In the first week of 2025, the Crypto Market staged a wonderful scene. Before the final competition of the BTCFi track, people with different perspectives and positions have complicated mentality and mood. This article is not here to eat melons, but to summarize the previous pattern and analyze the future market opportunities. LSD has gradually detonated a new round of DeFi demand since Lido. After two months of extra confidence brought by Trumps victory, how to face the future market and move forward is believed to be the most concerned issue in Q1 2025.
tl;dr
1. LSD defines the narrative and ignites the market, while LYD emphasizes Yield and weakens the negative impact of Staking on Liquid
2. LSD started from Lido, providing a liquidity balance mechanism for token issuers and holders, and gradually evolved to form an industry pattern
3. LSD captures the BTC ecosystem and BTCFi as a development vehicle, and achieves a number of projects in the TVL and Listing competition in 2024
4. LSD essentially promotes the process of attracting deposits in the Crypto market. The competition among project parties is similar to the thinking of TradFi banks.
5. LSD has two negative problems due to Over Staking, which poses risks and makes its development unsustainable.
6. LYD is oriented to Yield, introducing sustainable value to the market by realizing the Trade Off game process between Liquid and Yield
7. LYD solves the problem of sustainable Real Yield. The project owner will assume the roles of Crypto Fund, Asset Management and Asset Management.
8. LYD will promote Protocol Asset Management, which is also the basis for AI Agent to participate in financial management and form AIFi
9. LYD will trigger the transformation of Crypto from virtual to real, becoming the development basis of actual payment, asset interest and other financial scenarios
1. What are LSD and LYD?
The original meaning of LSD (Liquid Staking Derivatives) is to provide benefits to Cypto holders by staking Crypto liquidity to form various derivative scenarios. LSD is a very sophisticated and excellent narrative concept. It cleverly combines Liquid, Staking, and Derivatives into a word to form a model. It uses a very native method to directly hit the essence of Crypto and DeFi, successfully detonating the market and leading a new round of rapid development of DeFi and CeDeFi ecology.
LYD (Liquid Yield Derivatives) means to seek a balance between the binary states of Crypto liquidity and interest-bearing income and form various derivative scenarios. LYD inherits the native concept of LSD, weakens the negative problems and bubble phenomenon brought by Staking to Liquid, emphasizes the importance of Real Yield to the sustainability of Crypto Market and Derivatives, and opens and promotes the next stage of Secure, Scalable, Sustainable benign market environment.
2. The origin and purpose of LSD
LSD began with stETH launched by Lido in December 2020 and broke out in 2023-2024. This model is very similar to the role of U.S. Treasury bonds on the U.S. dollar. It essentially uses return expectations to trade off liquidity and seeks a liquidity balance between token issuers and holders.
The original intention of LSD in the early stage was different from that in the later stage. The rebase model represented by stETH anchored the rewards of staking on the Ethereum POS network. Although it was not the fixed rate guaranteed by the foundation, it had a relatively solid underlying value. This model can attract liquid to stake through the expected return, which can bring a large amount of TVL as a KPI mark for industry evaluation, and can derive various interesting and innovative derivatives. Therefore, it has rapidly evolved and formed a rich DeFi and CeDeFi industry landscape.
3. The outbreak of LSD on BTCFi and the competitive landscape
Soon after LSD appeared, at the end of the bear market in 2022, it gradually captured and awakened a real demand of BTC holders: BTC holders wanted to increase the value of the BTC they held but suffered from the lack of a suitable ecosystem and financial assets.
The emergence of Merlin kicked off the BTC ecosystem, BVM and BTC Layer 2, and BTCFi, which quickly became an important track for Crypto in 2024. From the Hundred Regiments War to the continuous iteration of several core projects, the final outcome of the BTCFi competition based on LSD gradually became clear in Q3 2024. The project side quickly reached billions of dollars in funding by staking users BTC liquidity based on expected returns to obtain TVL.
In this cycle, there are Marketplaces formed by model innovation like Pendle, and there are also income strategies formed by stablecoins like Ethena. By the end of 2024, in the constant competition between TVL and listing, Solv and Babylon may become the final winners.
4. The industry significance and value of LSD
LSD’s capture of the demand of BTC holders is real. In essence, it forms the deposit of Crypto Tokens through the process of Liquid->Staking. In other words, the LSD project party actually has a similar thinking to that of a bank, and the competition of BTCFi is essentially the competition among project parties for BTC deposits.
From its emergence to its evolution, LSD has brought the following significance and value to the market:
i. Provide a liquidity balance mechanism for token providers (issuers) and holders (users)
ii. Capture the common interest-earning needs of token holders and provide interest-earning products and asset stores
iii. Pooling token holders’ funds to form a deposit collection process and Crypto Bank
5. Dilemmas and Problems of LSD
Since it is about attracting deposits, the competition is bound to be fierce. In order to obtain TVL more quickly, project owners, players and the market have tried their best to differentiate the ecosystem and gameplay. The asset nesting of staking, restaking and rererestaking has evolved rapidly, and the phenomenon of one shovel for multiple mining is very common. The core problems of LSD have begun to be exposed.
