In-depth analysis | ETH 2.0 decentralized guardian Lido Finance

Mint Ventures

特邀专栏作者

2021-08-08 17:37 (UTC+8)

This article is about 17228 words, reading the full article takes about 25 minutes

Lido is likely to become TVL's largest DeFi protocol

AI Summary

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Lido is likely to become TVL's largest DeFi protocol

Researcher: Li Yuxuan

first quarter

Research Report Highlights

——

Researcher: Li Yuxuan

first level title

● Through horizontal and vertical valuation comparisons, we believe that: for short-term investors, LDO is currently extremely undervalued; for long-term investors, LDO's valuation is moderate.

second quarter

Basic information of the project

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1. Project business scope

Basic information of the project

Reading extension:"Terra: The Rise of the Stablecoin Legion"

1. Project business scope

Lido Finance's business is for the staking pool of the POS (Proof of Stake) public chain. It currently supports two chains, ETH2.0 and Terra, and may expand to other POS public chains such as Solana in the future.

Reading extension:

"Terra: The Rise of the Stablecoin Legion"

image description

Source https://Lido.fi/

At present, Lido Finance's total locked value (TVL) exceeds US$2.8 billion, of which US$1.75 billion is ETH and nearly US$1.1 billion is LUNA.

2. Past financing situation

Lido Finance has completed two rounds of financing in total:

In December 2020, Lido Finance completed a $2 million financing. Investors include: Semantic Ventures, ParaFi Capital, Terra, KR1, Stakefish, and Staking Facilities, as well as Rune Christensen from MakerDAO, Stani Kulechov from Aave, and Synthetix’s Kain Warwick et al.

In April 2021, Lido DAO passed a proposal to finance LDO tokens reserved by the Ministry of Finance. A total of 100 million LDOs were sold in this round, and a total of 21,600 ETHs were raised, which is equivalent to 0.000216ETH/LDO. The investment was officially concluded on May 5, 21. According to the ETH price on that day, it was about 0.75U/LDO, which means that 75 million US dollars was raised. This part of the tokens will be released linearly in 12 months after the 1-year lock-up period, but its governance rights are given to these investors from the date of investment.

The investment lineup of this round is relatively luxurious, in which Paradigm obtained 70 million LDOs, and the remaining 26 million LDOs were funded by Three Arrows Capital, DeFiance Capital, Jump Trading, Alameda Research, iFinex, Dragonfly Capital, Delphi Digital, Robot Ventures (founded by Compound People's Fund), Coinbase Ventures, Digital Currency Group, The LAO and other institutions, and another 4 million LDOs were allocated to a series of individuals (partially anonymous), including Sushiswap's 0xmaki and Optimism's Jinglan Wang and others.

It can be seen that the investors of Lido Finance include almost all investment institutions active in Ethereum and a considerable number of DeFi blue-chip founders.

3. Team

The founding team is mainly from P2P Validator. P2P Validator is a professional non-custodial pledge platform that supports users to pledge more than 20 tokens of POS mechanism, including ETH, DOT, SOL, ATOM and so on.

Lido's founding members include -

Konstantin Lomashuk, the founder of P2P Validator, was a very early BTC investor and founded the Satoshi Fund in 2015, which focuses on blockchain investment.

Vasiliy Shapovalov, CTO of P2P Validator.

Kasper Rasmussen, he is the CMO of P2P Validator, and before that, he was the Marketing Director of Bitfinex.

In addition, Georgios Konstantopoulos, Hasu and Arjun Balaji from Paradigm conducted in-depth research on Lido Finance and contributed to Paradigm's investment, and the three of them also influenced and even guided the development of Lido Finance on the key decentralization issues of Lido Finance route. Combined with the voting rights represented by a large number of LDOs held by Paradigm and the huge influence on Lido, to some extent, these three members of Paradigm can also be counted as team members of Lido Finance.

