What is the value of Lido Finance, a leading ETH pledge project?

特邀专栏作者

2023-02-22 21:10 (UTC+8)

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In the future, Lido will continue to firmly move towards the direction of trust-based pledge and network democratization.

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In the future, Lido will continue to firmly move towards the direction of trust-based pledge and network democratization.

Original Author: Daniel Li

In the first half of 2023, the upgrade of Ethereum Shanghai has become the most watched event in the currency circle. The upgrade will allow withdrawals of staked ETH, which is expected to attract more users to invest in ETH. In this context, Lido Finance (Lido) has become the focus of attention. As the largest pledge agreement on the Ethereum beacon chain, Lido has a TVL of 8 billion US dollars, accounting for 30% of the pledge amount on the beacon chain, and is the DeFi agreement with the highest TVL.

The news is optimistic that Lido may become the biggest winner

The U.S. Securities and Exchange Commission (SEC) penalty against Kraken sparked a change in the ETH staking landscape. This has prompted more and more centralized institutions to transfer their pledged ETH to decentralized institutions, among which the decentralized ETH pledge agreement represented by Lido has benefited a lot. In addition, the Shanghai upgrade of Ethereum will introduce a withdrawal function at that time, which is expected to further promote the growth of ETH staking protocols. The superposition of these news makes more and more investors optimistic about Lido, and makes its token LDO attract market attention. In the past month, LDO has risen by more than 50%. As of now, the price of LDO is $2.99, with a market value of $2.513 billion , ranking 25th in terms of market capitalization.

The U.S. SEC hits hard, ETH pledge will usher in a new pattern

Last week, cryptocurrency exchange Kraken was accused by the U.S. Securities and Exchange Commission (SEC) of failing to register offers and sales of its crypto asset staking-as-a-service program. The SEC alleges that Kraken lured investors by touting a return on investment of up to 21%, but that Kraken failed to provide proper disclosures and investor protections. To settle the SEC’s charges, Kraken agreed to immediately stop offering staking-as-a-service to U.S. customers and pay a $30 million fine.

The SEC's heavy blow to the leading pledge platform has caused shocks in the entire industry, and Coinbase, a centralized exchange that also provides pledge services, is deeply worried about this. Although it is reported that Coinbase suspended ETH staking services in October last year, the current scale of ETH pledged by Coinbase still ranks second in the ETH staking market after Lido. Once the SEC decides to ban retail investors from participating in staking services in the US market, Coinbase is likely to be the next target.

Following the SEC ruling, investors seem to see this as a positive for “decentralized” staking platforms. Because the decentralized staking platform does not rely on centralized institutions or companies, but realizes the liquidity staking service of digital assets through a decentralized smart contract mechanism, it is least affected by regulatory policies. According to data, the governance token of Lido, the largest decentralized staking platform, soared 11% the day after Kraken’s punishment was announced. It is foreseeable that with the termination of staking services of some centralized staking platforms such as Kraken, more and more users will flock to decentralized platforms in the future, and Lido, which ranks first, will undoubtedly benefit the most.

Shanghai upgrades ETH pledge track will usher in an explosion

Ethereum is one of the public chains with a low pledge rate, currently only 12% of tokens are staked. In comparison, other public chains typically have collateralization rates between 60% and 80%, suggesting that Ethereum still has a lot of room to improve. In addition, other public chains often attract users to staking by increasing the annualized rate of return, but this approach may lead to shrinking of the value of the pledged tokens, lacking sustainability. Ethereum is different. Since its merger, ETH has entered a deflationary phase, and as the Ethereum ecosystem continues to prosper, the economic incentives for ETH staking have become more sustainable and attractive. In general, the ETH pledge track has the potential to explode, and the current lack is just an opportunity, and the upgrade of Ethereum Shanghai may become this opportunity.

