM and 7% for OSMO. Today, these two chains represent over 85% of Stride TVL. Compared to Ethereum's 41% penetration rate (which is still growing), this represents 5-20 times more opportunities for ATOM/OSMO before adding other supported Cosmos chains and new chain expansions (Celestia, dYdX).

Stride holds 14-20 times more ATOM than its two competitors (holding over 85% of the circulating staked ATOM), and 59 times more OSMO than Quicksilver (holding over 95% of the circulating staked OSMO). This leading position is very impressive, and we believe that this advantage will be maintained over time.

Stride's share on other LSTs (including INJ, EVMOS, and JUNO) also exceeds 95%.

In our view, there are many reasons why Stride emerged victorious, as a practitioner in the encryption industry, I will not translate the industry-specific terms and names, such as ZKS, STARK, SCROLL. English words and phrases, as well as capitalized English words and phrases, will not be translated or omitted, for example: ZKS, STARK, SCROLL. If there are English characters in the hyperlink, they will be returned directly without translation, and the hyperlink will not be missed. 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

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

· Supports most chains - Stride supports 10 chains in the Cosmos ecosystem. Since its launch in February 2022, pStake has only supported two asset pairs (ATOM and XPRT).

· Ecosystem Consistency - Stride is closely integrated with the Cosmos ecosystem. Starting from July 19, 2023, Stride will use ATOM (Cosmos Hub) for economic security (meaning that ATOM holders who stake their tokens will secure the Stride blockchain and handle block production). In return, Stride will share 15% of its issuance and protocol revenue with ATOM.

· Stronger Economic Security - Utilizing ATOM for consensus means that Stride has stronger economic security than pStake (with a circulating market value of less than $10 million). In addition, the Stride chain is very concise, with no non-LST products on its roadmap. This simplifies the security of the chain.

· Network effect - With the asset support of Stride in Cosmos reaching a turning point, the network effect is beginning to show. By enabling IBC to support new Cosmos chains, the required code changes are minimal, which means that Stride's scale and Lindy effect make it the preferred and safest partner for new Cosmos chains (Celestia, dYdX) to use for their LST.

· Deep AMM Liquidity - Compared to competitors, Stride has significantly deeper liquidity in AMM pools. Stride's stATOM liquidity on Osmosis exceeds $17 million, while pStake's stkATOM liquidity is less than $1 million. This is typically achieved through "Protocol-Owned Liquidity" (POL) provided to the main chain, which reduces the incentives that Stride needs to provide for expanding a given LST pair. For example, Osmosis has deployed $11 million worth of OSMO to the stOSMO liquidity pool, while Juno has deployed $1.65 million worth of Juno to the stJUNO liquidity pool.

· DeFi integration - Stride's LST can now be used in various Cosmos applications, including Umee ($6.5 million TVL), Shade ($3 million), Kujira ($1.5 million), Mars ($1 million), etc. These additions increase the utility and network effects of Stride LST assets. Stride focuses on LST without competing with other DeFi protocols, which also allows for wider integration.

· Stride charges a 10% commission rate on the staking income collected through its protocol. Among them, 8.5% belongs to the Stride protocol (belonging to the stakers of the STRD token), and 1.5% belongs to ATOM/Cosmos Hub, providing economic security for the Stride blockchain.

Cosmos and Ethereum have significant differences in terms of staking economics.

· Validator Fees: To launch a new validator node on Ethereum, 32 ETH must be staked. Therefore, Lido charges a 10% fee (same as Stride), but must pay 5% to validators and reserve the remaining 5% for Lido DAO. As Cosmos operates on a delegated PoS or equivalent model where staking is simply delegated to existing large validators, there are no additional costs or fee sharing between Stride and validators. The result is a higher profit margin, making Stride a more profitable liquidity staking protocol from a net cost perspective.

· Pledge Yield: The Cosmos network typically launches with higher issuance and inflation rates. For example, the annualized yield (APY) for ATOM is 18%, OSMO is 9%, JUNO is 15%, and INJ is 15%. In contrast, Ethereum's current pledge yield is 3-4%. This naturally tends to allow LST to capture a larger proportion of economic benefits and make LST a more attractive value-added service when deployed to DeFi protocols.

With TVL increasing from 5 million USD to 60 million USD over the past year, and an average staking APY of 16%, Stride's annual revenue has grown to nearly 1 million USD.

We believe that in the next 6-12 months, the following chains from the Cosmos ecosystem will provide support and buying opportunities for the growth of Stride. Stride has expressed its intention to support the liquidity staking of dYdX and Celestia (through stDYDX and stTIA tokens).

· dYdX (30-40 billion USD FDV): dYdX is the largest decentralized derivatives exchange with over 400 billion USD in trading volume and generates 100 million USD in annualized fees. dYdX has been developing product upgrades (v4) to migrate its trading platform from StarkEx chain to its custom Cosmos blockchain. Importantly, trading fees will now accrue to DYDX token holders who stake (with a 30-day unlocking period). As the market penetration of decentralized perpetual contracts grows from 1-2% to 30% like spot markets, dYdX has the potential to become one of the largest public chains in the Cosmos ecosystem in terms of FDV. On November 21, 2023, Stride announced the upcoming launch of stDYDX and the issuance of 250,000 STRD to drive early adoption.