4. Historical development

● On November 26, 2020, Lido Finance launched the test network;

● On December 18, 2020, Lido Finance officially launched the pledge of ETH, and launched Lido DAO on Aragon;

● On January 5, 2021, the native token LDO will be released;

● On July 19, 2021, the Lido referral program will be launched, and the Lido referral program will issue 15 LDOs as rewards to the ETH recommended by each user

third quarter

business analysis

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In addition, Lido Finance's stETH has been deeply integrated with various DeFi protocols in less than a year since its launch. We will introduce it in detail in 3.2

first level title

third quarter

first level title

business analysis

1. Industry Analysis

As for the PoS (Proof of Stake, proof of rights and interests) mechanism, it seems that the attitude of the regulatory authorities and Wall Street is much more positive:

● On July 6, 2021, Sygnum, a bank that has obtained regulatory approval from the Swiss Financial Market Supervisory Authority (FINMA) to enter the cryptocurrency market, officially began to provide pledge services for ETH2.0. They have provided pledge services for Tezos before;

● Goldman Sachs pointed out in a recent report that "the advantage of pos is that it greatly improves the energy efficiency of the system, because it rewards miners according to the amount of Ethereum they hold, rather than their processing power, which will end miner rewards "burning electric race"

ETH2.0 staking

In addition to consuming a large amount of energy, PoW mining requires the preparation of mining machines to obtain income. Facing the problem of iterative upgrading of mining machines, PoW mining is a capital-intensive and energy-intensive industry, and the threshold for ordinary users is relatively high. As for POS mining, although the mechanism of each public chain is different, the threshold is usually much lower than POW.

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Top 10 assets ranked by staked asset value https://www.stakingrewards.com/

To sum up, the staking industry where Lido Finance is located has a broad space, and in the future, ETH2.0 will turn to pos, and the entire track is also on an upward path.

On December 1, 2020, Ethereum officially began the transition from PoW to PoS by launching the beacon chain. This means that the consensus of Ethereum will be protected by the validator (Validator) instead of being protected by miners. In the design of Ethereum, each validator node needs to pledge a security deposit of 32 ETH to increase the chance of creating new blocks in the network (and get rewards), and to reach a consensus on the status of the beacon chain by voting. Good behavior of validators will be rewarded with additional ETH, while offline or malicious behavior will be punished. At the time of writing, there are over 200,000 validators on the Beacon Chain, equivalent to about 6.68 million ETH staked (5.5% of total ETH)

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Source https://launchpad.ETHereum.org/en/

In theory, all users can pledge ETH to become a validator to obtain 5%~20% of ETH-based income. But there are still a few major hurdles to this gain—

● 1. The operation cost is high: staking requires considerable hardware, bandwidth costs, and knowledge reserve requirements. Once you go offline or make a wrong operation, you may be fined and confiscated, even the principal;

● 2. High capital requirements: Due to the requirements of the beacon chain, users can only pledge multiples of 32 ETH. While this creates a high threshold, it will also reduce the efficiency of capital utilization (a user with 60 ETH can only run 1 verification node, and the capital utilization rate is just over 50%);

● 3. Liquidity loss: Once deposited into ETH2.0, until the transfer function of the beacon chain is enabled (at least at the end of 2021), all pledges cannot be canceled, which will cause users to lose this part of ETH flow sex. (In fact, all POS public chains will have this problem, but it may not be as extreme as the beacon chain. For the stability of the system, most POS public chains generally still need to pay some time costs to withdraw from the pledge: the unlocking of Polkadot requires 21 days, it takes 7 days to unlock the Binance Chain, and when the transfer function of the Beacon Chain is enabled, it takes at least 27 hours to unlock the ETH - it may be as long as 1 month, depending on the congestion level of the exit pledge).

Obviously, an aggregation platform for stakers - Staking Pool is very useful in this scenario, because the platform can effectively solve the above 1 and 2 -

● For 1, the operating cost is marginally decreasing, and the professional knowledge of the platform can avoid operational risks;

But for users, the most important thing is actually 3. The lock-up period of at least one year when the beacon chain goes online (it is still half a year now) will greatly affect the confidence and enthusiasm of ordinary people to participate in ETH2.0. For this problem, all staking pools can theoretically reserve a part of ETH reserves to meet the withdrawal needs of staking users in a way similar to banks, so as to achieve a balance between users' staking needs and liquidity needs, but due to the possibility The current mainstream platforms have not adopted this kind of scheme for the risk of running out. Players including CEX and Lido Finance's solution to problem 3 are mainly to establish and stimulate the liquidity between ETH2.0 pledge certificates and ETH.

