LSD MAP 2.0: analysis of pattern, data, trend, income, users and other factors

After the last release of LSDFi Map, most of the products we predicted have already appeared, such as stable coins supported by LST (R, TAI, USDL, etc.), Governance War (Pendle War) triggered by veToken, etc. But there are also many unexpected data and discoveries. This article will sort out most of the LSD-related items that can be found and raise questions, thinking and action guidelines.

The first is the organized LSD MAP 2.0, as shown below. For the detailed data part and subjective evaluation part, please see Personal Organize Google Sheet.

pattern

The LSD track has formed a preliminary pattern. If it is divided into levels, DVT technology service providers such as SSV Network and Obol Labs can be regarded as L0. DVT technology can make the verifier more stable and safer to exercise the signature responsibility. As the first project in the hierarchy to issue tokens, SSV Network has a first-mover advantage in terms of brand awareness.

LST issuers such as Lido, Ankr, and Coinbase can be regarded as L1. L1 is mainly a commission model, and the main benefit point for users comes from the POS income of ETH. After the upgrade in Shanghai, according to statistical data, the number of projects at the L1 level is far more than that at the next L2 level, exceeding the first version of MAP predictions. However, after investigation, it was found that more than 20% of them are in the testnet stage. According to Defilama data, Lido accounts for 74.45% of the liquid staking share. Lido and Rocket Pool account for about 82.5%, and LST issued by centralized exchanges led by Coinbase accounts for more than 12% of the liquid pledge, leaving a narrow space for other decentralized pledges. Some participating projects at this level are multi-chain LST issuers to get a share of the pie, but in fact, the Ethereum LSD gameplay is slightly different from other public chains. Except for Ankr, which has the first-mover advantage, no other outstanding results have been seen yet. s project.

TVL Share Chart (Source: DeFillama, Time: 2023.6.23)

Fixed-income products designed based on LST, stable coins, income aggregation, etc. occupy the L3 level, which is often referred to as LSDFi. At this level, the largest number are LST-based stablecoins, all of which list LST as collateral, and almost all support other stablecoins and ETH/WETH. There are fewer borrowing and leverage projects. The lack of such projects directly leads to a temporary decrease in the number of income aggregation projects and structured strategy projects. Similar to Yearn’s income pool, Shield’s structured products using options, and the emergence and development of Pendle’s fixed-income products will further promote the emergence of income aggregation projects and structured strategy projects; projects that use their own Token subsidies to increase pledge yields are in Shanghai After the upgrade, both Token and TVL dropped rapidly.

The price trend chart of a project with an APY over 1,000 in Shanghai after the upgrade

At the L2 level, people can see the importance of the team. Some projects have entered the LSD track halfway and achieved good results. After some projects in fixed income, options, income aggregation, stable currency, synthetic assets and other tracks have achieved results, people can’t help but think about the possibility of their competing products entering LSDFi. The market liquidity is insufficient. Before and after the Shanghai upgrade, ETH, as the TOP2 cryptocurrency, can also bring strong liquidity in a bear market. How many teams have seized the opportunity? The cycle is approaching, the bull market is in sight, and after liquidity increases, can other interest-earning assets learn from ETH to develop some products?

A fixed-income agreement achieves a 10x increase in Token with the help of LSD products

This paper adopts the product established based on L2 as the definition of L3. StakeDAO, Equilibria, and Penpie triggered by Pendle War meet the definition based on L3; AcidTrip, which automatically reinvests 0xAcid; and gUSHer, which simplifies unshETH operations and increases returns; it can be seen that the mainstream is still the governance rights competition triggered by veToken. There is a lot of room for imagination at this level, not just L2 tools and aggregated governance projects. For example, the L3 of multiple L2 products, the front end of the aggregation strategy.

