introduce
Original editor: Vincero, YL
introduce
Since the popularity of LSD, there have been many excellent articles explaining the mechanism of LSD and DVT:
The first-mover advantages and potential risks of LidoFinance, and the qualitative changes v2 will bring to Lido.
The ability of SSV Network to capture value as the underlying architecture of LSD and its technical threshold.
Frax Finances 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.
Eigenlayers 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
ETH 2.0 pledge data
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Current LSD Scheme
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1. Centralized hosting solutions provided by CEX such as Binance and Coinbase for users:
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2. Rocket Pools decentralized solution:
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3.Lido Finances 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 stETH to be mortgaged to lend mainstream assets, and the mortgage rate can reach 90% in the E-mode mode. Currently, Aave has a total of 991.91 k stETH worth $1.63 B mortgaged, accounting for 17.7% of the stETH circulation.
On CurveFinance, you can also use stETH-ETH to form LP and pledge LP Token to earn transaction fees, CRV incentives and LDO incentives. Currently, a total of 535.3 k stETH are formed into LPs on Curve, accounting for 6.2% of the stETH circulation. These 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.
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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 108.23 k frxETHs have been minted, and only 59.4 k frxETHs have been further pledged in exchange for sfrxETH. Therefore, the staking rewards of 108.23 k ETHs were all distributed to sfrxETH, which brought 6.43% annualized income to sfrxETH.
Frax provides 5.604% APR to the frxETH pool by virtue of its Curve domination rate, and a total of 39,197 frxETH constitute LPs on Curve.
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5. Staders 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 multi-chain PoS pledge, currently supports Polygon, Hedera, Fantom, BNB, Near, Terra 2.0. Listing ETH is coming soon, with plans to list Avalanche and Solana.
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National debt mechanism
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The current national debt mechanism and deposit absorption method:
with different expiration dates
Establish a national debt redemption mechanism to liberate the liquidity of national debt
Introducing multiple distribution platforms
Provide repurchase and reverse repurchase, introduce financial lending scheme
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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. Usually, 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.
Usually, 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.
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LSD can learn from the program
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1. Zero Coupon Bonds with a Maturity Date vs. Bond Coupons
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 be generated using ETH pledge certificates such as stETH: 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, 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 multiple stable income from PT value return over time, LP handling fees, pledge rewards for ETH pledged certificates, and LP pledge incentives.
Combination Strategies: Maturity offers a variety of investment strategies for ETH staking.
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2. Establish a sound LSD pledge certificate derivatives market (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 Layer 2. 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 date and zero-coupon bonds and bond coupons, we will be able to build more complex strategies and products to 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 Layer 1s Lido, Rocket Pool and many other protocols compete for market share, there are also Layer 0s DVT protocol and Re-Stakings EigenLayer to explore other layers of the market. The Layer 2 pledge certificate derivatives market 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 an 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.
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Future Outlook - Cryptopia
Based on LSD to ETH 2.0, we talked about national debt, which reminds us of Crypto and the future development of the country. Let us first look at some related definitions:
Cyber-states 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 states. - Balaji Srinivasan
Network nation is a social network with moral innovation, national awareness and recognized founder; its collective power of action, individual members are civilized and humble; it integrates cryptocurrency, establishes government based on consensus, and power is controlled by social intelligence. Contract restrictions; crowdfunded archipelagos are its real territory, and the capital is virtual; its population, income, and property size are verified through on-chain censuses, making it enough to win some 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 peoples 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.
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Cryptopia，for Love & Peace。
Reference
[1] How to stake your ETH and earn rewards while securing Ethereum: https://ethereum.org/en/staking/
[2] DefiLlama, ETH liquid mortgage derivatives, ETH LSD with total value locked: https://defillama.com/lsd
[3] Kodi, Evaluation of Top LSD Solutions: Analysis of Pros and Cons of Lido, Frax and Rocket Pool, Deep Tide TECH FLOW, 2023, 30 (1): https://www.techflowpost.com/article/1981
[4] Riddler, an article about Stader: Will LSD + real income promote the explosion of token value? , Deep Tide TECH FLOW, 2023, 18 (1): https://www.techflowpost.com/article/1953
[5] CapitalismLab, LSD high-level gameplay and its essence, BlockBeats, 2023, 06 (3): https://www.theblockbeats.info/news/35245
[6] China-government bonds, Yingwei Finance: https://cn.investing.com/rates-bonds/china-government-bonds
[7] Option Strategies, Option Volatility Strategies--Butterfly Combination, CME Group: https://www.cmegroup.com/cn-s/education/courses/option-strategies/option-butterfly.html