· Celestia (FDV of 800-900 million US dollars): Celestia is part of Ethereum's modular expansion roadmap and is one of the leading data availability (DA) layers. They were recently deployed to the mainnet on October 31, 2023. With the growth of Ethereum and its L2 usage, Celestia may see further development. Stride has reached out to Celestia's governance body to begin supporting LST (known as stTIA).

· Akash (FDV over $400 million): Akash is a decentralized computing marketplace that has recently focused on GPUs. Since the launch of the GPU mainnet in September, Akash has expanded to around 200 GPUs with an annualized GMV of approximately $500,000 to $1 million. Importantly, a portion of the 20% revenue share charged by Akash will be distributed to Akash stakers and the annual release amount.

· Noble (Native USDC on Cosmos): Circle recently launched native USDC support on Cosmos through the application chain Noble, which is specifically designed for issuing native assets. Currently, there are over $30 million worth of Noble USDC on Cosmos. As demand from dYdX, Celestia, Akash, and other platforms pours in, the issuance of Noble USDC on Cosmos may significantly increase, which will stimulate activity on other Cosmos application chains such as Osmosis. Osmosis currently accounts for a large portion of the total value locked (TVL) on Stride.

In the long run, compared to the existing supported chains of about 6 billion US dollars, dYdX and Celestia provide Stride with an opportunity of over 10 billion US dollars in FDV. We believe that in addition to the continued penetration of LST on existing chains (ATOM, OSMO, etc.), these could be powerful additional drivers for Stride's growth.

Generally speaking, Stride intends to be a pioneer of the new Cosmos chain. As long as IBC/Cosmos SDK remains attractive to developers for deploying application chains, Stride can continue to support, collaborate, and benefit from the growth of the new ecosystem.

 Valuation and Scenario Analysis

Below, we will provide several scenarios for the key driving factors of Stride. In our basic assumptions:

· Stride's FDV growth: We assume that Stride's FDV will increase from $6 billion to $25 billion. Currently, Stride obtains $6 billion FDV from existing chains (mainly including ATOM, OSMO, and INJ). We assume that this will increase to $10 billion in one market cycle. Stride is developing support for dYdX and Celestia (TIA), which currently represent nearly $10 billion FDV. Due to our optimistic attitude towards dYdX and Celestia, we assume that their FDV will increase by 50% to $15 billion.

· Stable Pledge Rate: Throughout the entire Cosmos network, the pledge rate remains stable at 50%. For major existing chains such as OSMO and ATOM, there have been no changes.

· dYdX and Celestia's staking drive: dYdX's new product will return its fees to token holders, which should drive staking rates comparable to other L1/Cosmos blockchains. Currently, over 16 million dYdX tokens have been staked. Celestia (TIA) requires a strong set of validators to ensure the security of its data availability layer, which may also drive high staking rates.

· Liquidity staking penetration rate growth: On Ethereum, the liquidity staking penetration rate accounts for 41% of all staked ETH (with LDO accounting for>30% of this share). As activity in the Cosmos ecosystem increases across DeFi, AMM, lending, perpetual contract trading, and more, we believe that the liquidity staking (LST) penetration rate can significantly increase from 2% to 15%, which is still far below Ethereum's level. Due to Cosmos typically having longer unbonding times (21+ days) than other chains, this should provide greater support for LST penetration rate growth.

· Market share remains stable: LSTs typically exhibit a winner-takes-all effect, as seen with Lido in the Ethereum ecosystem. Since January 1, 2023, Stride's market share has grown from 72% to 92%, and we expect it to continue to dominate this market.

· Stride maintains existing fees: We believe that Stride may demonstrate moderate pricing power in the future, but this is not assumed in our base case or optimistic scenarios. Therefore, we assume that Stride maintains its current 8.5% fee rate. Based on these assumptions and analysis, we can construct various financial forecasts and valuation models for Stride to evaluate its performance and potential under different market conditions.

Stride Investment Risks and Mitigation Measures

· Competition Risk: Although winner-takes-all market dynamics often prevail in large-scale liquid staking, the LST market in Cosmos is still in its early stages with a penetration rate of only 2%. The Cosmos ecosystem has experienced several changes in dominant players (such as Lido and pStake), who have gradually lost market share with changing market conditions (such as the collapse of LUNA and the crypto bear market). The risk of Stride not being able to dominate liquid staking in the Cosmos ecosystem still exists. Recently, new players like Milky Way are attempting to compete with Celestia's (TIA) LST.

· Osmosis's Superfluid Staking: Osmosis launched Superfluid Staking in early 2022, allowing liquidity providers on the Osmosis DEX to collect OSMO staking rewards while providing AMM liquidity. Although this is not exactly the same as a liquidity staking protocol, it could be a replacement for Stride's stOSMO (which accounts for 22% of TVL). Compared to holding stOSMO (after deducting Stride's 10% fee), Superfluid Staking only allows LPs to receive 75% of OSMO staking rewards, so we believe that Stride offers a better product. In addition, despite facing competition from Superfluid Staking over the past 12-18 months, Stride has still been successful in the OSMO ecosystem (with an 8% liquidity staking penetration rate, even higher than ATOM).

Special thanks: Thanks to Vishal Talasani (Co-founder of Stride), Jeff Kuan (Axelar), Paul Veradittakit (Pantera Capital), and Cody Poh (Spartan Group) for their review and valuable feedback.

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