In Eigenlayer, individual ETH holders pledge ETH and stETH to the pledge service provider, allowing the node operator assigned by the service provider to participate in the Eigenlayer agreement, the verification node directly participates in Eigenlayer, or entrusts other operators to help manage through entrustment. All kinds of middleware, data availability layer, etc. pay certain remuneration (project party token, handling fee, etc.) to obtain income. In fact, it uses the principle of ETH pledge, but instead of producing LST, it can pledge LST (currently supports rETH, stETH, cbETH), so it is recorded at the L2 level.

Index-type products are mainly three LST indexes launched by Index Coop, and there are fewer LST types in the components.

Overall

[1] L0 has the most technical barriers, but we should pay attention to the actual utility of tokens

[2] With the emergence of leaders in L1, except for internal or systemic risks, time and space conditions do not allow new TOP3, rookies will have.

[3] A large part of L2 does not have a moat, which tests the team and BD capabilities more. The more LST-based basic DeFi strategy projects, the more prosperous L2 will be.

[4] The market value/liquidity of L3 is limited by the development of L2 products, and there is a lot of room for imagination, and it will take a certain amount of time to develop.

Data & Trends

Pledge rate

Before the upgrade in Shanghai, the predicted result was that the first wave would pick up after the launch and the second wave of pledge rate would drop, but the result was not the case. After the upgrade in Shanghai, the two biggest waves of staking were the collection of staking rewards and continued staking, and the first wave was The principal (mainly from CEX) was released from the pledge, and then began to rise steadily. The pledge amount exceeded 20M in mid-May, and exceeded 16% in June.

ETH staking and contact staking/total staking graph (source: Nansen, time: 2023.06.23)

Regarding the opinions on comparing the ETH pledge rate with other public chains in the market, the author holds a strong pledge attitude. In MAP 1.0, the author also predicted that the stability will be around 25%. The reasons and judgments are as follows:

Reason 1: The degree of decentralization of ETH

The chip dispersion of ETH is different from some “VC chains” and “alliance chains” with high pledge rates. Tokens on many chains have to be pledged. The market is large and there are few players. Selling is equivalent to a collapse.

Large ETH holdings (with exchanges and bridge addresses) and changes in the number of addresses (source: Feixiaohao, time: 2023.06.23)

Reason 2: Practicality

As the most active public chain at present, ETH can be described as the golden shovel of Ethereum. Using ETH can participate in DeFi, GameFi, and NFT. At the same time, when participating in projects on the chain, it will involve ETH-denominated transactions. ETH is well-deserved number one in the frequency of on-chain activities. It is also a leader in usage scenarios.

Reason 3: External scalability

With the emergence and prosperity of L2 and the arrival of the multi-chain era, ETH will also serve as the mainstream asset in multiple ecosystems, further dispersing tokens and reducing the trend of centralizing pledges in Ethereum. Of course, we will see cross-chain in the next section The protocol analysis of staking Ethereum will further explore the impact of cross-chain staking on the LSD ecosystem.

Reason 4: Compliance

As we all know, cryptocurrency is the focus of traditional finance and the supervision of various countries. Among many ETFs, ETH has the largest share after BTC, and ETH generally occupies the top 5 shares in secondary funds. With the increase of encrypted ETFs/encrypted secondary funds, some people have suggested that secondary funds and ETFs will pledge tokens in one step, but compliance issues are difficult to solve. Even if pledges are used to increase returns, it is safer to go directly to StakeFish , less legal risk.

The price factor may also affect the pledge rate. If the halving cycle that comes one year later ignites the bull market sentiment, will a large number of ETH pledgers choose to sell the profitable ETH and buy new hot currencies when the altcoin rises? observe.

Pledge ETH purchase price distribution map (source: Nansen, time: 2023.06.23)

LSDFi will undoubtedly promote the increase of the pledge rate. The LST generated by pledge can enter a variety of projects to earn multiple incomes, reduce opportunity costs, and even earn excess income. However, at the current L2 level, there are no projects that can carry a large amount of ETH. Many LSTs in L1 have not been used in L2, so I think there are still huge investment opportunities in L2.

