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Arthur Hayes: Why did I sell all the Ldos I had for so long at a loss?

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Arthur Hayes has long been concerned that Lidos are not decentralized enough and that tokens will plummet if the market picks up on them.

Original title: Shapella's Show

原文作者： Arthur Hayes

原文编译：白泽研究院

Crypto researcher Thor Hartvigsen recently summarized the activity of some well-known venture capital funds, large investors, and traders in the cryptocurrency market over the past 30 days. These activities involve a variety of digital assets, including $GNS, $DYDX, $GMX, $RDNT, $DPX, $ARB, $LDO, $ETH, $BTC, $MATIC and $AAVE. (See "Analysis of the Link between Whale and VC's on-chain Dynamics and Token Price Fluctuations" compiled by Shenchao TechFlow for more details)

Arthur Hayes, a BitMEX co-founder and trading enthusiaster, bought 758, 000 $Ldos (Lido Finance's original token) at an average price of $2.53 during 2022, But sold it all at a loss in March at $2.42.

However, the average price at which he bought $LDO was also said to be $2.26 or $2.35, which may have been a small profit.

Shapella upgrade (Shanghai upgrade +Capella upgrade) is coming soon, after which, the pledged $ETH can be redeemed, and the increased willingness of users to participate in the pledge will also promote the increase of the pledge rate. It can be predicted that the scale of Ethereum LSD (liquidity pledge derivatives) track will continue to expand.

Arthur Hayes has been bullish on Ethereum mergers, the LSD track, and the leading project Lido, so why sell $LDO, which he has held for six months?

Today, he gives the answer in a blog post.

In December, I launched my crypto family office Fund, the Maelstrom Fund. I hired Akshat Vaidya, former head of corporate development at BitMEX, to scour the world for crypto projects worth investing in. Our goal is to invest in early stage projects that will generate excess returns over just holding $BTC and $ETH.

Next, Akshat will, every once in a while, offer readers musings on encrypted racetracks that he's very excited about. Obviously, we're paying out of our own pocket, but we also want to try to get the market to understand "why the problems these programs are trying to solve are important to the goal of further decentralization." Ultimately, we hope to help these teams destroy the rotten TradFi financial system once and for all - aha! I mean, offer an alternative.

The following article talks about the decentralization movement of Ethereum network validators. It's a very exciting field,I have expressed a bullish view on Ethereum consolidation in the past by overweight $ETH and $LDO in my portfolio. But, in my heart of hearts, IThere was always a concern that Lido wasn't decentralized enough, and once the market started to focus on that, tokens tanked.After Akshat invested in Obol and ether.fi and explained his reasons for doing so, I knew it was time to sell my $LDO.

Akshat's Encryption Paper: The Upcoming Restructuring of the $ETH Pledge Circuit

"Not your keys, not your crypto" has been the industry motto for as long as I've been in the crypto industry. But traders, investors, and even founders and high-profile fund managers have messed it up over and over again, and too many people have made the same mistakes over and over again and lost control of their private keys - resulting in billions of dollars' worth of money being lost or stolen (from Mt. Gox to FTX and everything in between).

Before DeFi Summer (around 2020), investors typically lost money in CeFi exchanges that had mismanaged funds or were fraudulent.

But in 2021-22, the issue resurfaced in a new way -- with a number of so-called "decentralized" (but ultimately still managed) cross-chain Bridges compromised by hackers, totaling more than $2.5 billion.

Given the inherent properties of blockchain, our loss of control over our private keys -- whether in CeFi or "decentralized" entities -- is not a compromise any of us should have to make. Here we are, however, in 2023, and in our desire for simple $ETH pledge rewards, dangerous flames are once again emerging.

Post-defi Summer, we've come to expect yields from our cryptocurrencies - especially our $ETH, and even more so now given the recent Fed rate hike.

However, as it remains difficult to set up validators, investors find themselves forced to make a choice between using risky hosting services or simply leaving their $ETH idle.

Worryingly, many people choose the former, entrusting their private keys to:

1) Fully centralized services like Coinbase, Kraken, and Binance;

2) Early decentralized ETH LSD protocols, such as Lido Finance.

To be fair, these hosting services or agreements are important stepping stones to a distrustful, decentralized $ETH pledge future. However, they also prioritise speed to market, but at the cost of exposing stakeholders to potential node operator risk, regulatory risk and security risk.

