We are not practitioners, we are investors. What we need to understand is not the principle of technology, but the investment value that technology can bring.
To put it bluntly, what we should pay attention to is what kind of changes a certain technology can bring, how big a market it will create, and how much return on investment it will bring.
We must place the significance of technology in the industry and on the track, and judge its true importance at a macro level, so as to make good investment decisions.
Let’s get to the point. Let’s talk about my research and analysis ideas on the LSD track, as well as my investment decisions on specific projects such as Lido and SSV. I hope more friends can understand the concept of crypto risk value investment.
What exactly is an LSD track?
"LSD" is an English abbreviation, and its full name is Liquid Staking Derivatives, which is Liquid Staking Derivatives.
Staking is one of the "mining" methods often referred to in the encryption industry. For example, Bitcoin relies on solving problems to verify transactions, so it requires computing power support, which we call the proof-of-work mechanism (POW).
A way to verify on-chain transactions corresponding to POW is called the Proof of Stake mechanism (POS).
Users need to prove ownership of a certain amount of digital currency. The way to prove it is to stake the tokens you own in the blockchain network and earn income from it. The source of income is the tokens produced on a certain chain.
For example, most of the public chains we are familiar with, such as EOS (eos), Solana (sol), Tezos (XTZ), and Cardano (ADA), are all proof-of-stake mechanisms (POS) or proxy proof-of-stake mechanisms (DPOS).
To simply understand, pledging the tokens you hold onto the corresponding blockchain and obtaining staking income is called liquidity staking derivatives.
However, it is not easy for users to directly participate in the native staking of various public chains. The threshold for funds, income, operation, and learning is very high. For example, EOS needs to run for super nodes, and Ethereum also requires 32 ETH to start, which is very difficult for most users to participate and obtain staking benefits.
Therefore, the LSD track began to slowly derive service projects. Such as P2P Validator and various centralized exchanges, have begun to provide simpler pledge channels to earn handling fees.
Among them, according to different pledge methods, more subdivided fields have been derived. For example, there is officially supported custody-type pledge, where users only need to pledge tokens without the need for hardware to run nodes; and for example, group-type pledge, where a few people gather enough funds and submit them to a third-party platform for custody.
The above two are decentralized pledge methods, running on smart contracts. The other is to pledge to a centralized exchange, and the exchange will provide you with interest. As for whether the funds are actually put on the chain, or used Elsewhere, it becomes a black box.
The LSD track I don’t like
*The development logic of liquidity staking based on automated market makers
Strictly speaking, the above is only LSD of POS. As early as July 2020, the source of the DeFi explosion was the emergence of liquidity staking for automatic market makers.
Although many DeFi staking yields at the time were beyond imagination, various so-called “head mines” could earn several times or even dozens of times the income.
However, this high rate of return is bound to be unsustainable, because as the number of people participating in staking and the market cools down in the future, the rate of return of LSD will definitely decrease to a state similar to the risk-free rate of return.
Therefore, in comparing the major DeFi track projects such as AAVE\UNI\SNX and the subdivided pledge derivatives track, we decisively focused on the native DeFi sector.
This is also true. Through market verification, the return on investment of DeFi 1.0 projects at that time was far more segmented.
*The development logic of POS-based liquidity staking
After experiencing the boom of DeFi and NFT, at the end of 2020, the explosion of public chains such as BSC, Solana, and Terra triggered another round of hot attention for LSD.
As mentioned above, the income of LSD service providers comes from handling fees. So the biggest problem facing the LSD track is that the ceiling is too low.
At that time, the craze of liquidity mining had passed, and the yield rate had returned to a relatively normal stage. Solana’s annual staking yield is 1.5~5%, AAVE’s is 6~7%, and the staking yields of other major leading projects are maintained at this level.
However, when I studied and judged the LSD track again, I found two very critical issues:
1. The pledge rate of major POS public chains has remained high (generally 60~70%), and it is difficult to have endogenous growth opportunities.
2. The profits of the LSD track are limited by the market value of the public chain. Except for Ethereum, the total market value of the top 10 POS public chains is only a hundred billion US dollars, and the imagination of the track is lackluster.
Then, I judge that the LSD track needs to open up the ceiling, and it must become the risk-free rate of return in the industry, so as to obtain a market size similar to the debt market in traditional finance, so as to obtain a broader valuation imagination.
