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How will LSD revenue be "stacked" after Shanghai upgrade?

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Worried about LSD revenue drop after Shanghai upgrade? Briefly describe the "seven benefits" hidden in LSD.

原文标题：《 LSD 暗藏「七重收益」，APR-War 终局为 TVL 10X 增长》

Original article by shutong, SevenUp DAO

LSD has hidden "seven fold revenue", the upcoming APR-war will boost DeFi TVL 10X growth, and the spell of repulsing APR and TVL based on this Ethereum mainnet pledge will be broken.

In this article, I would like to explore the definition of ETH-Staking and four staking approaches to staking. In this article, I would like to explore seven approaches to continuing the high yield story of LSD staking.

Definition of ETH-Staking, pain points, and four approaches to staking

1.1 Definition of Pledge mining:

Simply speaking, it is mining, but in the context of 2.0, the "pledgee" replaces the verification work of the "miner" and gets the right to profit. The biggest hurdle is that the fixed cost is changed from the previous miner expenditure to the deposit of at least 32 ETH.

1.2 Pain points:

High cost: there is a minimum investment threshold, and the pledged capital efficiency is low, locked for a long time, can not be extracted; In addition, users need to independently verify nodes to maintain good node performance and avoid costs caused by going offline

Low revenue: 4%-6% and in a declining state, hardware costs are low, but not negligible

1.3 Four ways of pledge:

Staking your staking staking. If you pledge your assets to the ETH staking network, you will get two private keys -- the validating private key (which is responsible for the signature of the ETH nodes while they are running) and the staking private key (which is responsible for the staking and staking rights of the Ethereum staking network). Depending on the ownership of the two private keys, we staking our staking solution.

Solo (direct pledge), Sass (make nodes run with 32 ETH), Pool (joint pledge scheme similar to LDO), CEX (trading platform and compliance scheme similar to Coinbase)

Photo by RobertHu SSV, Chinese Ambassador @RobertHuWeb3

The degree of security and decentralization gradually decreases from top to bottom. solo mode users have control over the two private keys, free disposal benefits and node verification. sass scheme users only have the private key for withdrawal, which can guarantee the security of funds, while Pool and CEX belong to the category of trustement, and both private keys have been handed over. CEX is much more opaque, and Pool is relatively "decentralized hosting," to say the least.

Each of the four schemes has its advantages and disadvantages. Users mainly focus on the security of funds, convenience, cost, income level and other dimensions to make comprehensive consideration. Undoubtedly, the Pool scheme is a compromise and attracts the most attention from the market, because it lowers the threshold for users to enter LSD on the premise of ensuring the rate of return. At the same time, the security psychology of the pledgor can be compensated by the way of "seemingly decentralized custody".

At present, the market focuses on the CEX solution, whose centralized pledge method is accompanied by inflated or inflated rates of return. The agreement does not disclose in detail, and users are easy to be "free-riding" without knowing the right to know. Unclear rules are often the means for the platform to win over assets. The need for convenience or compliance is probably the biggest competitor to decentralized pledge agreements, otherwise it wouldn't take up 30%.

Second, ETH pledge high yield narrative can continue?

The current pledge rate is about 14.6%, and the rate of return will decrease with the increase of the number of pledges on the whole network. Therefore, many people in the market expect that the rate of return of Shanghai will decrease significantly after the upgrade. As a fixed income product, its competitiveness is not as good as that of the US national debt in the same period. Therefore, the LSD market may not have such a large space for imagination. The following explains how to expand the rate of return of LSD track from the two dimensions of time and space.

2.1 Time Dimension:

The mainstream public chain pledge rate is generally 60%+, with Solana-70% and Bnb-90%. In December 2020, ETH beacon chain was released and POS pledge deposit was opened. After 21 years of annual verification nodes, the pledge rate was raised to less than 15%. Therefore, the improvement of verification node and pledge rate is not achieved overnight, which requires the game between the market and miners.

In addition, according to the current rules of the main pledge network, it can accommodate about 5w Ethereum new entry contracts every day, and can increase its share by 15% a year on the premise of no large withdrawals. Therefore, the LSD yield will not plunge, and will maintain at a certain level for a long time.

During this gap period, various leverage tools derived from LSD will boost the yield, and even the subsidies from the external track will flow into LSD, so the decrease in the yield due to the increase of the main network pledge rate will be neutralized.