The Shanghai upgrade will inject long-term vitality into ETH staking. The withdrawal function, which will be opened at that time, will allow users to withdraw funds from the beacon chain, allowing ETH validators to unstake and decide to sell or hold. Part of the decompressed ETH will enter the secondary market, but due to the limitation of the validator exit mechanism, the market will not be greatly affected. Although it will affect the total amount of ETH pledged in the short term, the proportion of Staking may continue to rise afterwards. Because after the upgrade, the ETH Staking mechanism becomes more flexible and can be withdrawn freely instead of having to be locked for a long time, which may attract more holders to use ETH for Staking to earn income. This is like bank deposits changing from time deposits to demand deposits. The calculation method of deposit interest basically remains the same, but the amount of deposits may increase.

The upgrade of Ethereum Shanghai is good news for Lido, but it is also a challenge. After the upgrade, the ETH pledge scale will skyrocket, which is a good opportunity for decentralized pledge platforms such as Lido to expand their scale. However, after the Shanghai upgrade, the pledged ETH can be withdrawn. The previous model that Lido can redeem the pledged ETH at any time will no longer have advantages. For Lido, how to build a new moat has become an upcoming challenge.

From a technical perspective, the advantages of Lido are highlighted

Lido is a liquid staking protocol launched in October 2020. It emerged to address the limitations of EHT 2.0 staking and the lack of liquidity. Users who want to independently participate in the pledge of ETH 2.0 need to pledge 32 integral multiples of ETH, which is very unfriendly to retail investors. However, Lido is more humane in terms of the number of pledges. Users can participate in ETH 2.0 pledges by pledging any amount of ETH. With its friendly staking model, Lido quickly gained market recognition once it was launched. Currently, Lido occupies more than 75% of the staking market share and 30% of the ETH staking market, becoming a well-deserved industry leader.

Lido's pledge principle

Lido introduces Staked Ether (stETH) or Lido stETH as a liquid staking solution. This enables users to stake any amount of ETH they wish while still spending that ETH on other decentralized finance (DeFi) platforms. The specific process is that users provide their fragmented ETH to Lido, and Lido will allocate 32 ETH to the node operator approved by Lido DAO to pledge after receiving the user's pledge. The pledger pledges ETH through the Lido protocol, and can obtain stETH as a certificate at a ratio of 1:1, which represents the user's pledge share in Lido and corresponds to the pledged ETH.

stETH plays an important role in the Lido ecosystem. It is the main certificate of the Lido platform. Users holding stETH tokens can obtain the benefits of staking ETH, such as staking rewards, commission sharing, etc. At the same time, users can also use stETH tokens for trading and circulation in the ecosystem of Lido partners, such as liquidity mining and trading in platforms such as Curve, Yearn and ARCx.

The transferability and tradability of stETH makes Lido's staking model more liquid compared to other platforms. In addition, stETH can also be exchanged for ETH through the LP of stETH-ETH on CRV at any time. This is also the advantage that Lido can quickly lead other staking platforms before the Ethereum Shanghai upgrade.

Lido's Profit Model

At present, Lido’s profit model mainly relies on taking 10% of the staking proceeds as agreement revenue, 5% of which is owned by the pledge node operator, and the other 5% goes to the Lido treasury, which is governed by LDO. Staking income is less affected by market fluctuations, so its currency-based income is hardly affected by the bear market. In December, Lido’s agreement income was only slightly less than GMX, and the total agreement fee exceeded Uniswap. In addition, due to the expected impact of Shanghai’s upgrade and Lido’s leading position in the industry, Lido will absorb more pledged assets in the future, and these pledged assets will also bring higher revenue to the Lido platform. agreement income. The continuous rise of LIDO this year also reflects people's market sentiment towards Lido.

Lido V2 upgrade.

Lido V2 upgrade will be carried out in two aspects: Staking Router (staking router) and withdrawal.

Pledge Router

Staking Routing is a controller contract designed to gradually evolve Lido into a scalable protocol through a modular infrastructure. Its core idea is to regard various modules as potential suppliers of the protocol and form a validator pool. Each module will be responsible for managing internal node registration, storing validator keys, and distributing stake shares and rewards. Modules can include various types of node operators, from community-assessed stakers, to professional or fledgling staking institutions, to DAO organizations. They can run validators independently or collaboratively through infrastructure such as DVT, and can participate in multiple modules at the same time.