2. Project competition landscape

Staking service providers in the market are mainly divided into two types——

● The first category is service providers that only solve problem 1, such as staked.us and stakefish. The services they provide are similar to PoW mining machine hosting providers, and the fees are generally charged monthly according to the number of nodes. Such solutions have low barriers to entry and cannot generate network utility.

● The second category is service providers trying to solve problems 2 and 3, such as various CEXs and Lido. This type of solution will have higher value because it provides an experience far beyond the user's own operation. This type of service provider is also the main object of our discussion below.

It is worth pointing out that if you want to solve 2 and 3, you must not be able to provide completely non-custodial services, and the operating rights of ETH must be transferred to other people or contracts. However, since the contract code can be open-sourced and audited, we will regard "authorize the operation right of ETH to the contract" as a non-custodial service, and "authorize the operation right of ETH to one or several individuals" will be regarded as a non-custodial service. Considered a hosted service.

2. Project competition landscape

The core mechanism of Lido is as follows——

For pledgers, they can pledge any amount of ETH to Lido's contract account, and Lido will distribute the corresponding amount of stETH (an ERC-20 token) to users. The balance of stETH will be updated at 24:00 UTC every day to ensure that stETH is consistent with the total amount of ETH on the beacon chain, so as to realize the real-time acquisition of pledge income every day. Stakers can get 90% of the ETH pledge income on the beacon chain.

Every time 32 ETH is accumulated on the Ethereum smart contract, the DAO will select a new validator from the list of validators. Then call the deposit contract and allocate 32 ETH to the validator. There are currently 9 verification nodes, including P2P Validator, stakefish, blockscope, etc. They are selected by Lido DAO after verification, and are responsible for obtaining the ETH deposited by the pledger according to the pledge contract for every 32 deposits into ETH2.0 income. Validator nodes need to bear hardware costs and bandwidth costs, and they currently get 5% of the total revenue.

The last 5% of the income is controlled by Lido DAO, which is currently all allocated to the insurance fund.

The insurance fund is mainly used to make up the user's income and even the principal when the ETH2.0 verification is punished.

DEX：

The core mechanism of the protocol for pledge liquidity solutions is generally similar to Lido, and the reason why Lido has been able to develop so successfully is mainly because they provide a lot of DeFi use cases for stETH:

stETH in DeFi

Since its launch, Lido has attached great importance to the integration with other DeFi protocols, and they set up the LEGO team (Lido Ecosystem Grants Organization, LEGO) to promote the progress of this work

We summarize the current use case expansion of stETH and the progress of integration with DeFi blue chips as follows——

● Curve: Not long after Lido Finance was launched, Curve launched the stETH/ETH trading pair. Lido DAO will use a large number of LDOs (about 5 million) to motivate the stETH/ETH pool every month to ensure the liquidity of stETH At present, it seems that the effect of this incentive is quite significant: Curve's stETH/ETH pool is the most liquid trading platform for stETH, and there are currently a total of 1 million ETH and stETH in this pool, with deep liquidity. And especially in May, under the huge fluctuation of the price of ETH itself, stETH has always maintained an anchor slightly lower than the price of ETH (this is reasonable, because users can exchange 1ETH for 1stETH in Lido at any time)

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● Sushiswap provides a hot spring plan for LDO-ETH

Borrowing:

● 1inch: shortly after Lido went online, stETH was integrated by 1inch

● DeversiFi: LDO officially launched on L2 exchange DeversiFi in March

● Bancor: On July 13, wstETH will be launched in Bancor’s wstETH-BNT mining pool. Users can obtain stETH income under the protection of Bancor’s impermanent loss mechanism

● Uniswap: Since the Uniswap pool building is completely license-free, the liquidity of stETH has been available on Uniswap V2 for a long time. Considering that Curve fits the stETH/ETH scene, the team has not encouraged the liquidity of Uniswap, so currently There is very little liquidity in Uniswap v2; after Uniswap V3 went live, Lido’s Lego team also initiated a proposal to test on Uniswap V3

● In March Lido integrated with ARCx, allowing stETH to be used as collateral to mint STABLEx tokens - the native stablecoin of the ARCx platform.

other:

● Inverse Finance supported stETH as collateral on June 21st.

