Table of Contents 1. Three major narratives lead the LSD track 2. Opportunities and challenges of the LS protocol 2.1. Lido's moat and challenges 2.2.1. Moat: right time, right place, and right people 2.2.2. Challenge: Lido tends to be centralized 2.2. Chasers seek opportunities in innovation 2.3. Liquidity pledge under the Web3 narrative 3. LSDFi continues to innovate in applications 3.1. Stablecoins: Lybra&CrvUSD 3.2. Lending: Alchemix&Instadapp 3.3. Advanced derivatives: Pendle&Flashstake 4. Two solutions help decentralize staking 4.1. DVT technology and SSV protocol 4.2. Re-Staking and EigenLayer protocol 5. Many new capital favorites are ready to go 01. Three major narratives lead the LSD track
After the transition from PoW to PoS, the scale of Ethereum staking has continued to rise, and the staked Ethereum is redeemable after the Shanghai upgrade. This event has promoted the rapid growth of the scale of Ethereum staking, with liquidity staking as the dominant force, and formed a situation of "three major narratives leading the development of the Ethereum LSD track" around liquidity staking.
The so-called "three major narratives" are shown in Figure 1-1, which refer to three closely related ecological links and corresponding business forms formed around liquidity pledge, each with its own focus, or three LSD branch tracks. They are combined together to form a relatively complete closed loop of liquidity pledge business.
Figure 1-1 Three major narratives of the liquidity pledge track
Specifically they are:
LS protocol and LSD: the protocol that provides liquidity staking services and its derived liquidity staking certificate LSD, such as Lido's stETH/wstETH, Frax's sfrxETH, Rocket's rETH, Swell's swETH, etc. The liquidity staking protocol lowers the threshold for users to participate in staking, improves staking efficiency, and creates liquidity and income for pledged assets through LSD. LSD application scenario LSDFi: LSD is a strong consensus interest-bearing asset with programmable, composable, and free flow characteristics. It can be applied to various DeFi scenarios to meet investors' different needs for capital liquidity, capital efficiency, income strategy, and risk management, thus forming various LSDFi business forms. For example, by depositing stETH in Pendle, you can obtain PT (principal token) and YT (income token), and thus provide different income and risk strategies. Decentralized solution: In view of the "centralization" trend and risks brought about by the rapid development of the current liquidity staking protocol dominated by Lido, there are currently two mainstream solutions to ensure the security and decentralization of the blockchain network. One is DVT technology, and related implementation protocols include SSV.Network, Obol Labs and other projects. The other is Re-staking, such as EigenLayer. 02. Opportunities and Challenges of LS Protocol
Most of the current mainstream public chains have adopted the PoS consensus mechanism, which requires staking public chain tokens to produce blocks for the network, verify transactions and provide security, so staking public chain tokens is a rigid application scenario for POS public chains, which provides the necessary conditions for the germination of the liquidity staking ecosystem in various public chain ecosystems. Compared with local staking, liquidity staking not only maintains a stable risk-free return, but also obtains capital liquidity and diversified returns at the same time, which provides sufficient conditions for the rapid development of the liquidity staking ecosystem.
Although the development of the liquidity staking ecosystem is spreading to other POS public chains, the liquidity staking ecosystem on Ethereum is still the current mainstream. It can be said that Ethereum and its ecological development largely reflect the current development status and trends of the crypto industry and have become the main target of observation.
Lido is the largest liquidity pledge protocol in the Ethereum ecosystem, and a fundamental and competitive pattern of one superpower and many strong players has been formed around it. On the one hand, for leaders such as Lido, how to use existing advantages to maintain and expand market share, prevent share loss or being overtaken; at the same time, we must also beware of industry counterattacks caused by excessive "centralization"; on the other hand, for followers, they can judge the situation, play to their strengths and avoid their weaknesses, accurately position themselves, and make innovative breakthroughs in order to get a share of the pledge pie, or create new demand, expand their territory, and bring about a new situation.