2.2 Spatial dimension: The beginning of LSD APR-War

Revolving loan and pledge

At present, there are mainly two ways to expand the income of LSD track. One is to enlarge the leverage of stETH in the form of circular loan. If the borrowing cost is not taken into account, 3X leverage and 13% yield can be obtained eventually, and there is a large premium space compared with the yield of national debt.

In addition, through the Aave V3 efficient mode, revolving pledge can bring the leverage to 10x level, and the yield will expand along with it. However, it is worth noting that, on the one hand, it has higher borrowing costs, and on the other hand, the excessive leverage amplification ratio will hinder the withdrawal. The false liquidity in the revolving loan market, A $100 million liquidity may only be backed by $2,000 worth of assets. The process of adding leverage is easy, but a stampede to deleverage will quickly dry up liquidity.

Old DeFi agreement external subsidy

Without leverage, there are also old DeFi agreements like FXS and YFI, which hold a large number of veCRV votes. The power of emission income of curve LP is changed by manipulating vote buying, essentially subsidizing the income of LSD pledgor in the way of external subsidies. And as a core means to access the LSD track.

In fact, it is very wise for these old agreements to cut into the LSD track from the DeFi protocol. On the one hand, the resources accumulated by the early DeFI can be used for secondary development. Reclamation in the LSD track is equivalent to a good card in hand.

On the other hand, the growth of the old DeFi protocol is stuck in a bottleneck. Since November, 21st, YFI's TVL has been in a state of continuous flight, with the peak value of 5 billion falling to around 400 million at present. Recently, after FXS took LSD as its new exposure to accommodate funds, TVL rapidly increased from 1.2 billion to 1.5 billion.

After LDO became the largest lock-in agreement, it could be seen that the old DeFi agreement would try its best to enter into the LSD track and get a piece of the pie. In the case that the Token allocation of the agreement has been exhausted, it can only introduce external subsidies to attract funds to re-promote TVL.

However, the subsequent returns may also be rich, such as FXS itself stable coin play, after absorbing a large number of ETH casting frxETH may develop lsdETH-USD stable coin play, superposition a layer of asset creation, the follow-up will be the focus of each DeFi protocol. From the initial simple pile lsd-TVL lock-in quantity gradually transition to APR War and nesting doll plus leverage process.

New agreement Token Mining incentive

对于新的 LSD 协议来说，尚未开垦的经济模型是他们的最大优势，直接以 Token 激励的方式挖矿吸引资金流入，对老牌协议发起一场类似「吸血鬼攻击」，说不定来一场 LSD 挖矿 Summer 呢？类似 Aura Finance 背靠 Balancer 的流动性支持，或许也能成为一匹黑马。

The true benefits of Re-staking a repledge scheme

在未来 Eigenlayer 作为 ETH 共识层的扩容方案，透过 Eigenlayer 提出的再质押方案，LSD 流动性 Token 除了在 ETH 本身的捕获收益外，节点在其他跨链桥、预言机等也能获得收益，如果后续推出 lsdETH 的 LP 质押，可以做到收益的三位一体。

Pledge Ethereum earnings

合作项目方节点构建、验证的 Token 奖励

Liquidity Token Pledge DeFi group LP reward

Introduced liquidity revenue from lsdETH trading pairs on Dex

At present, most transactions on dex are dominated by eth and usdx. In the future, with the increase of ETH's pledge rate on the main network, ETH in the market will decrease and its liquidity will inevitably decline. Instead, lsdETH's share will expand on Dex. As ETH's trading pairs become weaker, more assets will be encouraged to use lsdETH as an anchor asset, which will provide a layer of trading pairs for LSD users and provide liquid income.

"Fixed income +" financial products to a higher level of income

The ETH-Staking yield would represent the "risk-free rate" of crypto ecosystems, much like the yield on Treasury bonds is in traditional financial markets.

Fixed-income products, such as deposits and national bonds, have the largest scale in the traditional financial market, and the derived "fixed-income +" products also have a scale of several billion dollars. "Fixed income +" is a kind of investment strategy that increases the rate of return and can guarantee the capital. In the crypto world, it is equivalent to depositing the user's principal into the stable fixed income, i.e., POS pledge, and putting a small amount of capital (the part that can be made up by the rate of return) into high-risk assets, such as synthetic assets, cryptocurrencies, index funds, quantitative strategies, etc., in order to obtain a higher rate of return.

summary

Therefore, there is no need to be pessimistic about the overall revenue level of the LSD track in the future, with diversified revenue models and "partially combinable characteristics".