● Aave--not yet online: Anjan from ParaFi Capital put forward a proposal in the Aave governance forum, proposing to use stETH as collateral, and the community is currently discussing it.

● Maker--not online: the community is currently discussing

● Compound--not yet online: ParaFi Capital has put forward a proposal in the Compound Governance Forum, proposing to use stETH as collateral.

other:

● Insurance: Lido cooperated with the insurance agreement Unslashed to insure more than 200,000 stETH; also cooperated with Nexus

● Earning agreement: Yearn, Harvest and Convex have all launched crvSTETH (stETH’s deposit certificate in curve) earning pool

● Entry integration: Lido has been integrated into Gnosis Safe, which is a trusted multi-signature wallet. Currently, more than 2 million ETHs have been stored in Gnosis Safe. In addition, aggregation platforms such as Zapper and Zerion, and wallets such as Argent Wallet, Trust Wallet, and Imtoken have also integrated Lido

The full application of stETH in DeFi enables users to maintain the stability of ETH2.0 (and obtain income), while the ETH (actually stETH) pledged by users can still be used in various DeFi applications, which makes Lido truly provide "Liquidity staking solution": Users can participate in staking with almost no loss of liquidity. Due to the liquidity moat of stETH and the network effects associated with it, stETH's derivatives pledged on ETH will very likely "winner takes all". As such, stETH has the potential to replace ETH in many use cases, and possibly even completely. At present, stETH only needs to be integrated by Maker, Aave and Compound, the three most important lending products, and it is not much different from ETH. We predict that this process will happen at the latest when the transfer function of the beacon chain is enabled (ETH can be retrieved with stETH), and whether it can happen earlier depends mainly on the market's confidence in ETH2.0, the degree of participation, and the continuation of Lido effort.

ETH Staking derivatives represented by stETH will have a major impact on the entire Ethereum ecosystem, including ETH pledgers, ordinary ETH holders, and even Ethereum itself.

Pledgers: The main benefit of pledgers is that they can re-mortgage, which allows them to deposit in the loan agreement or dex as LP to obtain other income while obtaining the pledge income. This greatly reduces the opportunity cost of staking.

Non-pledged ETH holders: If stETH can be used as collateral to borrow ETH, it can unlock the need to borrow ETH for leveraged pledges. This will drive up the interest rate on the supply of ETH, ultimately benefiting all ETH holders with higher interest rates.

Ethereum: The impact of derivatives such as stETH on Ethereum, Paradigm’s Georgios and Hasu’s argument (https://research.paradigm.xyz/staking) is very exciting, we extract it as follows——

“There is a popular belief that staking derivatives reduce the security of PoS because they separate block production from staking and penalties. This is also known as the principal-agent problem and can result in block producers not adhering to the protocol motives, since they have no stake in them.

However, this argument has to be weighed against benefits: if collateralized derivatives reduce the cost of collateralizing, they may cause more (or even all) ETH to be collateralized. Note that this is a perfect example of a virtuous cycle: the more liquid stETH is, the lower the opportunity cost of participating in staking, which leads to more ETH being staked, which further deepens the liquidity of stETH, and so on.

Without collateralized derivatives, we might expect 15-30% of ETH to be collateralized. However, with staking derivatives, this number can be as high as 80-100%, since staking has no additional cost (but has additional benefits) compared to not participating in staking.

To illustrate why this leads to greater economic security, let's look at the following attack scenario −

● (without stETH) If 20% of all ETH is staked, and an attacker wants to get 66% of all (staked) tokens (the critical threshold for breaking the chain), they will have to buy all of them on the open market 40% of ETH.

● If 60% of ETH is staked (via stETH), but stETH is liquid, then the attacker would have to buy 66% of all stETH, which is also 40% of all ETH. Note that this has an extra step, the attacker must first redeem stETH to remove honest validators, and then re-stake their ETH.

● More than 60% of ETH is pledged, the share of all ETH that the attacker must buy is higher than 40%, and from then on, the amount of ETH that the attacker needs to buy will only be more.

● If 100% of ETH is staked, then the attacker needs 66% of all stETH to reach the same threshold.