The ingenuity of the word LSD eventually became the problem. It overemphasized Staking and ignored the importance of Real Yield in front of Derivatives. In the final analysis, the operation of LSD in this cycle still follows the usual route, that is, a cycle of innovative narratives, describing expectations, building consensus, and issuing coins for cash. Without Real Yield and Real Application as the underlying support for assets and ecology, even if Trumps victory replenished the confidence expectations for two months, it would be difficult to maintain the sustainable development of the market.
Over staking caused by LSD brings two essential negative problems:
i. For users: After excessive use of staking, the underlying opacity and cumbersome redemption process have created a lot of information opacity and time asymmetry, greatly reducing the fairness of users initial use of liquid value to trade off benefits, and thus forming a conflict of motivation and interests between project owners and users, forming bubbles and potential risks;
ii. For the industry: Excessive staking affects the liquidity of a large amount of the ecosystem’s native currency, forming a damper. While resisting bear market declines, it also causes the bull market to be short-lived, hindering the flexible development of the ecosystem and the rapid fluctuations in prices.
Interestingly, in order to solve this situation derived from LSD, many projects introduced T-Bill as the underlying asset. Projects represented by Ondo and OpenEden are actually the product of the LSD cycle. They use T-Bill as the underlying protection pad and find some big names to endorse their credit. A few seemingly simple (but not easy) operations have formed a market branch and gained a market value of billions of dollars. The emergence of this branch actually illustrates the essential problem. The LSD market is seriously lacking in Real Yield.
6. The inevitability of LYD
The success of LSD lies in the smooth and native process of Liquid->Staking->Derivatives, but what should be compared with Liquid is not Staking, because Staking is a liquidity management tool used to help issuers weaken Liquid. What should be compared with Liquid is not a method or a tool, but a financial essence: Yield.
Liquid and Yield are both a binary seesaw and a contradictory community. Whether as an issuer, a holder, or the entire market, we must think about the balance between the two, and the same applies to government bonds, funds, and Crypto Derivatives.
The selection process of Liquid and Yield is a trade-off. The right to choose this trade-off should not be restricted by rules unilaterally given by one party, but should be a market game mechanism, which can be reflected by a protocol in Web3 and Crypto. The R²Protocol proposed by CICADA in Q4 2024 does this well.
The problem with LSD is that the staking process limits the game mechanism. If Crypto wants to truly pump production value into the market to form sustainable development, it must release this limitation and allow the market to form a free game between Liquid and Yield. Such an ecological mechanism and financial derivative is LYD.
7. Surface problems solved by LYD
The emergence of LYD will allow the market, project parties, and funding parties that have already formed a competitive landscape to shift their focus to real and sustainable interest-bearing assets, gradually introduce various types of RYA (Real Yield Asset) into the Marketplace, work and compete in the development, selection and provision of Real Yield, and form a stable and healthy development environment.
It is advocated that LYD projects and Crypto Protocol will assume the role of Crypto asset management and asset management in this process, which is similar to the asset management, trust, fund and family office in TradFi, corresponding to the Crypto deposit-raising and bank-like financial institutions formed by the LSD cycle, providing them with various interest-bearing solutions with real yield, forming a more complete financial system.
8. Essential Problems Solved by LYD
The micro-meaning of LYD is to allow Crypto Holders and Crypto Investors to choose the balance between Liquidity and Yield. Each institution and individual can trade off Liquidity and Yield based on their own needs, information analysis and risk preferences. This is the common sense of TradFi iteration so far, which is the practice of returning freedom to the market and is also inevitable for the sustainable development of the Crypto Market.
From a macro perspective, LYD is promoting the trend of real-income assets RYA and real-world assets RWA to quickly enter the Crypto Market. This trend will soon undergo a qualitative change from quantitative change, pushing the global economy and finance into the Protocol and AI era. More Protocol Asset Management and Smart Contract Asset Management will emerge, which will also become the basis for AI Agents to participate in the management of economic finance and form AIFi.
9. LYD will trigger a turning point for Crypto
This relay transition from LSD to LYD is likely to trigger or even become an important turning point in the CryptoMarket over the years. This turning point is not a transition from prosperity to decline, but more precisely a transition from virtual to real.
Many people said in the early stage of this bull market that this is the last round of opportunities. In fact, the so-called last round is not the last round of the Crypto market. On the contrary, Crypto is changing the global economic, financial and payment systems in an unstoppable way. The last round mentioned here actually refers to the end of the initial dissemination stage of Crypto that uses narratives to build consensus.
The next stage will be a major development stage for Crypto in practical applications, including actual payments, asset interest, and various financial scenarios. These will quickly enter the Crypto Market and form part of the new generation of global economic and financial system. LYD will play an important role as a link in this.
