I’ve always thought that not being able to use your staked assets was sort of the catch in earning your staking rewards. That’s the way it works with time deposits in banks, or even in securities where if more people hold the asset the stronger it becomes. On hindsight, having all that liquidity locked up in a validator is kind of a bummer for the whole ETH ecosystem.

Consider these two scenarios: First is an eth economy where the value of the currency is high because a lot of it has been locked up by speculators looking for yield. The second is an economy where the value of eth is high because a lot of people have been using it to pay gas, burning it on transactions, and biggest of all, using it to supply liquidity in DeFi protocols. Which one is more sustainable?

I dunno bout you, but I’d go for the second- the demand-and-churn driven price. Merely inflating a token’s value by hoarding the supply doesn’t seem to be a healthy strategy for growing an ecosystem because at some point, stakers will be looking to sell.

You could be wondering what em blabbering about. I’ll tell you fren. But please don’t call da tokhang task force coz Danki is completely sober. I just stumbled on some really good shit. It’s called LSD-- short for Liquid Staking Derivatives.

The catch is that we need to stake to more validator nodes to secure the network and prevent centralization, but we also need that eth for liquidity in our DeFi markets. Well, there’s the demand.

The other dot to connect is that eth staking protocols issue their stakers a token that represents their staked eth. They needed it to keep track of who owns what amount of stake, and then they burn this token once the eth is ready to unstake. This token is by the way your LSD, and it functions like an IOU from your staking protocol.

The final dot in this trifecta of liquidity is that some dexes and exchanges started to offer ETH to stETH swaps… so you don’t even have to wait for your stake to unlock to get back your ETH .

Given this high level of liquidity, it didn’t take long for people and protocols to realize that they could as well use their staked ETH as a means of exchange… almost as good as real ETH, with gas usage the exception.

There are many, many implications to LSDs, but the first thing that happened is that it just made that ~5% yield you get from staking your ETH totally risk free. It’s almost a no-brainer to stake now because you can just exchange your staked tokens back to ETH in any popular dex out there, at any time you wish.

And while danki iz (personally) not a pure believer of efficient markets, i know that risk-free transactions will be a magnet to eventually pull a really huge portion of ETH to be staked inside validator nodes.

Except that actually, it already happened.

The biggest barrier to entry to staking is the 32 ETH minimum requirement to run a validator node. That’s a lot for your average cryptobro. So staking protocols like Lido offered to pool people’s ETH to run nodes. Now anyone can get staking yields for any amount of they wanna stake.

Of course people eat it up. And now Lido with its whopping $13.08B TVL (that’s approximately 26% of all value locked in DeFi application) became the biggest protocol in the face of the planet, in just a span of months. And my hypothesis is that it will still get bigger.

It gets crazier though.

At one point Lido’s dominance posed a threat to Ethereum’s decentralization because they operate a huge portion of validator nodes. They eventually shifted to delegating to other node operators, but the operators still need to apply to Lido, making it permissioned. This doesn’t sit well if you’re an advocate of decentralization wanting to stake to both earn yields and help the ecosystem at the same time.

So you’ve guessed it, new liquid staking protocols emerged. For instance, there’s RocketPool that runs a permissionless network of node operators and offers the same thing Lido does but with a more diverse set of validators and infrastructure.

Then there are some more protocols that were made for better UX and easy integration, but you get the gist.

Der are two more things I wanna give as your takeaway about LSDs: first is that allowing for staked ETH to be spent like normal ETH opens up a whole new market for yield-bearing assets. And I wanna talk about fascinating new primitives that emerged because staked ETH.

Second is that since ETH is not merely a financial asset but also a way to secure the consensus layer of a network, liquid staking derivatives also opens up new possibilities and risks for other aspects of the ecosystem, and not just on the DeFi side.