We can conclude that if staking derivatives can increase the amount of ETH staked beyond 60%, then they will strictly increase the economic security of Ethereum, not decrease it. "

In addition, we can find that a considerable number of integrations are facilitated by Lido's investors. Including ParaFi and Delphi are actively promoting the cooperation between Lido and various DeFi projects, and Paradigm is guiding the development of Lido. This is a very important feature and an important advantage in the development process of Lido: Lido has obtained Full support of the Ethereum core developers, the community, and the Ethereum Orthodoxy Fund on behalf of Ethereum.

decentralization problem

In fact, the services provided by Lido are not completely decentralized (de-trusted), and users still need to trust Lido in the following aspects:

● 1. From the launch of Lido until July 15, 2021, all user deposits are not non-custodial, and the ETH2.0 withdrawal certificate is not controlled by the user himself, but an 11-digit multi-signature selected by Lido user to control."● 2. Withdrawal requires a verification node to manually unstake: According to the current design of the withdrawal certificate, if the pledger wants to cancel the pledge, Lido’s verification node must manually cancel the pledge at present, and there is no way to force the verification node to follow the user’s needs Foreclosed.

● 3. It is not unlicensed to become a verification node. The verification node is currently open to all users to apply, but it needs to be reviewed and approved by Lido DAO before it can officially become a verification node.

*(In order to understand the above two questions 1 and 2, you need to have an understanding of the architecture of ETH2.0 and the current stage. Due to space limitations, this article will not go into details. Interested friends can go to https://blog.Lido .fi/the-road-to-trustless-ETHereum-staking/ read)

In fact, since the withdrawal (transfer) function of the beacon chain is not yet enabled, currently no one (including 11-bit unions with multi-signatures) can withdraw funds from the deposit contract. So the first two issues may not seem like a problem today, but they will indeed become a problem once withdrawals are enabled on the beacon chain.

On July 27th, Lido published an article signed by 7 people including 3 of Paradigm and 2 founders of Lido, "The Road to Trustless Ethereum Mortgage

, In this article, the solutions to these three problems are introduced and discussed in detail (for technical details, please refer to the original text https://blog.Lido.fi/the-road-to-trustless-ETHereum-staking/ ) — —

●For the issue of 1 deposit being non-custodial, at the beginning of Lido’s launch, due to the limitations of the ETH2.0 system at that time, it did not support the use of smart contracts as withdrawal certificates, so this problem was not something that Lido could solve at the time. The plan is to select 11 individuals including Banteg (Yearn), Alex Svanevik (Nansen), Anton Bukov (1inch), Michael Egorov (Curve/Nucypher), Rune Christensen (MakerDAO) who are closely related to the interests of ETH and have a good reputation ( And it has nothing to do with Lido's interests - users who did not participate in the seed round) to control the multi-signature of all Lido withdrawal certificates. And on July 15, Lido updated the smart contract withdrawal certificate. After that, all ETH newly deposited into Lido is non-custodial (the withdrawal certificate is a smart contract).

● Problem 2 is actually a problem that all staking pools in ETH2.0’s current staking scheme will encounter. Recently, Ethereum put forward a new proposal (this proposal was proposed by Georgios Konstantopoulos of paradise), and this proposal passed After that, stETH holders will be allowed to remotely trigger the cancellation of the pledge from the beacon chain. After this proposal is passed, the problem can be completely solved.

● Problem 3 is the most difficult problem to solve. Since the ETH pledged by any verification node on ETH2.0 generates a homogeneous ERC-20 token stETH, all stETH holders bear the risk of any verification node error or evil. Triggered from this perspective, the review of verification nodes is necessary, and it is also the core work of Lidodao. Only honest and experienced verification nodes can have better operational capabilities, thereby protecting users' income and even principal.

This is actually a quality control issue, but on the basis of quality control, Lido needs to make the solution more decentralized and trustless. The solutions proposed by Lido include——

● All verification nodes that have passed the system review are open to users to choose;

● The verification node must be pledged with the user according to a certain minimum ratio, so that if there is a verification error, the funds of the verification node will be deducted first, so as to achieve trustlessness;

Terra Staking

● insurance;

● Technical solution SSV (Secret Shared Validators)

● Verification node performance tracking and scoring mechanism;

At present, the specific solution has not been fully determined, and it is likely to be a combination of the above-mentioned solutions, but the deep and decentralized original intention shown by the team in dealing with this problem is impressive.