Above, we have briefly reviewed the crypto industry, Ethereum public chain, and the competitive landscape within the Ethereum ecosystem. The purpose is to establish an industry background and fundamentals. This section will be based on three aspects:
Lido has become a leader in liquidity staking and even the entire Ethereum staking. The advantages it possesses and the challenges it faces will become challenges and opportunities for other LS protocols; followers need to analyze trends, capture innovation space, and formulate competitive strategies with reference to Lido’s strengths and weaknesses, and seek development opportunities through innovation; Lido has taken advantage of Ethereum’s PoS transformation to become the entrance for ETH staking traffic. So, looking at the entire industry, will it bring long-term opportunities to other public chains, especially the liquidity staking protocols of the Polkadot ecosystem, under the grand narrative of Web3? Part.2.1 Lido’s moat and challenges
2.1.1. Moat: The right time, right place, and right people
The right time refers to events or trends that have a significant impact on the development of the industry.
For Lido, a major event is Ethereum’s transition from PoW to PoS, a trend that started in 2020 and lasted for 1.5 years.
The former makes Ethereum staking a rigid demand, and the scale of staking continues to grow. However, staking locks liquidity and creates conditions for the birth of liquidity staking. The latter helps to accelerate the expansion of the scale of liquidity staking because compared with other staking models, Ethereum pledged at high prices in a bull market can obtain liquidity through liquidity staking, reducing opportunity costs and bringing higher returns, thereby attracting a large number of staking users to enter the liquidity staking market.
In December 2020, after a year of bottoming out, the crypto market started a vigorous bull market; on December 1, 2020, Ethereum began its transition to PoS by launching the beacon chain; on December 18, 2020, Lido Finance officially launched ETH liquidity staking. It can be said that Lido has grasped the timing of entering the market well and met the two core needs of capital for liquidity and returns.
Geographical advantage refers to Lido’s own positioning, competition and development strategies, and network effects.
Centralized exchanges (CEX) are vested interests in the "Exchange era". They have long-term accumulation and strong strength in terms of user scale, capital reserves and flexibility, and operational capabilities. They became early winners in the competition at the beginning of Ethereum staking, such as CEX's Kraken, Binance and Coinbase. In July 2021, they occupied 29.3% of the Ethereum staking market, while Lido only accounted for 9%, as shown in Figure 2-1.
Figure 2-1 Competition landscape of Ethereum staking market (July 2021)
The "centralization" of the node network goes against the vision of Ethereum's decentralization and may bring fragility to the Ethereum network. Decentralization is the future, and the industry calls for a "decentralized, trustless" staking pool. Lido has emerged as the "guardian of ETH2.0 decentralization" and has captured the hearts of investors in the process of continuous decentralization.
Lido's road to counterattack lies first in that it stands on the side of users and fully meets the user's staking needs - the core is to lower the staking threshold, create liquidity of pledged assets and increase returns. In this process, Lido has achieved precise positioning - a decentralized, trustless liquidity staking service provider, and stands out in the competition with CEX.
As shown in Figure 2-2, as of July 22, Lido occupied 31.8% of Ethereum's overall staking market and 74.22% of the liquid staking market, taking the throne.
Figure 2-2 Lido’s share of Ethereum’s overall staking and liquidity staking
The correct positioning has enabled Lido to gain development opportunities, but the key factor in winning the competition and achieving such impressive results should be attributed to the network effect brought by Lido's staking derivative asset stETH, which includes stETH's market share, liquidity and composability (integration).
Refer to our analysis in "Creating liquidity for strong consensus interest-bearing assets to drive returns, LSDFi has activated DeFi and may gain 50 times growth space":
In terms of market share, Lido's stETH and stETH-packaged wstETH account for 88.25% of all LSD markets, taking an absolute leading position.
In terms of building liquidity, Curve has the largest stETH-ETH liquidity pool, holding 144,342 stETH and 142,547 ETH, with a TVL of US$538 million; while Balancer has built the largest wstETH liquidity pool, holding 25,312 wsETH and 25,501 ETH, with a TVL of US$102 million.
