Basics Capital|Big water feeds big fish, why LSD is a $100 billion business volume track

Basics Capital
8 min readJan 15, 2023

The current pledge rate of ETH beacon chain is 13.28%, and the average pledge rate of other PoS chains in the top five in terms of pledge market capitalization is 60%-70%. Assuming that the pledge of ETH can reach the pledge rate of other PoS chains, it still has nearly 5 times of upside. Now the pledged asset size of ETH beacon chain is about $22 billion. Without considering the price of ETH, LSD will grow into a track with 100 billion business volume.

In March 2015, during a roaring bear market, Bitcoin had fallen from a high of $1,100 for over a year and was gradually bottoming out in the $200 range. It was still a cold spring in the northern hemisphere and the Ethereum mainnet had not yet gone live. After nearly a year of discussion and development, the early team of Ethereum divided the development of Ethereum into four major phases, codenamed Frontier, Homestead, Metropolis and Serenity.

This was the beginning of a march to build a home and a metropolis for the gold seekers of the American West. Who knew it was this plan that would shape the next eight years of Ether’s development? Now, with the Shanghai upgrade approaching, Serenity’s final step will come to an end in March 2023, when it returns to peace.

While the bearish shadow of the venture capital market looms over the macro-cycle of global monetary tightening, the LSD (Liquid Staking Derivatives) section has taken the lead in the recent outlier, with the overall track up an average of over 40% in the last seven days, and the track’s leading project, Lido, up over 60% in 7 days and has even doubled in highs, adding a few shades of green to the depressed crypto market.

I. The current state of pledging in the ETH 2.0 market

The LSD protocol is a DeFi derivative track that grew up along with the ETH 2.0 upgrade, and has not formally entered the mainstream DeFi vision before. With Lido’s TVL overtaking MakerDAO to leap to the top of the DeFi list, and the asset size of products such as RocketPool and Stakewise expanding, it is as if LSD has become a booming track LSD has become a booming track that is still on the rise.

Since the launch of the ETH beacon chain pledge on December 1, 2020, the ETH involved in the pledge has exceeded 16 million pieces, the scale of locked assets exceeds $22 billion, and the verification nodes are close to 500,000, which has become the PoS public chain with the largest scale of locked assets and the most verification nodes, but in a comprehensive comparison of the pledge rate of the top 5 PoS chains in terms of market capitalization, ETH 13.28% of this achievement is still very early.

With the exception of ETH, the top 5 PoS public chains in terms of market capitalisation all have pledge rates of 60%-70% or more. The level of pledge rate affects the stability and security of public chains, and Ether is never short of a narrative in this regard. I believe that after the Shanghai upgrade, with the release of ETH tokens, the drive for arbitrage and the development of the LSD protocol, ETH’s pledge rate will definitely continue to rise.

Assuming the ETH pledge rate can reach 60%-70%, that still leaves nearly 5 times the space. The current pledge asset size of the ETH beacon chain is about $22 billion, and LSD will grow into a $100 billion business volume track without considering ETH prices.

II. Working Principle of LSD Protocol

Independent node verifiers require at least 32 ETH and cannot be retrieved until Shanghai is upgraded. The process of adding new blocks to the blockchain, processing transactions and storing data is risky for ETH verifiers, where technical problems can easily lead to loss of pledged assets or loss of rewards, and the high threshold keeps a large number of ordinary users out.

The LSD protocol allows ordinary users to participate in pledging and receive rewards without the need to maintain the pledging infrastructure without a threshold. In addition the design of the note assets frees up the liquidity of ETH during pledging, so it has captured a large number of users and assets in a short time and developed into a separate track.

LSD’s business logic contains three roles: ETH Stakers, Pools and Node Operators.

Stakers are responsible for providing the ETH, Pools are responsible for collecting, managing and distributing the proceeds, and Node is responsible for going about performing the signing, verification and blocking of the beacon chain.

Regular users deposit ETH into the Staking Pool, and the LSD protocol hands over the ETH collected in the pool to the Node Operators, who perform the signature verification for the rewards. In this link, the operator needs the verifier private key to complete the verification when verifying the work, but if the verifier private key is handed over to the node directly, there is likely to be various risks of mischief, so DVT shared verifiers like SSV Network and Obol Network, which fragment the verifier private key, are gradually developed again.

III. Development of the LSD track

Currently in the pledge market of ETH 2.0, 16,006,711 ETHs have been pledged by participating beacon chains (data as of 2023/1/12), the number of ETHs captured by LSD protocols accounts for a 32.8% share, the number of ETHs pledged in CEXs accounts for a 28.7% share, the number of ETHs pledged by Whales accounts for a 23.5% share, and the number of ETHs pledged by Staking CEXs already have a natural advantage in being able to pledge with one click on a centralised exchange, but the LSD protocol has overtaken CEXs to take first place, showing its potential for future growth.