Lido's trustless issue is very important to Lido and even the entire Ethereum community. And Paradigm is leading Lido towards full decentralization, so to some extent, it is not Lido that chose Paradigm, but Paradigm chose Lido. We will discuss this issue in detail in the next section.

The staking service provided by Lido on Terra was officially launched in March this year. Terra is a DPOS public chain. The staking process for users to participate in Terra is——

The user pledges LUNA, and the pledge certificate is bluna, and bluna can also participate in various ecology in terra. After receiving the user's luna, Lido will proxy luna to the verification node selected by Lido DAO, and the verification node will help the user obtain Validation rewards.

Different from ETH2.0, bluna can be extracted into Luna, but it needs to go through a lock-up period of 21-24 days.

It is worth mentioning that staking on Terra currently does not bring any revenue to the Lido protocol, and all revenue is captured by the node operators selected by Lido.

Solana and Aave -- not live yet

Solana is also the public chain of Pos. Lido DAO has passed the proposal to provide liquid staking services for Solana, and it is expected to be launched in the near future.

What is more noticeable is that Lido provides pledge services to Aave:

On June 2, 2021, Delphi Digital's CTO Luke Saunders proposed to include Aave's Staking in Lido's services. The proposal (https://research.Lido.fi/t/Lido-for-aave-proposal-by -delphi-digital/671) and votes have been passed, the code has also been written, tested, and audited, and is currently waiting for audit issues to be fixed.

Disadvantages of Aave Staking's current scheme

At present, there are two main ways for users to pledge AAVE tokens: 1) through the pledge contract provided by Aave, and 2) through third-party pledge services, such as the xAAVE contract of xToken.

When using the AAVE contract for staking, users can get 1 stkAAVE token for every 1 AAVE token pledged, and the staking rewards are calculated separately. In this way, if you need to obtain compound interest income, users need to claim rewards frequently and re-invest, which will generate very high GAS costs.

When using xToken for staking, users can get a certain amount of xAAVE tokens every time they deposit an AAVE token. As staking rewards accumulate, the exchange rate between AAVE and xAAVE will change, and the contract of xToken does not allow xAAVE holders to vote in Aave governance. Instead, the xToken team votes on behalf of users. Concentration of governance power among a small number of xToken team members.

Lido's solution

The liquid staking solution proposal for Aave is as follows:

● The user pledges AAVE to Lido, Lido distributes stAAVE to the user, and at the same time, Lido performs contract pledge operations on behalf of the user as a whole to reduce gas costs;

● The balance of stAAVE tokens in each user’s wallet is automatically updated every block, reflecting the accumulated staking rewards (similar to stETH), that is, the automatic compounding of staking rewards;

● Simultaneously stimulate the liquidity of AAVE and stAAVE in the Curve pool.

However, this solution is an abstraction of the problem solved by Lido. Lido's service is further abstracted from "Pos pledge liquidity solution" to "all pledge liquidity solution", so that it can be extended to all To obtain income, and at the same time, it can meet the liquidity needs of pledged assets". In this way, the combination of Lido and DeFi projects has more possibilities for scenarios.

3. Competitors

Let’s first look at the deposit distribution of ETH2: (the deposit distribution mark involves manual judgment, so different data sources will be different, let’s look at it together with the data disclosed by Etherscan and Lido)

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Source https://bi.ETHerscan.io/public/dashboards/KH9jbP687szqlAnHiNEfNictrwNhvdOEQl0PwB6m?org_slug=default

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Source https://blog.Lido.fi/the-road-to-trustless-ETHereum-staking/

Outside of CEX, Lido Finance occupies the largest share. In addition, professional staking pool service providers such as staked and stakefish also occupy a relatively high share (stakefish is also one of the nine nodes of Lido Finance).

Lido vs other Defi staking pools

In the field of DeFi, Lido Finance’s competitors include Ankr\StakeHound\Fis\Rocket Pool\Liquidstake\Kira, etc. Their solutions are basically the same, they all provide a pledge for the ETH deposited by users on the platform Derivatives of ETH, by stimulating the liquidity between ETH derivatives (similar to stETH) and ETH to meet the capital needs of users after pledge; through the integration of ETH derivatives and other DeFi protocols to meet users' demand for ETH derivatives interest , and reduce the opportunity cost for users to participate in staking.