In terms of composability, composability means the possibility of obtaining higher returns and higher capital efficiency, which is happening on stETH and wstETH. stETH and wstETH are supported by DeFi protocols such as AAVE, Uniswap, Compound, MakerDAO, Lybra, etc. For example, 911,108 stETH are pledged in the Aave V2 lending pool, with a TVL of US$1.709 billion, 314,500 stETH in MakerDAO wstETH-A, with a TVL of US$712 million, and 201,200 stETH in Lybra Finance, with a minted stablecoin eUSD TVL of more than US$377 million... stETH and wstETH are widely used in various scenarios such as DEX, lending/CDP, yield aggregators, fixed income, risk grading management, leveraged pledge, etc., to meet users' needs for capital liquidity, capital efficiency, diversified returns, and risk management, injecting vitality into DeFi and ultimately presenting a network effect.
Harmony refers to the founding team, the Ethereum community and active investment institutions working together to promote the development of Lido. The founding members are early participants, investors and entrepreneurs in the crypto industry. They mainly come from P2P Validator, a professional non-custodial staking platform with rich experience in this field.
Community support. Ethereum needs to develop a diversified staking model, especially a decentralized, trustless but influential staking pool to compete with CEX to balance the adverse effects of centralization. Lido has received strong support from Ethereum core developers and the community in the competition. However, when Lido was in an absolute leading position in market size, the community also expressed concerns about its "centralization" and hoped that it would formulate improvement measures and strategies to prevent it from bringing systemic risks to the Ethereum ecosystem.
Investment institutions. Lido has completed multiple rounds of financing, with a financing amount of nearly 150 million US dollars. Its investors include almost all active investment institutions in Ethereum and a considerable number of DeFi blue-chip founders. Investment institutions represented by Paradigm not only provided strong financial support, but also vigorously promoted Lido's cooperation with many DeFi protocols, and guided Lido's development in governance, decentralization and development routes.
In short, whether it is the founding team, the Ethereum community or investment institutions, they have jointly promoted the development of Lido.
2.1.2 Challenge: Lido tends to be centralized
Lido appeared as the "guardian of ETH2.0 decentralization" and won the competition with CEX and others in the staking market, occupying 31.67% of the entire staking market and maintaining the highest growth of 2% in the past 6 months, as shown in Figure 2-3.
Figure 2-3 Ethereum staking market distribution and growth
Lido is becoming the center of the staking market, and its derivative token stETH's deep liquidity, flexible composability, lower staking fees, and financial incentives continue to attract stakers to Lido and maintain its market dominance. Coupled with CEX's market share of 18%, Ethereum network staking tends to be centralized and centralized, which may pose a systemic risk to the Ethereum network.
The industry has called on Lido to impose self-restrictions. Superphiz.eth, a community security consultant for the Ethereum beacon chain, said that staking service providers should limit the verification ratio to below 22%, while Ethereum founder Vitalik Buterin suggested that it be controlled below 15%. However, the Lido community rejected the self-restriction proposal by an overwhelming vote (99.81%) in June 2022.
The Lido team expressed their view that the core reason for creating the Lido protocol is to prevent centralized entities or exchange groups from dominating the Ethereum staking market. Without Lido, the market will be controlled by centralized exchanges that already have power in the ecosystem, which will lead to a worse situation. Lido is taking measures such as DVT technology to make its node operators more decentralized and let them supervise each other to ensure the security and decentralization of the blockchain network.
Part.2.2 Followers seek opportunities in innovation
After Ethereum switches to PoS, as long as the network operates normally, staking will be a permanent demand, which provides a staking market with stable returns and attracts many staking service providers to participate. So what are the differences between different service providers and how do they win the market?
Providing staking income with comparative advantages may be the most direct market expansion strategy, so we compared the yields of various service providers, as shown in Figure 2-4.
Figure 2-4 Ranking of yield and effectiveness of various pledge service providers
A comprehensive comparison of the yield data of all time periods of various LSD protocols, StakingPool and CEX shows that there is not much difference between the TOP10 service providers, and the average level is between 5% and 5.5%, so APR is not an important factor causing business gaps.
In order to further understand the development status of liquidity staking protocols, we selected 5 liquidity staking protocols from the TOP10 market share for horizontal comparison (as of 2023-07-25), as shown in Figure 2-5.
