After Shapella, a new dawn for the ETH revenue product track
Original title: "After Shapella, a new dawn for ETH yield products"
Original compilation: Kxp, BlockBeats
Original compilation: Kxp, BlockBeats
Ethereum’s Shapella upgrade is the culmination of a nearly decade-long move to proof-of-stake (PoS). This upgrade allowed Ethereum holding PoS to withdraw funds, followed by the launch of the Beacon Chain in November 2020 and the completion of Merge in September last year, which also marked the official abandonment of the Proof of Stake chain.
DeFi on Ethereum boomed in 2019 and 2020, with ETH providing more than half of the total locked value in those two years. Ethereum's move to proof-of-stake has in turn created new opportunities to earn Ethereum yield.
Not long after the launch of the Beacon Chain, a new revenue opportunity began to emerge — Liquid Staking Derivatives (LSD). Lido's stETH, Coinbase's cbETH and Rocketpool's rETH all allow holding Token to directly obtain Ethereum pledge income. LSD has continued to grow over the past two years, and its popularity will now accelerate with the opening of Shapella's withdrawal function.
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ETFization of Ethereum earnings
The idea of an Ethereum staking Token era has received a lot of attention. At the MEVnomics.wtf online summit last month, Gauntlet founder Tarun Chitra laid out a compelling vision:
“We’re bound to have some concept of ETFization where people will want different classes of ETH yield. There will be:
· Highest level of ETH yield - pure staking
Slightly riskier but higher yielding ETH - staking plus submitting oracle updates
Higher risk ETH yield options - data availability and oracle updates
I can imagine people fragmenting ETH and assigning different levels of ETH yield risk. "
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LSD: Lido Dominance
When DeFi emerged as an enigma and market in 2019, it had three clear market segments: lending, DEXs, and stablecoins. LSD has cemented itself as the fourth major market in the DeFi space.
Lido (stETH) took an early lead and isn't backing down. It attracted dozens of well-known validator companies, and then focused on DeFi integration. It also launched a Curve stable pool and provided it with LDO Token incentives to build on-chain liquidity. This strong on-chain liquidity has helped stETH maintain its 1:1 peg to ETH in 2021 and early 2022, although only convertible to ETH via Lido after withdrawal (expected next month).
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LSD: the best option left
· Coinbase's second largest LSD is cbETH, reflecting its second position to USDC in the stablecoin market. Launching in October 2022, cbETH has the advantage of attracting a large number of retail and institutional investors with Coinbase hosting ETH. Just as its fiat on-ramp makes it a major player in the stablecoin market, the same is true for LSD. It also charges the highest fee (25% of the gain earned). Coinbase's biggest concern is regulation. Given the intense scrutiny Coinbase is currently facing, it's hard to imagine Mr. Gensler ignoring a token that promises yield. But regulation isn't Coinbase's only problem. The same goes for the exchange lanes that will face more competition as Binance announces its entry into the LSD market.
· Rocket Pool is the most decentralized of the major LSDs. It is also the oldest, with origins dating back to 2016. Importantly, becoming a Rocketpool node operator is permissionless. With the Atlas upgrade released last week, node operators only need 8 ETH to join the agreement, making their participation in the agreement more risky (in addition to needing to pledge RPL, the remaining 24 ETH are required to purchase Rocket Pool's LSD- rETH).
Frax launched its LSD (sfrxETH) last November. It's fairly centralized, but intends to move to a Rocket Pool-like model in the future. Frax has carved out market share through effective liquidity mining strategies and their integration into its Frax Lend product.
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EigenLayer: The Next Iteration of ETH Yields
EigenLayer was founded by Sreeram Kannan, a professor at the University of Washington and director of the UW Blockchain Lab. Over the past few months, EigenLayer has been cited by Vitalik and other core Ethereum developers as the solution to Ethereum's toughest problems. Additionally, the company just announced a $50 million Series A round led by Blockchain Capital.
Stanford student Bridget Harris explains the advantages of rehypothecation well:
“Typically, developers need to choose between innovating outside of Ethereum (and not being able to take advantage of its validator set), or building on top of the EVM, but must abide by the above constraints, these projects require active validation services (“ AVS") for proper authentication. However, establishing an AVS introduces significant limitations. "
“EigenLayer proposes a solution to these problems by applying the security provided by the Ethereum validator set to these modules for integrated security through restaking and free market governance.”
Rather than launching a network, EigenLayer will recruit Ethereum validators to run additional services for specific applications. The key is to leverage the ETH staked behind validators to ensure they perform tasks for which they are rewarded. To participate, validators must assign their ETH stake withdrawal address to EigenLayer. This will make it possible for a validator to have its ETH slashed if it does not act according to certain conditions it has agreed to (approved by EigenLayer governance).
With this model, EigenLayer can serve as "Ethereum's segmented network", testing new features before implementing the core protocol. It can also enable validator consensus, MEV smoothing, or redistribute MEV profits by cutting any validators trying to gain more than their fair share.
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Re-staking LSD
In its white paper, EigenLayer made it clear that it did not identify LSD as a core protocol.
But we can see the future trend, and it will become more difficult to create a tokenized version based on ETH re-pledged income. Both LSDs pack the same base rewards from the Ethereum protocol rewards, although they also introduce the additional reward of running MEV-boost. EigenLayer envisions hundreds of different earning opportunities for ETH validators. Making them interchangeable would indeed be a challenge.
We believe that Liquidity Rehypothecation Derivatives (LRDs?) will take the same form as the current LSD. EigenLayer is designed to accept LSD Token itself, so investors can stake stETH or cbETH in EigenLayer, and then delegate to validators who run higher return services. This is a great way to integrate with existing systems and validators, but it does not provide enough interchangeability and liquidity to interact with DeFi, requiring new Tokens to capture additional returns.
For those interested in developing liquidity re-pledging derivatives (Token), the most important thing is to build around the core service that Ethereum applications urgently need: a service that is both safe and can provide high returns. After that, the focus should be on how the LSD market was formed in the first place. This simple formula (pioneered by Lido) is as follows:
Step 1. Recruit multiple top staking companies as trusted verifiers.
Step 2. Launch a Token that can capture revenue and build on-chain liquidity through Curve or Balancer (Aura also helps).
Step 3. Make sure the Token is accepted as collateral by major lending platforms.
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