No matter in terms of TVL, the market value of its mortgage certificates, or the market value anchoring of its ETH derivatives and ETH, Lido's advantages are very significant. The market share has exceeded 70% and is still gradually rising. The competitive advantage is solid.

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Lido vs CEX

ETH2.0 staking project TVL change chart https://duneanalytics.com/vsh/Lido-finance-extended

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ETH2.0 staking project TVL https://DeFillama.com/protocols/staking

If the original degree of decentralization of Lido may be the weakness of being attacked by competitors, then with the follow-up decentralization measures announced by the team on July 27, this last shortcoming has also been made up.

We believe that Lido, which is supported by almost all DeFi blue chips and funds representing the orthodoxy of Ethereum, after making up for its shortcomings in decentralization, due to stETH's liquidity moat and related network effects, stETH pledged derivatives on ETH It is very likely that Lido will "winner takes all", which will further increase Lido's share in ETH2.0.

For Lido, the main battlefield is between them and CEX.

Compared with Lido, the main advantage of CEX is that it has a large amount of managed ETH, which will have the following advantages:

● 1. When the user deposits ETH into CEX, he has already expressed his trust, so participating in the mortgage of ETH2.0 does not require the user to pay any more trust costs;

● 3. For the consideration of the overall business, CEX may not even charge fees during this process.

The advantages of Lido lie in: 1. stETH's strong stability and liquidity; 2. The powerful use cases brought about by the composability of DeFi; .

1. The strong stability and liquidity of stETH

The figure below shows the price trend, transaction depth, and transaction volume of Kraken’s ETH derivative ETH2 and Binance’s ETH pledged derivative BETH

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Source Kraken official website

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Source Binance official website

It can be clearly seen that in terms of price stability and liquidity of ETH derivatives, Kraken and Binance are far behind Lido. Of course, this is related to Lido’s incentives for stETH/ETH pools, but for users, Lido brings the deepest liquidity and better price anchoring of ETH pledged derivatives.

2. The powerful use cases brought about by the composability of DeFi, which is the strongest advantage of Lido over CEX

In CEX, after the pledge of ETH2.0, the obtained certificate can only be used for trading into ETH, and the transaction needs to endure 3-4% slippage, otherwise it needs to wait. And stETH, as we introduced earlier, can be re-used in various DeFi protocols. stETH is also an interest-bearing asset. Users can use stETH for Curve, 1inch, Yearn and other protocols to obtain double income while obtaining ETH pledge income. .

For Ethereum, there must be a decentralized, trustless, and preferably minimally governed pledge pool to become the largest pledge pool to balance the impact of CEX on Ethereum. After all, any real Ethereum supporters are reluctant to see the situation that "the largest staker of the Ethereum network is a CEX that owns a competing public chain".

Token distribution

This is why Paradigm has been guiding Lido to be as decentralized as possible, because only Lido can be as decentralized as possible to meet Ethereum's expectations for its largest pledge pool, and to be able to compete with CEX after ETH is converted to POS , ETH decentralized guardian.

4. Token Economy

The primary use case for LDOs is for governance.

In addition, Lido DAO will receive 10% of all pledge rewards from users. The current distribution ratio is: 5% for verification nodes and 5% for insurance funds. Therefore, there is no direct income cash flow for LDO tokens, so we do not Think Lido generated profits.

Token distribution

The total number of LDO tokens is 1 billion. As of August 3, 2021, the distribution of LDO tokens is as follows——

● Investors received a total of 321.8 million pieces (32.18%)

● Among them, the seed round investors obtained 220 million pieces, which will be unlocked linearly in 12 months starting from December 2021

● Investors in this round of Paradigm received 100 million pieces, which will be unlocked linearly in 12 months starting from May 2022

● Initial Lido developers get 200 million (20%), which will be unlocked linearly in 12 months starting from December 2021

● The founders and future team members will receive 150 million (15%), which will be unlocked linearly in 12 months starting from December 2021

● Verification nodes and multi-signature members get 65 million pieces (6.5%), which will be unlocked linearly in 12 months starting from December 2021

● There are 28.4 million (2.84%) in circulation. Most of these LDOs are released to stimulate the liquidity of stETH/ETH (about 5 million per month). The cooperation between DeveriFi and Bancor and the airdrop also consume part of the LDO

● The remaining 235 million (23.5%) are still controlled by DAO treasury.

