LSD MAP 2.0: Analysis of Patterns, Data, Trends, Revenue, Users, and Other Factors

Written by: waynezhang.eth

Since the last LSDFi Map was released, most of the products we predicted have emerged, such as LST-supported stablecoins (R, TAI, USDL, etc.), and the Governance War triggered by veToken (Pendle War), among others. However, there are also many unexpected data and discoveries. This article will organize most of the LSD-related projects that can be researched and raise questions, thoughts, and action guidelines.

First, here is the organized LSD MAP 2.0, as shown in the figure below. For detailed data and subjective evaluations, please refer to my organized Google Sheet.

Pattern

The LSD track has formed a preliminary pattern. If categorized by levels, SSV Network, Obol Labs, and other DVT technology service providers can be seen as L0. DVT technology allows validators to exercise their signing responsibilities more stably and securely. As the first project to issue tokens at this level, SSV Network has a first-mover advantage in brand recognition. Lido, Ankr, Coinbase, and other LST issuers can be seen as L1. L1 mainly operates on a commission model, where users primarily benefit from ETH's POS income. After the Shanghai upgrade, according to statistical data, the number of L1 projects far exceeds the subsequent L2 level, surpassing the predictions of the first version of the MAP. However, investigations found that over 20% are still in the testnet phase. According to Defilama data, Lido holds 74.45% of the liquid staking share. Lido and Rocket Pool account for about 82.5%, while LSTs issued by centralized exchanges led by Coinbase account for over 12% of the liquid staking ratio, leaving little room for other decentralized staking. Some participating projects at this level are multi-chain LST issuers trying to get a share, but in fact, the Ethereum LSD gameplay is slightly different from other public chains. Apart from the first-mover advantage of Ankr, no other projects with outstanding performance have been observed.

TVL share chart (Source: DeFillama, Date: 2023.6.23)

Fixed income products designed based on LST, stablecoins, yield aggregation, etc., occupy the L3 level, which is commonly referred to as LSDFi. At this level, the most numerous are stablecoins based on LST, which list LST as collateral and almost all support other stablecoins and ETH/WETH, etc. There are few lending and leveraged projects, and the lack of such projects directly leads to a temporary scarcity of yield aggregation and structured strategy projects. The emergence and development of yield pools similar to Yearn, structured products using options like Shield, and fixed income products from Pendle will further promote the emergence of yield aggregation and structured strategy projects; projects that use their own tokens to subsidize and improve staking yields have seen rapid declines in both tokens and TVL after the Shanghai upgrade.

Price trend chart of a project with over a thousand APY after the Shanghai upgrade

The L2 level highlights the importance of teams, as some projects that entered the LSD track halfway have achieved good results. The success of some projects in fixed income, options, yield aggregation, stablecoins, synthetic assets, etc., also raises questions about their potential to enter LSDFi with similar products. With insufficient market liquidity, ETH, as the TOP2 cryptocurrency, can still bring strong liquidity even in a bear market after the Shanghai upgrade. How many teams seized the opportunity? As the cycle approaches, with a bull market on the horizon, will other income-generating assets be able to learn from ETH and develop similar products once liquidity increases?

Token 10x increase chart of a fixed income protocol leveraging LSD products

This article defines products based on L2 as L3. The Pendle War triggered by StakeDAO, Equilibria, and Penpie fits the L3 definition; the auto-compounding 0xAcid's AcidTrip; and gUSHer, which simplifies unshETH operations and increases yields; it can be seen that the mainstream is still the governance power struggle triggered by veToken. This level has a lot of imaginative space, not just L2 tools and aggregated governance-type projects. For example, L3 with multiple L2 products and front-end aggregation strategies.

In Eigenlayer, individual ETH holders stake ETH and stETH with staking service providers, allowing the nodes assigned by the service providers to participate in the Eigenlayer protocol, validate nodes directly participating in Eigenlayer, or delegate to other operators for management. Various middleware, data availability layers, etc., pay certain rewards (project tokens, fees, etc.) to earn income. This essentially utilizes the principle of ETH staking but does not produce LST; instead, it can stake LST (currently supporting rETH, stETH, cbETH), so it is recorded at the L2 level.

Index products are mainly based on the three LST indices launched by Index Coop, with relatively few types of LST in the components.

Overall View

【1】L0 has the highest technical barriers, but attention should be paid to the actual utility of the tokens.

【2】L1 has leading projects emerging; barring internal or systemic risks, time and space conditions no longer allow for new TOP3; new entrants will appear.

【3】A large portion of L2 lacks a moat, testing the team's and BD's capabilities more. The more foundational DeFi strategy projects based on LST, the more prosperous L2 will be.

【4】L3's market cap/liquidity is limited by the development level of L2 products and has significant imaginative space, requiring time to develop.