The Staking Router is a major upgrade of the Lido protocol. By moving node operator registration to a modular and more composable architecture, stakers, developers, and node operators can coordinate and benefit from each other on Lido without friction. Include:

Pledgers: Due to the increase of node service providers, users' pledge deposits will be distributed among more service providers, thereby reducing the risk of network downtime and improving the resilience of Ethereum.

Developers: Users can propose and execute models through different combinations of node operators and their competitive characteristics (such as coverage options and fee structures), and can also apply to join the module collection of pledge routers.

withdraw money

Lido V2 will optimize the withdrawal function, one of the basic features, and balance user experience, operation speed and protocol security. The upgrade allows Staked Ethereum [stETH] holders to withdraw their tokens from the Lido ecosystem at a 1:1 ratio with no additional fees or penalties. However, due to the complexity of the Ethereum network, the withdrawal mechanism in the Lido protocol design will have two modes: Turbo and Bunker.

Turbo Mode: This is the default mode, where withdrawal requests are fulfilled quickly, but with an indeterminate time to exit the network. Withdrawal requests may take several hours to process. To reduce possible delays, contributors have proposed automation tools to help protocol and node operators automate the process around validator exits.

Bunker Mode: In order to process withdrawals in an orderly manner in catastrophic scenarios, Bunker Mode was proposed. Its purpose is to prevent sophisticated participants from gaining an unfair advantage over other stakeholders by delaying withdrawals and negative socialization throughout the protocol.

The Lido V2 upgrade points out the direction for Lido's future development, and the new modular architecture design brought by the pledge router will further help Lido achieve decentralization. With the development of the Beacon Chain, new requirements are placed on the current ETH staking model. As an industry leader, Lido was ready for this day. Lido V2 will become Lido's new moat, promoting Lido to become a more inclusive, open and transparent platform.

Can Lido stay ahead in the long run?

Lido's ultra-high market share has almost monopolized the entire staking market, which has aroused concerns among some investors. Among them, Vitalik suggested that staking projects should self-limit the number of stakes they control, and proposed 15% as the upper threshold. However, Lido didn't take the advice. As early as June 24 last year, Lido Dao voted on whether it should be "self-restricted". As a result, 99.81% of LDO holders voted against it and did not approve of self-restricted Lido. The main arguments of the naysayers are: "we don't do it others will do it" "CEX will do it" "no one can meet the demand at the moment".

On the other hand, if the dominance of the ETH staking market is handed over to a centralized institution, such as Coinbase, whose market share is second only to Lido, this may not necessarily be a good thing. First, it defeats Ethereum's goal of building a decentralized network. Second, centralized institutions are more vulnerable to regulatory intervention, such as the US SEC's punishment of Kraken. Therefore, it seems unlikely that centralized institutions will replace Lido to dominate the ETH staking market.

From the data point of view, Lido is already in the leading position in the entire industry, and it is difficult for successors to compete with it. According to Dune data, as of February 18, the total pledge amount of the Ethereum beacon chain has exceeded 16.7 million ETH. Among them, Lido is the only one, with a pledged amount of 4.92 million ETH and a market share of 29.34%, which is equivalent to the sum of the second to fifth centralized pledge institutions. In second place is Coinbase with 12.34% market share which is less than half that of Lido. Kraken is in third place behind Lido and Coinbase, accounting for 7.36% of total Ethereum staked. Kraken has just been punished by the U.S. SEC. Although Kraken claims to stop staking services only in the U.S., the loss of customers is still inevitable.

Although Lido's super high staking market share has been criticized. But it is undeniable that in the absence of ideological concerns and external interference, Lido's liquidity, composability, and yield have absolute advantages in the ETH pledge market. In a winner-takes-all market, Lido’s share is the result of market competition and an inevitable trend of decentralization of ETH pledges. With the upgrade of Ethereum Shanghai and the restrictions of the policy of the central pledge institution, investors are generally optimistic about the future development trend of Lido.