Overall, the token shares of the team and investors are relatively high, accounting for more than 62% of the total circulation, and there will be a relatively large number of releases starting in December 2021.

5. Risk

a. The risk of ETH2.0

ETH2.0 is still a developing product, and there may be bugs and loopholes, which may result in impairment of stETH. In addition, the transfer function of the beacon chain is not enabled, and stETH cannot maintain a 1:1 rigid payment with the pledged ETH, which means that if a run occurs, Lido cannot redeem all the ETH.

first level title

fourth quarter

Preliminary Valuation

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1. Five core questions

What operating cycle is the project in? Is it a mature stage, or an early and middle stage of development?

first level title

Does the project have a solid competitive advantage? Where does this competitive advantage come from?

1. Five core questions

Is the long-term investment logic of the project clear? Is it in line with the general trend of the industry?

The project is in the mid-term of operation, and has already taken the lead in staking of ETH2.0, and is expanding to other public chains.

What are the main variables in the operation of the project? Is this factor easy to quantify and measure?

As analyzed in 3.3, the project has a relatively solid competitive advantage, which comes from the scale effect of stETH and the support of the ETH community.

How will the project be managed and governed? What is the level of DAO?

Is the long-term investment logic of the project clear? Is it in line with the general trend of the industry?

The medium and long-term investment logic of the project is clear, which is in line with the general trend of the industry.

What are the main variables in the operation of the project? Is this factor easy to quantify and measure?

How will the project be managed and governed? What is the level of DAO?

DAO was created on Aragon at the beginning of the project, and the community forum was active. Paradigm and other top institutions were introduced through the governance of DAO, and after Paradigm was introduced, Paradigm was also introduced into the governance of Lido to a large extent. So far The level of DAO is higher.

2. Valuation evaluation

Longitudinal Valuation Assessment

10% of the staking income will be attributed to LidoDAO, but currently LidoDAO allocates all of this part to the insurance fund and verification nodes, so this 10% income will not directly generate value for LDOtoken at present, so we do not think LDO is profitable Therefore, the P/S index is used for vertical value evaluation.

https://www.tokenterminal.com/terminal/projects/Lido-finance The caliber of P in the figure is the full circulation market value.

Considering that the current circulation ratio of LDO is only less than 3%, its circulation P/S is only about 1, which is extremely underestimated compared to the past.

Horizontal Valuation

Since there is a large gap between other pledge pool projects and Lido, and there is no project that is relatively close to Lido in terms of business form, we compare Lido with the "total market value/annualized agreement income" and "circulation market value/annualized agreement income" of tokens. Annualized Agreement Revenue", "Total Market Value/TVL" and "Circulation Market Value/TVL" indicators to compare Lido and several top-ranked agreements by TVL:

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Note: The market value data is taken from coingecko, the income data is taken from tokenterminal, and the TVL data is taken from Defillama. The unit is in millions of US dollars. The data time is August 6 at 23:00 UTC+8

From the data point of view, all the indicators of LDO calculated using the circulating market capitalization are extremely underestimated, while the indicators using the total market capitalization will appear to be relatively reasonable.

In terms of TVL indicators, due to the small circulation of Lido and Balancer, their "circulation market value/TVL" indicators are significantly underestimated. However, after considering the circulation ratio, the current valuation of LDO is higher than that of the top players except UNI. The agreement is higher.

In terms of more exaggerated income indicators, the circulation P/S of LDO is only less than 2, which has an order of magnitude gap with the top DeFi protocol, and it is extremely underestimated in the entire DeFi protocol. Even considering the full circulation market value, LDO is still not overestimated.

Every investor may have his own answer to the question of "should the market value of the DeFi protocol be valued using the market value of circulation or the market value of full circulation". We believe that:

future outlook

Judging from Lido's business data, for short-term investors, LDO is currently extremely undervalued; for long-term investors, LDO's valuation is moderate.

About Governance Value

It is worth noting that this value cannot be quantified, nor will it necessarily be recognized by the market. However, it is indeed possible to participate in the governance of ETH by holding LDO, which may be a value that cannot be withdrawn from LDO business data.