Centralized staking and decentralized staking

According to rough calculations based on Nansen’s data, the staking ratio of decentralized staking platforms is less than 40%, CEX accounts for about 20%, and most of the remaining ETH is node staking and Solo Staking. After the upgrade in Shanghai, CEX accounted for 57.74% of the capital withdrawal. Since Lido accounts for 31.8% of the total pledge share, it is easy to cause the centralization of the decentralized platform. In L2, a project with a balanced ratio of LST appears, and the rewards are distributed in proportion to promote participants to obtain more LST from small platforms. award.

ETH pledge situation (source: Nansen, time: 2023.06.23)

There are also many L1 platforms that use DVT technology to make themselves more decentralized, but from the perspective of rational people, the first priority of pledgers is security, and the second is income. Lido and Rocket Pool’s LST are almost applicable to all L2 Level LSDFi project, and no security incidents have occurred. Lido relies on the leading position of ETH pledge to obtain income and market share. As a vested interest, harming Ethereum after centralization will also harm its own fundamental interests. Of course, internal risks and external risks similar to supervision are risks that every L1 platform needs to pay attention to.

ETH principal/reward settlement pledge chart after Shanghai upgrade (source: Nansen, time: 2023.06.23)

Therefore, the author continues to be optimistic about the leading position of Top 3, but believes that decentralization is a natural attribute of encryption, and L1 diversification is an inevitable trend. There are also many L1 products that take into account decentralization, security, and low threshold. But some high-quality products cannot escape the issue of token utility.

rate of return

Regardless of security factors, high yield and income continuity are the two most important factors related to LSD. Regarding high yield, pledgers need to rely on their own risk-taking ability to participate. When many L2 projects were launched in the early stage, LST was directly pledged Under the Token subsidy, the income can reach 3 digits, and LP can reach 4 digits, but the price fluctuates violently, and mining and selling are inevitable. At present, the point reward model adopted by some projects and the pledge to obtain airdrops have the least impact on user retention and token prices.

Pledgers can refer to the common gameplay of DeFi Lego to increase the rate of return, and consider several methods:

1. Choose an LST with many scenarios/partners

2. Increase capital efficiency through leverage

3. Participate in L2 products (some L2 products can have multiple nesting dolls in L3)

4. Participate in IDO or reward activities of new projects (low security, but considerable returns)

The use of two-layer matryoshka can basically increase the rate of return on the pledge to more than 10%. Readers can design their own strategies according to their own risks.

After research, it is found that projects that can maintain sustainability basically have one characteristic: the rate of return is not high, and many of them rely on their own Token or other project Tokens (for example, Frax uses Curve) to provide certain subsidies. If ETH → LST Part of the income is the basis, which comes from the Ethereum pledge rewards, so where does the income of L2 and L3 based on LST come from?

After the research, it was concluded that:

[1] Token incentives: own Token subsidy / other parties’ token subsidy

[2] Borrowing fees: some stable coins

【3】LP liquidity pool fee

【4】Derivatives hedging

[5] Eigenlayer charges service providers to subsidize pledge nodes

【6】Product transaction fees/commissions

……

The stability of L2/L3 income can basically be judged from the stability of income sources. Only methods [1], [4], and [6] can meet the nature of high income, while [4] and [6] have operational advantages. Strong uncertainty, so [1] is the mainstream method at present and for a long time in the future, but there are great differences in details in the specific use process. However, if the project wants to survive for a long time, it needs to adopt excellent Tokenomics to adopt the [1] method.

I personally think that a high-quality project should be a combination of real income + application scenarios + good Tokenomics. At present, there have been real income + veToken projects headed by PENDLE at the L2 level, which basically meet the above conditions.

L2 LSD

From the table, we can see that many projects have been deployed on the L2 layer, taking Top3 decentralized pledge LST: wstETH, rETH, fraxETH as statistics.