Figure 2-5 Development of Liquidity Staking Protocol
From a preliminary analysis, all liquidity pledge protocols were launched between 2020 and 2021, and experienced the same major events of Ethereum PoW to PoS and industry cycle changes. However, compared with Lido, other liquidity pledge protocols have huge differences in pledge market share and LST TVL. Possible reasons for this competitive landscape are:
The decision-making and execution capabilities in response to major industry events and in the industry cycle; Different positioning, innovation and strategies show different efficiencies, development stages and development spaces; The power of industry capital is strong, and the capital that has joined the project has played an important guiding and promoting role in the projects it invests in at this stage. Part.2.3 Liquidity staking under the Web3 narrative
Consider this question: most of the current public chains are based on PoS consensus, and the staking of each PoS public chain has started since the launch of its main network. In addition, except for ETH, the staking rates of other mainstream public chains are above 50% on average, and the staking market value is between $2 billion and $9 billion, as shown in Figure 2-6.
Figure 2-6 PoS public chain pledge related data
But why did it take until Ethereum switched from PoW to PoS for liquidity staking to quickly become popular and become the mainstream narrative?
Do other public chains have no liquidity pledge? Of course not! The Cosmos ecosystem has Stride, pSTAKE Finance, Quicksilverhe, etc., Polkadot has Acala, Bifrost, Parallel, etc., and the new public chain Aptos has Tortuga and Ditto, etc. But the common feature is that both the liquidity pledge share and the TVL of liquidity derivative assets are not large-scale. One of the obvious reasons may be that DeFi in these public chain ecosystems has not yet developed, and LSD lacks application scenarios.
But this situation is about to change, because from the perspective of the development of the crypto industry, there is a mainstream narrative at each stage. This narrative is decentralized encrypted digital currency in Bitcoin, decentralized finance in Ethereum, and Web3 in Polkadot, corresponding to a decentralized society and a decentralized innovative digital economy. Bitcoin, Ethereum, and Polkadot are different public chains, but they also represent different stages of the development of the crypto industry and the infrastructure required. From currency, finance to economy, the crypto industry is forming a complete closed loop.
Polkadot is built on the PoS consensus mechanism, and the public chain token DOT staking has become a rigid demand for network operation to support the operation of various Web3 economic activities, which also lays the foundation and provides development space for the development of liquidity staking. In other words, under the grand narrative of Web3, as various aspects of the Polkadot ecosystem such as stablecoins, DeFi, XCM/XCMP, etc. mature and improve, liquidity staking may usher in its highlight moment.
We also observe that in the Polkadot ecosystem, Bifrost is a scalable, non-custodial, decentralized full-chain liquidity staking parachain. Its concept and implementation of "full chain" means decentralization, shared security, and cross-chain interoperability, which is very consistent with Polkadot's own philosophy and operating mechanism.
Currently, Bifrost has launched liquidity staking for DOT, ETH, FIL, and vGLMR, with the highest annualized return reaching 26.15%, as shown in Figure 2-7.
Figure 2-7 Bifrost’s liquidity pledge
Bifrost's mission is to aggregate more than 80% of the staking liquidity of the PoS consensus chain through cross-chain derivatives and become a service provider of underlying liquidity for the innovative digital economy of Web3. Then, with the development of Polkadot and Web3, Bifrost will also gain continuous development space.
03. LSDFi continues to innovate in applications
In Section 4.2 of "Creating liquidity to drive returns for strong consensus interest-bearing assets, LSDFi has activated DeFi and may gain 50 times of growth space", we conducted a horizontal comparison of the TOP10 LSDFi protocols. Here we focus on analyzing the mechanisms and innovations of LSDFi protocols in several different application directions.
Figure 3-1 TOP10 LSDFi
Figure 3-1 shows the TOP10 LSDFi, among which Lybra, crvUSD, Raft and Gravit are 4 stablecoin protocols, accounting for 70.5% of the total market share; IETH and Alchmix are 2 lending protocols, accounting for 12.47%; 1 advanced derivatives protocol Pendle, accounting for 7.56%; the rest are gambling and staking mining, accounting for 2.51% and 2.17% respectively.
It can be seen that stablecoin protocols occupy the main market of LSDFi, which is closely related to the wider application scenarios and better liquidity of stablecoins. Lending and advanced derivatives also occupy a considerable share. Next, we will focus on analyzing these three types of projects.