第一份自带主网质押的保底「固定收益」，第二份在 DeFi 中循环借贷扩大杠杆将收益率成倍提升，第三份 lsdETH/ETH 在 Dex 组成 LP 提供流动性的收益，第四份可预见的「百团大战」LSD 协议的激励收益（老 defi 协议用 curve 等贿选操纵选票，提高激励上限，而新协议挖治理 Token 排放，类似于初期的 LDO），第五份 Eigenlayer 为代表的再质押协议赋予额外的第三方项目的验证节点奖励，第六份来自于 Dex 上引入（lsdETH/ 某 token）交易对的流动性激励收入，第七份收益聚合器将挖矿奖励复投高额汇报理财产品所带来的「固收 + 市场」。

The above seven types of returns cannot be completely superimposed, but they can be expanded by a partial superimposed combination.

例如 LSD 收益聚合器协议 Shield 采用的策略之一是，质押者一半 ETH 存入 LDO，获得主网节点验证奖励的同时得到流动性质押 Token stETH，然后将剩下的一半 ETH 共同组成 stETH/ETH 的 LP 存入 curve 获得平台流动性奖励和 curve 激励奖励，此举可以将纯质押的收益率提高 20-30%；另外如果用户想要获得更高的收益，shield 会将部分收益购入锚定 ETH 价格的期权获得价格增值的收益，是一款加密世界的「固收 +」产品。

To sum up, from the perspective of time, the rate of POS pledge will delay the possibility of sharp drop in rate of return. The time window formed during this period will give more innovative ways to play on the LSD track, push up the amount of lock position and expand the income and liquidity of pledged assets. The superposition of financial attributes will break the spell of mutual exclusion of TVL and APR on the LSD track.

Let's talk more about Alpha's direction below, without getting into specific targets.

Three, about some digressions

After Shanghai's upgrade, is lsdETH's deal still necessary?

We can go back to what is the purpose of the user's liquidity pledge on Ethereum. The most intuitive purpose is mainly three points: threshold, liquidity and financial attribute.

Shanghai upgrade is mainly to optimize the withdrawal and pledge reward extraction process, can only solve the demand for liquidity, white eye a or even more yield is more attention to large households, reduce the pledge threshold + convenience is more retail investors see, increase lsdETH's financial attributes and leverage scale is the agreement parties to focus on.

To this end, the lsdETH protocol will not only exist, but competition is fierce, and it will not be surprising if lsdETH deth more widely in use than native ETH in the future.

Which LSD tracks can we focus on in the future?

The value discovery of a track generally follows the gradual diffusion process from midstream to upstream and downstream. For example, decentralized pledge agreements such as LDO focus more on midstream track, but midstream track is also the first to be found, and the current valuation level (P/F10X) has been matched with UNI.

另外 LSD 中游当前属于收益存量有限（每日 1500 产量上限），红海赛道，一众新老 DeFi 协议带着外部补贴和 Token 激励抢市场，同时也有交易平台与合规赛道对其虎视眈眈。

Therefore, a better staking staking in midstream will be staking on the staking staking in the future by improving the TVL pledge rate and staking agreements such as Re-Staking, DVT, DeFi building Lego.

LSD upstream circuit is the most direct DVT related technology protocol.

Narrative side: DVT technology is an indispensable part of ETH ecological security, which originates from the technical debt formed after Merge to POS. Besides, DVT was originally proposed by Ethereum Foundation, but it was carried out separately. It can be said that DVT and ETH are interdependent, and the business to B has market barriers and technology accumulation. Ecological aspect: the short-term specialty competition scheme will develop into the industry standard in the long run. After enough market education (SEC, kraken, Coinbase, etc.), the importance of anti-regulation and anti-review will be gradually realized. The fact that many of the main DVT networks are not online is still an advantage.

Downstream tracks are mostly revenue aggregators and Re-staking agreements that are not yet online.

Revenue aggregators are the most direct entry to LSD pledge, and high revenue is the most direct way to capture users' attention. As mentioned above, there will be a War on APR in the future LSD track, which is also the opportunity for revenue aggregators.

Most importantly, the projects that lead the industry to the highlight are more often the ones that the market didn't expect, and the new gameplay overlay with the Shanghai upgrade will add a touch of light to the LSD.