Fortunately, that option is coming to an end. The Shanghai Upgrade (Shapella Upgrade) will be implemented over the next 24 hours and will allow the pledge to withdraw $ETH for the first time (0.4% of the total ETH pledged per day). More than $18 million ETH (about 15% of the float and worth tens of billions of dollars) is about to be freed from the previously mentioned high risk escrow business model.

These services or agreements have the most to lose in terms of their existing market share of $ETH pledged services and are likely to benefit the least from the tens of millions of dollars of ETH pledged over the next few years.

Of these, Lido -- the largest and first decentralized LSD protocol -- may be the biggest ticking time bomb of them all.

Here's a look at how the Shapella upgrade could break Lido's dominance of the $ETH pledge market:

Lido, which accounts for about 75% of all $ETH locked in the LSD protocol and about 30% of the total $ETH pledged, is basically based on the verifier's belief in the credibility of the node operator:

The verifier deposits $ETH, but the node operator does not contribute (unlike Rocketpool's model, where the node operator contributes 16 of 32 ETH per verifier);

Node operator generated key (including BLS private key and verifier key) Rather than the pledgee and to carry out the redemption process of the pledged $ETH on a voluntary basis;

This means that the verifier has no direct claim on their $ETH or pledge rewards, only a hypothetical pool of assets generated on the protocol itself (similar to the cross-chain bridge Wormhole business model, which was hacked last year)

To be clear -- Lido works because the node operators have chosen to cooperate.

If the node operator is unwilling or unable to exit their validator for whatever reason (in order to redeem $ETH and pledge rewards for you), then you are in trouble. Of course, Lido has taken some meaningful steps to reduce the risk of a major event - such as hackers breaking the verator key, or regulatory/law enforcement actions preventing node operators from redeeming $ETH and causing market panic. The entire redemption process for Lido will only be tested on a large scale for the first time after the Shapella upgrade on April 12, so so far it's been a one-way street. But in any case, in the end the node operator can simply refuse to opt out, effectively making the $ETH pledged by "you" illiquid and inaccessible for a period of time, but with limited downside risk for the node operator to bear.

In short: the Lido model (and the revenue model for its node operators) depends on you not only giving up your private key, but also taking on most of the risk. All for the sake of... A 4-6% return on your valuable assets. Sound familiar?

Fortunately, none of us need to take that risk anymore.

The architecture of Lido was good enough in its early stagesA withdrawal certificate at the executive level is not sufficient to make the LSD protocol unmanaged.We now know that it is not possible to simply create a smart contract-controlled redemption mechanism as a solution. So how do we design Ethereum pledge services that are both unmanaged and scalable?

We launched BitMEX's family office fund, Arthur Hayes' Maelstrom, in December 2022 amid the rubble of the collapse of many custody business models to invest in projects designed to fix the problems.

We are therefore investing in ETH pledge infrastructure projects which:

1) Directly compete with the above two risky hosting business models (full centralization and early decentralization);

2) Complementary programs to existing services to help them further decentralize.

Maelstrom's first investment is in the second category, which competes with neither Lido nor Coinbases but uses them to eliminate a single point of failure. Obol Labs, an investment we made in January, is helping to further decentralize existing services and "decentralize" protocols. Obol's Distributed Verifier Technology (" DVT ") middleware allows the verifier key to be "split" between multiple node operators, effectively creating a "multi-signed" verifier that can run simultaneously on multiple machines. These multiple validators still act as a "dialogue" with the beacon chain, avoiding penalties or cuts while improving the safety and decentralization of the $ETH pledge track.

On the other hand, ether.fi is our first investment in the second category, a project designed to evolve from the legacy hosting models of Lido and Coinbase. ether.fi is building the first true unmanaged pledge protocols for Ethereum (and other PoS networks in the future). In the post-Shapella era, the pledge is free to jump among multiple pledge services in pursuit of the highest yield, the highest APY, but ether.fi chooses to compete with other protocols in other ways. Using ether.fi, the pledge generates and controls its own key throughout the pledge process from creation to redemption, and can exit the verifier at any time to reclaim their $ETH, thus preventing malfeasance by the node operator. Good for "Your keys, Your crypto." ether.fi reduces the risk for all parties, including node operators who no longer need to keep wallets connected or rely on trusted intermediaries for coordination.

Giving up control of your private key is not a compromise you need to make in order to participate in any decentralized ecosystem. Existing services and protocols in the $ETH pledge - both centralized and early decentralized - prioritize time-to-market. But a dark cloud hangs over these participants as more and more new projects are being built and designed to provide trust-free, truly unmanaged $ETH pledge solutions. With today's Shappela upgrade, the bondage has finally come off.