Part.3.1 Stablecoins: Lybra & CrvUSD
Lybra: A decentralized, interest-bearing stablecoin protocol with zero minting cost and full chain integration
Lybra Finance is an interest-bearing stablecoin protocol with 0 minting cost and LayerZero full-chain integration as its main features. Currently, Lybra protocol ranks first in LSD TVL, which is $356.17m, with collateralized ETH value of $14.24m and a total of $250m in eUSD/pUSD in circulation.
0 minting cost. Users can deposit ETH or stETH as collateral, and in V2 they can also deposit rETH, WBETH, and swETH, and then borrow Lybra's stablecoin eUSD with a collateral rate of up to 170%. Lybra does not charge any eUSD minting fees or interest on the borrowed amount, and can earn an 8% APY on the interest-bearing stablecoin eUSD.
LayerZero full-chain integration. eUSD can be converted back and forth with peUSD. peUSD is a full-chain version of eUSD supported by LayerZero's full-chain homogeneous token (OFT) standard. This approach makes the eUSD liquidity pool full-chain oriented, eliminating the need to build a separate eUSD liquidity pool on each chain, avoiding the problem of liquidity pool fragmentation; at the same time, it reduces the complexity of bridging and packaging procedures and related transaction fees. This means that Lybra is able to seamlessly integrate free full-chain functions into its interest-bearing stablecoin products, and the ecosystem will inevitably move towards a full-chain model, reflecting economic and technical efficiency.
The V2 version also includes features such as flash loans, dynamic liquidity provision (DLP), pegging stabilization mechanism, and token destruction mechanism. For details, please refer to: https://medium.com/@Lybra_Finance/a-simple-guide-to-lybra-v2s-market-leading-features-348068cc1e0
Regarding the source of income. In addition to holding eUSD to earn 8% interest, users can also provide liquidity to the eUSD pool to earn income, and use eUSD to buy more ETH to leverage long ETH. In addition, eUSD minters can also receive Lybra's governance token LBR incentives, and by staking LBR, users can participate in Lybra's governance and earn a portion of the protocol revenue.
crvUSD: A native CDP stablecoin based on Curve Finance’s LLAMMA
crvUSD is a decentralized collateralized debt position (CDP) stablecoin protocol launched by Curve Finance, which is the largest stablecoin trading DeFi protocol. Its loan liquidation AMM algorithm (LLAMMA) plays a key role. As a stablecoin protocol, crvUSD features the LLAMMA algorithm.
When the value of the borrower's collateral begins to fall, LLAMA will put the position into a "soft liquidation" state, liquidating part of the collateral into crvUSD. As the value of the collateral rises again, crvUSD is converted back to the original collateral asset.
This mechanism is different from traditional liquidation, in which if the value of the collateral falls beyond a threshold, the collateral will be liquidated all at once, and after liquidation, the borrower will hold the remaining stablecoins instead of the collateral assets, exposing them to losses beyond necessity. However, LLAMA's gradual liquidation can avoid both losses.
This model of crvUSD reduces liquidation risk and liquidation losses, and can attract more liquidity providers, especially for users who adopt leverage strategies.
In terms of earnings, the constant balancing of user collateral by LLAMA will generate more trading volume in the Curve pool, thereby generating more earnings for the protocol and veCRV token holders. In addition, crvUSD loans may also generate lending fees, which creates a new source of income for the protocol and its veCRV token holders.
Currently, crvUSD ranks 2nd in LSDFi, with LSD TVL of $85.25m.
Part.3.2 Lending: Alchemix & Instadapp
AIchemix: Non-liquidating self-repaying interest-free loans
Alchemix currently offers two derivative assets: alUSD and alETH. alUSD is collateralized by Dai, USDC, USDT, and FRAX, while alETH is collateralized by ETH, rETH, stETH, and frxETH.
Alchemix’s implementation mechanism enables users to earn tokenized value on their deposits and automatically repay borrowers’ loan balances over time using the power of DeFi. Alchemix is conceived as a new tool to leverage the time value of money.
Here's an example of how it works: For example, if you deposit money in a bank, the bank pays you interest and gives you a credit card. The credit card allows you to spend 50% of your deposit without paying it back, and the interest on your deposit helps you pay for the credit card.
Alchemix is currently deployed on the Ethereum mainnet, Optimism, and Fantom networks. It is currently ranked 10th in LSDFi, with LSD (alUSD and alETH) TVL of $13.52m and the total TVL of the protocol of $57.76m.