But I’ll take a break for now. There’s also somewhere in DeFi that my hooves can’t just stop typing about. Those are… AMMs haha. I promise it’s going to be a full story next time tho 🐎✨

I’ve always thought that not being able to use your staked assets was sort of the catch in earning your staking rewards. That’s the way it works with time deposits in banks, or even in securities where if more people hold the asset the stronger it becomes. On hindsight, having all that liquidity locked up in a validator is kind of a bummer for the whole ETH ecosystem.

Consider these two scenarios: First is an eth economy where the value of the currency is high because a lot of it has been locked up by speculators looking for yield. The second is an economy where the value of eth is high because a lot of people have been using it to pay gas, burning it on transactions, and biggest of all, using it to supply liquidity in DeFi protocols. Which one is more sustainable?

I dunno bout you, but I’d go for the second- the demand-and-churn driven price. Merely inflating a token’s value by hoarding the supply doesn’t seem to be a healthy strategy for growing an ecosystem because at some point, stakers will be looking to sell.

You could be wondering what em blabbering about. I’ll tell you fren. But please don’t call da tokhang task force coz Danki is completely sober. I just stumbled on some really good shit. It’s called LSD-- short for Liquid Staking Derivatives.

The catch is that we need to stake to more validator nodes to secure the network and prevent centralization, but we also need that eth for liquidity in our DeFi markets. Well, there’s the demand.

The other dot to connect is that eth staking protocols issue their stakers a token that represents their staked eth. They needed it to keep track of who owns what amount of stake, and then they burn this token once the eth is ready to unstake. This token is by the way your LSD, and it functions like an IOU from your staking protocol.

The final dot in this trifecta of liquidity is that some dexes and exchanges started to offer ETH to stETH swaps… so you don’t even have to wait for your stake to unlock to get back your ETH .

Given this high level of liquidity, it didn’t take long for people and protocols to realize that they could as well use their staked ETH as a means of exchange… almost as good as real ETH, with gas usage the exception.

There are many, many implications to LSDs, but the first thing that happened is that it just made that ~5% yield you get from staking your ETH totally risk free. It’s almost a no-brainer to stake now because you can just exchange your staked tokens back to ETH in any popular dex out there, at any time you wish.

And while danki iz (personally) not a pure believer of efficient markets, i know that risk-free transactions will be a magnet to eventually pull a really huge portion of ETH to be staked inside validator nodes.

Except that actually, it already happened.

The biggest barrier to entry to staking is the 32 ETH minimum requirement to run a validator node. That’s a lot for your average cryptobro. So staking protocols like Lido offered to pool people’s ETH to run nodes. Now anyone can get staking yields for any amount of they wanna stake.

Of course people eat it up. And now Lido with its whopping $13.08B TVL (that’s approximately 26% of all value locked in DeFi application) became the biggest protocol in the face of the planet, in just a span of months. And my hypothesis is that it will still get bigger.

It gets crazier though.

At one point Lido’s dominance posed a threat to Ethereum’s decentralization because they operate a huge portion of validator nodes. They eventually shifted to delegating to other node operators, but the operators still need to apply to Lido, making it permissioned. This doesn’t sit well if you’re an advocate of decentralization wanting to stake to both earn yields and help the ecosystem at the same time.

So you’ve guessed it, new liquid staking protocols emerged. For instance, there’s RocketPool that runs a permissionless network of node operators and offers the same thing Lido does but with a more diverse set of validators and infrastructure.

Then there are some more protocols that were made for better UX and easy integration, but you get the gist.

Der are two more things I wanna give as your takeaway about LSDs: first is that allowing for staked ETH to be spent like normal ETH opens up a whole new market for yield-bearing assets. And I wanna talk about fascinating new primitives that emerged because staked ETH.

Second is that since ETH is not merely a financial asset but also a way to secure the consensus layer of a network, liquid staking derivatives also opens up new possibilities and risks for other aspects of the ecosystem, and not just on the DeFi side.

But I’ll take a break for now. There’s also somewhere in DeFi that my hooves can’t just stop typing about. Those are… AMMs haha. I promise it’s going to be a full story next time tho 🐎✨