However, the POS public chain cannot build a long-term moat in terms of ecology or underlying moat. So how can the liquidity staking relying on the POS public chain become the "national debt" of the crypto world?
Obviously, LSD still cannot be administered at this time.
The mutual achievements of Ethereum 2.0 and LSD
As Ethereum 2.0 continues to advance, the key issues on the LSD track have finally been resolved:
The Ethereum Beacon Chain provides new ETH staking rewards, and the endogenous growth rate expands;
The total market value of ETH accounts for 18% of the crypto industry. It has a strong value consensus and can support ETH to become the industry's risk-free interest rate.
Refer to "My View on Ethereum: 5 Years, 100 Million, 30X". Ethereum will still be extremely explosive in the future, and the overall market growth potential is huge.
At this point, I believe that the LSD track combined with Ethereum has become an important track that cannot be ignored, and I have begun to focus on it.
The logic is established, we need market data to support investment decisions.
Ethereum's staking started as early as 2020, and during the same period, Lido, a service agreement that lowered the staking threshold for Ethereum, also appeared. But before making investment decisions, what we need to see is clearer certainty.
So I have been paying attention to the entire Ethereum staking data, and started to do pre-investment due diligence on the LSD track and Lido.
As of June 2022, the entire Ethereum pledge rate is 10%, the amount of ETH pledged is close to 1300W, and the pledge yield is approximately 4.5%. The LSD protocol accounts for 32% of the total amount pledged; exchange pledges account for 28%, third-party pledges account for 23%, and the remaining Pools and personal nodes account for about 17%.
Among them, the only one with a leading effect is Lido in the LSD protocol, which occupies nearly 90% of the market share of the entire LSD protocol track and captures more than 3.5 million ETH. The handling fee is 10% of the pledge income.
At this point, we can make a reasonable expectation of the future market and make an expected valuation of Lido.
The current circulating amount of ETH is 120 million. It is assumed that the pledge rate of Ethereum can reach the pledge rate of other public chains (i.e. 60~70%).
Then the number of pledged Ethereums is 72 million; based on Lido’s current 30% share, Lido will capture 21.6 million ETH. Based on a 4% staking yield and a 10% handling fee, Lido’s annual income is approximately 86,400 ETH.
Intervene in the price of ETH. If ETH returns to 4.8KUSDT in the bull market, Lido's annual income will be 414 million USDT; if ETH reaches 10KUSDT in the next bull market, Lido's annual income will be 864 million USDT.
In the last bull market, uniswap had a maximum revenue of US$1 billion, a fully diluted market value of nearly 40 billion, and a price-to-sales ratio of 40 times.
*Lido’s price-to-sales ratio is 40 times, then Lido’s market value is 16.56~34.56 billion USDT, and the LDO unit price is 16.5U~34.5U;
*Lido’s price-to-sales ratio is 30 times, then Lido’s market value is 12.42 to 25.92 billion USDT, and the LDO unit price is 12.4 to 25.9U;
*Lido’s price-to-sales ratio is 20 times, then Lido’s market value is 8.28~17.28 billion USDT, and the LDO unit price is 8.2~17.2U.
From the end of June to July 2022, after we completed the position building (0.68U), we immediately announced the research results and investment decisions in the internal community, and announced the investment decisions externally during the live broadcast in mid-July.
It is worth mentioning that the unsiwap protocol itself has zero revenue, and all revenue is distributed to LP; while Lido only needs to distribute 50% of the revenue to upstream node validators such as SSV. Therefore, we have also raised concerns about upstream projects such as SSV in the entire LSD link.
In December 2022, LDO experienced its first major correction. Based on a comprehensive analysis of the market, we believe that the long-term logic of the LSD track has not changed. At the same time, after the market reached a periodic low due to negative expectations, we once again announced a new decision-making plan. .
This is my overall approach to the LSD track from intervention analysis to investment decision-making. I think the two most important points in investing are:
1. We must maintain in-depth and macro thinking about the development of the industry. Because only in this way can we see farther and deeper than others, and grasp the key issues that really affect investment results in advance.
2. An investment system must be established. Because only a complete investment system can support you in transforming your leading knowledge into rational investment decisions and continuous position actions.
If you only rely on technology, K-line analysis, or news to participate in speculation without logical support, in the end you will not only fail to achieve super returns on any project, but you will also suffer from ignorance of the market. , leaving empty.
In the future, I will continue to share my research and judgment on industries, tracks, projects, and investment logic in articles.
that's all.