Instadapp Lite V2: A smart contract vault that automates DeFi strategies
Instadapp has three products: Avocado, Instadapp Pro and Instadapp Lite. Avocado is a Web3 wallet with abstracted accounts, Instadapp Pro is a lending aggregation platform, and Instadapp Lite is a smart contract vault that autonomously executes DeFi strategies. Currently, the V2 version is online.
Instadapp Lite V2 uses stETH as collateral and focuses on a variety of stETH-related treasury strategies. The treasury strategy is a smart contract supported by Instadapp, whose goal is to execute DeFi strategies and earn returns, and leverage multiple lending protocols such as Compound, Morpho, AAVE, etc. to amplify returns.
iETH is a deposit certificate for stETH deposited in Lite V2, so iETH can obtain the staking income of Ethereum, and iETH can also benefit from the powerful Instadapp Pro lending aggregation platform and combine with DeFi Lego to earn more income. iETH has a higher annualized return than stETH, as shown in Figure 3-2.
Figure 3-2 Comparison of yields between iETH and stETH
Currently, Instadapp Lite V2 ranks 3rd in LSDFi, with an LSD TVL of $78.37m.
Part.3.3 Advanced derivatives: Pendle & Flashstake
Pendle: DeFi yield trading protocol enabled by yield tokenization and AMM
Pendle Finance is a DeFi yield trading protocol deployed on Ethereum and Arbitrum chains. It uses innovative asset splitting and trading models to provide users with more asset utilization methods and profit opportunities.
Pendle splits LSD assets such as stETH into two parts: principal PT (Principle Token) and yield YT (Yeild Token), realizing the separation of principal and interest and independent trading, bringing flexible income and risk control strategies, such as purchasing assets at a discount to obtain low-risk fixed income, or going long or short on yield based on expected yields.
Specifically, if the expected rate of return rises, PT can be sold and YT can be purchased; if the expected rate of return falls, YT can be sold and PT can be purchased. Alternatively, YT can be purchased directly to obtain the income rights of Staking, while saving the cost of purchasing the principal, thereby improving capital efficiency; various hedging strategies can also be used to protect investors' positions, such as future rate of return contracts.
At the same time, Pendle provides AMM Pool to support the liquidity of PT and YT.
Currently, Pendle ranks 5th in LSDFi with an LSD TVL of $55.75m.
Flashstake: Immediately receive future returns on invested assets at a fixed rate
Flashstake provides users with flexibility in terms of returns, allowing users to immediately receive prepaid returns on deposited assets at a fixed interest rate within a set period. For example, if you stake 100 stETH for 180 days, the Flashstake protocol will immediately give you 2.82 WETH, with an annualized return of about 5.8%.
As shown in Figure 3-3.
Figure 3-3 Flashstake operation mechanism
The 2.82WETH you received did not come out of thin air. It came from the exchange of income between you and ordinary staking mode users. In other words, the staking income of ordinary staking users is 5.8% annualized, and you will receive the income of 180 days immediately. As compensation, ordinary staking users will receive the income of your assets in the next 180 days. In essence, you are shorting the income, while ordinary staking users are long on the income. It can be seen that Flashstake brings flexible income and risk management strategies.
Currently, Flashstake ranks 13th in LSDFi, with an LSD TVL of $3.37m.
summary
Above we have briefly sorted out the LSDFi protocols in different application directions. It can be seen that this track has just started, and the players have entered or are waiting to enter, but the horn has been sounded and they need to buy time.
Based on LSD's innovative assets and its DeFi innovation, it is like a seed after a spring rain, with the vitality and strong tension to break through the ground. After going through an industry cycle, just like going from summer to autumn, some sub-tracks will gradually take shape, and some LSD and LSDFi will win the market and establish their leading position.
04. Two solutions to help decentralize staking
The liquidity staking protocol presents a situation of one super and many strong, with Lido as the main one. There are even two addresses (Lido and Coinbase) that control more than 45% of Ethereum transactions. This is contrary to the goal of Ethereum's decentralization and may even bring security risks to the network.