Lido, Rocket Pool, Stkr (Ankr), Stakewise, StakeHound, Cream, SharedStake, Staked Finance and Frax Finance are the nine projects currently available in the LSD protocol section. ETH tokens, accounting for 88.41% of the LSD block market share and 29% of the overall beacon chain pledged market share, surpassing the number of all CEX pledged ETH combined.

A comprehensive comparison of yields across LSD protocols, StakingPool and CEX, based on the last 30 days of yield backtest data, shows that there is not much difference in performance between the platforms in this regard, with the average being between 5% and 5.5%, so APR is not a significant factor in the business gap.

Recently Frax Finance has opened a liquidity pledge business. Frax will partially purchase the agreement revenue into FXS tokens and distribute them to pledge users, which translates into an APR of 7.69%. The higher yield has quickly attracted a large number of users to participate in the pledge, and the pledged ETH has now exceeded 5W pieces, ranking fifth in the LSD section.

IV. Ecological opportunities in the LSD track

We mentioned earlier that the node operator needs the private key of the validator to complete the validation work, but if the private key of the validator is directly handed over to the node, it is likely that there will be various risks of evil, so the distributed-validator-technology DVT (Distributed-Validator-Technology) was born.

1. The DVT section

DVT splits the verifier’s key into multiple pieces and distributes them across multiple nodes, so that the verification is done jointly by multiple node operators and no single node operator has the right to do the signature verification independently. This not only reduces the risk of node malpractice, but also solves the problem of single point of failure and increases the robustness of the system.

SSV Network
SSV (ssv.network) uses Secret Shared Validator technology to encrypt and split the validator key into four KeyShares between untrusted nodes. This solves the problem of centralization of authenticator keys and makes the Ethernet network more decentralized.

Obol Network

Obol (obol.tech) is a trust-minimising pledge ecosystem focused on extending consensus by providing permissionless access to distributed verifiers, enabling users to create, test, run and coordinate distributed verifiers, creating distributed verification clusters that allow different verification nodes to come together as a single whole for pledging, so that a single pledge joining the cluster does not have to This makes it more competitive for validators to operate properly and minimises the risk of centralised malpractice.

2. Re-Staking section

EigenLayer is a Re-Staking protocol built on Ether, instead of users pledging directly on Ether, they pledge in Eigenlayer’s smart contracts, which can then be pledged secondarily to other protocols, such as sidechains, cross-chain bridges and prophecy machines. This will make the application more secure, as many different entities in the ETH ecosystem have their own trust networks, and a breakdown in some of these trust layers could lead to vulnerability exploitation and hacking, while trying to attack the security of the network shared through Eigenlayer would be more costly.

In addition, when users provide Re-Staking, they can also gain pledged revenue from the application layer items, improving network security while also increasing the efficiency of the use of funds. EigenLayer will support Re-Staking for three assets: ETH, LP tokens of ETH and LP tokens of stETH.

With secondary pledges to protect other infrastructure and middleware layers by leveraging existing trust networks, this narrative holds great promise and is expected to be the consensus security hub for the LSD track.

V. Conclusion

LSD will grow into a hundred billion dollar track, but this is only in terms of its business asset volume, secondary market trading opportunities still need to be analyzed in conjunction with Token’s market capitalization and application scenarios; in addition, while the liquidity pledge track explodes, there will also be Alpha in the LSD-related derivative ecology, the DVT and Re-Staking sections that serve LSD protocol-related components opportunities.

Reference.

https://dune.com/hildobby/ETH2-Deposits

https://ethereum.org/en/staking/pools

https://twitter.com/Maia_Zhao/status/1595983351671795713?s=20&t=ktcTIA6_eVAjbFO5psbvXA

https://docs.ssv.network/

https://docs.obol.tech/

https://www.eigenlayer.com/research

https://www.panewslab.com/zh/articledetails/lj7plnf0.html

About Basics Capital

Basics Capital is a global blockchain industry fund focusing on the primary market and helping the development of early-stage application layer projects, with investments from more than 30 countries and regions around the world, including Southeast Asia, the Middle East, Europe, the United States, Canada, Australia, Vietnam and Russia, covering Wallet, NFT, DeFi, GameFi, DID, SocialFi and LaunchPad across all segments of the application layer.

Email: basicscapital@gmail.com
Twitter: https://twitter.com/BasicsCapital
Website: https://www.basics.capital
Medium: https://medium.com/@basicscapital

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