Number of Top 3 decentralized pledged LST on different chains (source: blockchain browser provided by coingecko)

From the perspective of the total amount, Arbitrum has the largest number, and according to the survey results, the number of L2-level products built on Arbitrum is also the largest. Although Optimism has a large number of LSTs, the number of projects established solely for LSTs is far less than the number of DeFi projects that provide liquidity pools. The transaction fee on L2 is lower, transactions can occur faster, and the number of holders is also increasing, so there is reason to be optimistic about L2 developed on Layer 2. The sooner it is deployed, the more opportunities it has to seize the L2 LST fluidity.

User Rating

Different users have different requirements for staking, but the basic elements include security, rate of return, degree of decentralization, token economics, UI/UX, ease of use, etc.

At present, L0 level is due to the late issuance of Token, high technical barriers, VC early investment is large, and the number is small; at L1 level, the leader appears, and many whales/big investors basically pledge ETH at L1 level and participate in L2; L2 level has people from all parties However, from the perspective of L1 TVL and L2 TVL, taking Lido’s stETH as an example, the total amount is 7.383M, and the statistical amount pledged in LSDFi is about 150K, and there is still a lot of market space in L2.

(More detailed data tracking is recommended, the data complexity here is too high, and the analysis is simplified)

Each factor has a different degree of attraction/retention for users with different amounts of funds. The author believes that rookies at the L1 level and L2 will fully grasp each element in the future.

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

[2] Yield rate: high and low, long-lasting, diversified income varieties

【3】Decentralization degree: custody method, DVT technology, Token concentration degree

[4] Token Economics: Can the utility be guaranteed while the supply and demand are balanced or even in short supply?

[5] UI/UX: Can you have a clear and concise page and what is the user threshold?

[6] Ease of use: Whether the purpose of the product can be clearly told to the user

Project Promotion

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

Taking the author as an example, the author has a small amount of funds, and his personal strategy pursues high returns. He only participated in one L1 leader/L1 rookie, and the rest are L2 real income projects and L3 projects, and a small amount of new project sales.

(The above does not constitute financial advice)

Summarize

Dadu LSD projects all use LSD Summer as their slogan to benchmark against DeFi Summer. Judging from the above analysis, benchmarking is basically impossible, but Summer does exist. Tracing back to the source, the entire LSD ecology is based on the POS token standard, which also means that LSDFi users need to understand Web3, and most of them are on-chain projects, and the tokens are not listed on the exchange. The income is based on the currency standard, which means It means that those who participate in LSD are Web3 users with certain experience, and the participants are only a small part of the small user group of Web3. External user access is extremely limited.

Moreover, liquidity in the bear market has always been scarce. There were no NFTs, GameFi, BRC20, etc. in DeFi Summer. Now that liquidity enters the encryption market, it must first be divided by various tracks. Although LSD’s subdivision track in the DeFi track is a hot track, But it is also unable to obtain most of the DeFi liquidity. So aside from the hot hype, the real Summer may come with the bull market.

Due to space constraints, some of the more eye-catching projects were not introduced. Some of them enriched their own products through strong cooperation capabilities, and some expected the outbreak of LSD hotspots, became monks halfway, and handed in brilliant results. This directly proves the importance of the team. The severely homogeneous L1 and L2 tracks require both technological innovation and the efforts of the project team. The Cancun upgrade is imminent, and the bull market cycle is approaching. Whether it is possible to design new products or design products for different assets may be a problem that many projects need to consider.

There are cross-level products at all levels, which may be the trend in the future. It is also a choice for business expansion to seize the share of this level and use the advantages to develop other levels. At the same time, expanding to Layer and 2 seems to be an appropriate choice. Many projects have already In the plan development, look forward to their appearance.

As a pledger and investor, in the face of a wealth of products, I personally suggest that you first recognize your own risk preference, and then choose a product construction strategy with higher security (more attention, no safety accidents, etc.), which has recently There are Rug projects, scammer projects, and you need to be more vigilant.

*Disclaimer: All the projects mentioned in this article do not have investment advice, and I hold some project Tokens, there is an interest relationship, and the analysis is somewhat subjective. *