This year, @DeFi_Taha, @superphiz, @scott_lew_is and others have posted on Twitter, saying that Lido Finance poses a threat to the Ethereum network. The most direct argument to support this argument is that there are more than 160,000 ETH stakers, but only 29 node operators (data from May); and Lido also accounts for 30% of the total Ethereum stake, which means that 30% of all PoS validators are controlled by a small number of entities. If an entity exceeds key consensus thresholds, such as ⅓, ½ and ⅔, it can be used to increase value extraction, control block timing, and weaken anti-censorship, posing a threat to the Ethereum network.
In response to the centralization of the staking network, there are two mainstream technical solutions in the industry, one is the decentralized verification technology DVT, and the other is Re-Staking.
Part.4.1 DVT technology and SSV protocol
DVT, Distributed Validator Technology, enables Ethereum Proof of Stake (PoS) validators to run across multiple nodes and collaborate in real time to verify transactions, thereby building a distributed validator network.
The main advantage of DVT technology is that it can form a distributed validator network, which relies on the consensus mechanism (IBFT) to jointly perform the duties of the validator like a blockchain node network, and can achieve the diversity of validator clients, improve fault tolerance, and reduce the risk of single point failure of the validator.
Currently, the main protocols using DVT technology include SSV.Network, Obol Labs, etc. DVT technology was formerly called SSV (Secret Sharing Validator), and when the SSV.network network was launched, it was renamed DVT. SSV.network is the first practical solution based on DVT technology. Here we focus on SSV.network.
SSV.Network: Shaping the Future of Distributed ETH Staking
SSV.network is a trustless, permissionless, and ready-to-use validator infrastructure.
Positioning: Public staking infrastructure. SSV.network is open and is a staking infrastructure built for the public good. Whether it is developers, independent stakeholders, institutions, or service providers, the staking infrastructure can be used quickly and reusably, making SSV.network a powerful platform for any staking-based use case.
Role: Promote network decentralization. The SSV.network protocol is built on a node network and can distribute the operations of ETH validators between 4 or even 13 nodes. This greatly improves the decentralization of the Ethereum validator layer.
Effect: Forming a network effect. The reusability of the validator infrastructure saves users time and resources in building and maintaining infrastructure, simplifies development work and ultimately accelerates innovation in the staking industry. At the same time, the openness and inclusiveness of SSV.network allows more participants to participate in the network, thus forming a stronger ecosystem.
Currently, SSV.network is testing and adopting multiple liquidity staking protocols. For example:
Lido V2: By integrating the SSV.network solution, Lido V2 will be able to add validators run by a mix of permissioned and unpermissioned participants, which is a major improvement in the decentralization of Lido node operators. In addition, it can reduce the risk of staked ETH being deducted due to server downtime and reduce related operational risks. Stakewise V3: Stakewise V3 is adopting the SSV solution in a new staking vault. With this solution, the system can distribute the verification workload among multiple nodes, thereby minimizing the risks associated with single points of failure or manipulation by a single entity. With this upgrade, Stakewise V3 becomes a completely permissionless system. Anyone who has the ability to run a node can create their own staking pool, building an open market where stakeholders can choose different operators according to their needs. Rocket Pool: For Rochet Pool, adopting the SSV solution helps solve the maintenance and performance problems faced by individual stakers, allowing it to focus on protecting the network and earning rewards instead of solving problems. At the same time, it provides a more level playing field for individual stakers, bringing new advantages, such as four distributed nodes can form a DVT cluster in a mini-pool, with each node depositing 2ETH, thereby reducing the staking cost to below the 8ETH requirement and improving capital efficiency. Part.4.2 Re-Staking and EigenLayer Protocol
Re-Staking is to stake the staked ETH for the second time, using the existing Ethereum trust network to protect other infrastructure and middleware layers. This is a new primitive for cryptoeconomic security and consensus. The representative project based on this implementation is EigenLayer.
EigenLayer is an Ethereum-based protocol that introduces re-collateralization, allowing ETH to be reused on the consensus layer. Users who natively stake ETH or use Liquid Staking Tokens (LST) can choose to join the EigenLayer smart contract to re-collateralize their ETH or LST and extend cryptoeconomic security to other applications on the network to earn additional rewards.
With EigenLayer, Ethereum stakers can obtain collective security by re-staking their staked ETH and choosing many services to ensure security. At the same time, EigenLayer can also reduce the capital cost of stakers' participation and significantly increase the trust guarantee of a single service.
The Re-Staking protocol mechanism of EigenLayer is shown in Figure 4-1.
Figure 4-1 EigenLayer's Re-Staking protocol mechanism
The re-staking narrative is expected to become the consensus security hub of the LSD track, but it also faces some economic and technical challenges.
Vitalik once published an article titled "Don't Overload Ethereum's Consensus" pointing out that re-staking is a set of technologies used by many protocols including EigenLayer, and Ethereum stakers can use their stakes as deposits for another protocol at the same time. In some cases, if they misbehave according to the rules of other protocols, their deposits will also be cut... Although there are some risks in the dual use of ETH staked by validators, it is fundamentally fine, but trying to "recruit" Ethereum social consensus for the application's own purposes is not the case.
@sreeramkannan, the founder of EigenLayer, also responded to this, believing that Vitalik's warning is consistent with what EigenLayer advocates, and emphasized that the EigenLayer protocol is built on Ethereum, the largest programmable decentralized trust network, and splits Ethereum's trust layer, so the components of the trust network can be reused for other purposes. This trust reuse has three aspects: economic trust, decentralized trust, and ETH validator commitment, and EigenLayer is a general platform that allows builders to mix and match these elements to create an appropriate trust model.
05. Many new capital favorites are ready to go
This article comprehensively sorts out the LSD track from three dimensions: liquidity staking agreement, liquidity staking DeFi agreement, and decentralized solutions, and makes a summary analysis of representative agreements. It believes that the three major narrative directions have basically been formed and will burst out with strong vitality in the next industry cycle, showing a trend of vigorous development.
Because, from the analysis we see several typical characteristics of this industry:
Long-term capital supports real application scenarios to form fundamentals and future space: Ethereum-based PoS public chains provide real and sustainable application scenarios for staking, with relatively stable, continuous and safe staking returns. This is the investment preference of long-term large capital, which will form the fundamentals of industry investment and development space. The current total amount of Ethereum staking has reached 47 billion, and the staking rate is only about 20%, which still has a large room for growth. Many LSTs will become the new favorites of capital, and LST and LSDFi will strengthen each other in integration: Although a large number of LST and LSDFi innovations have emerged, they are still in the early stages, just like when Uniswap, Compound and other protocols were first launched. Although they have driven the development of the industry, only when their infrastructure is transformed into infrastructure, the industry development will enter the next stage. In the future development, many innovative LST assets such as stETH, rETH, vDOT, etc. will be blessed by capital and become the new favorites of capital, and will be integrated into a wide range of DeFi and Web3 application scenarios due to factors such as free liquidity and composability, forming a network effect; LST and LSDFi will strengthen each other in integration, promoting the emergence of new competition and development trends. Innovation and new narratives will bring new development prospects for the industry: some innovations have just begun and are far from being developed on a large scale. For example, Pendle tokenizes yields and creates a yield market in DeFi, which may release a huge derivatives market. In addition, under the grand narrative of Web3, Polkadot and its ecosystem will help the development of the new generation of digital economy. Guided by the innovation of the development of the next generation of digital economy, how the LSD track should be positioned and developed may bring another new prospect.
References:
1.https://dune.com/hildobby/eth2-staking
2.https://defillama.com/lsd
3.https://mp.weixin.qq.com/s/2AMITFUqySXJeU-CM1ZZtA
4.https://dune.com/defimochi/lsdfi-summer
5.https://dune.com/LidoAnalytical/Curve-ETHstETH
6.https://dune.com/LidoAnalytical/Balancer-WETHwstETH
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8.https://dune.com/LidoAnalytical/Integration-monitor-dashboard
9.https://www.stakingrewards.com/proof-of-stake/?page=1
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11.https://v2-test.lybra.finance/
12.https://flashstake.io/
13.https://medium.com/the-crypto-paper/fear-two-addresses-control-40-of-all-ethereum-transactions-e08cc3d34fe6
14.https://docs.eigenlayer.xyz/overview/readme
15.https://vitalik.ca/general/2023/05/21/dont_overload.html
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