Data & Trends

Staking Rate

Before the Shanghai upgrade, the predicted result was a wave of staking rate decline after a rebound following the launch, but the result was not as expected. After the Shanghai upgrade, the two largest waves of staking involved receiving staking rewards and then continuing to stake, while another wave involved the principal (mainly from CEX) being unstaked, followed by a steady increase. By mid-May, the staking volume broke through 20M, and in June, it surpassed 16M.

ETH staking and total staking volume chart (Source: Nansen, Date: 2023.06.23)

Regarding opinions comparing ETH staking rates with other public chains, I hold a strong staking attitude. In MAP 1.0, I also predicted stability around 25%, with the following reasons and judgment basis:

Reason 1: The degree of decentralization of ETH

The distribution of ETH chips is different from some high-staking "VC chains" and "alliance chains," where many tokens on the chain must be staked, with large market caps and few players, leading to a sell-off equating to a collapse.

ETH whale holdings (including exchange and bridge addresses) and address count change chart (Source: Non-small number, Date: 2023.06.23)

Reason 2: Practicality

As the most active public chain currently, ETH can be considered Ethereum's golden shovel. Using ETH allows participation in DeFi, GameFi, and NFTs, and when participating in on-chain projects, ETH-denominated transactions and ETH Gas are involved. Apart from stablecoins, ETH is undoubtedly the most frequently used asset in on-chain activities, making it a leader in usage scenarios.

Reason 3: External Scalability

The emergence and prosperity of L2, along with the arrival of a multi-chain era, will see ETH as a mainstream asset in multiple ecosystems, further dispersing tokens and reducing the trend of concentration in Ethereum staking. Of course, we will see in the next section an analysis of cross-chain staking Ethereum protocols, which will further explore the impact of cross-chain staking on the LSD ecosystem.

Reason 4: Compliance

It is well known that cryptocurrencies are a focus of traditional finance and regulatory scrutiny in various countries. In many ETFs, after BTC, ETH generally holds the largest share. In secondary funds, ETH also usually occupies a top 5 share. With the increase of crypto ETFs/secondary funds, some have suggested that secondary funds and ETFs will stake tokens in one go, but compliance issues are difficult to resolve. Even if staking is used to increase yields, directly seeking StakeFish is safer and poses less legal risk.

Price factors may also affect staking rates. If the upcoming halving cycle ignites bullish sentiment a year later, will a large number of ETH stakers choose to sell their ETH for profit and buy new hot tokens? This needs further observation.

ETH staking purchase price distribution chart (Source: Nansen, Date: 2023.06.23)

LSDFi will undoubtedly promote an increase in staking rates. The LST generated from staking can enter various projects to earn multiple yields, reducing opportunity costs, and even earning excess returns. However, there are currently no projects at the L2 level capable of accommodating a large amount of ETH, and many LSTs in L1 are not used in L2, so I believe there are still huge investment opportunities in L2.

Centralized Staking vs. Decentralized Staking

According to rough calculations based on data from Nansen, the staking ratio of decentralized staking platforms is less than 40%, with CEX accounting for about 20%, and the vast majority of ETH remaining for node staking and solo staking. After the Shanghai upgrade, the largest withdrawal of principal still came from CEX, accounting for 57.74%. Since Lido occupies 31.8% of the total staking share, it is easy to lead to centralization of decentralized platforms. Projects that balance the proportion of LST have emerged in L2, promoting participants to obtain more LST from smaller platforms by distributing yield rewards proportionally.

ETH staking situation (Source: Nansen, Date: 2023.06.23)

Many L1 platforms also utilize DVT technology to become more decentralized, but from a rational perspective, stakers prioritize safety first, followed by yield. The LSTs of Lido and Rocket Pool are almost applicable to all L2 LSDFi projects, and no security incidents have occurred so far. Lido relies on its leading position in ETH staking to gain income and market share. As a vested interest, centralization that harms Ethereum will also harm its fundamental interests. Of course, internal risks and external risks such as regulation are risks that every L1 platform needs to pay attention to.

Post-Shanghai upgrade ETH principal/reward staking resolution chart (Source: Nansen, Date: 2023.06.23)

Therefore, I continue to be optimistic about the top 3 leading positions but believe that decentralization, as a natural attribute of crypto, makes L1 diversification an inevitable trend. Many L1 products have emerged that balance decentralization, security, and low barriers. However, some quality products cannot escape the issue of token utility.

Yield Rate

Without considering safety factors, high yield rates and yield sustainability are the two most important factors related to LSD. Regarding high yield rates, stakers need to rely on their risk tolerance to participate. In the early launches of many L2 projects, the direct staking yield of LST could reach three digits under token subsidies, and LP could even reach four digits, but price volatility was severe, making mining, withdrawal, and selling unavoidable. Currently, some projects adopt a points reward model, and staking to obtain airdrops has minimal impact on user retention and token prices.

Stakers can refer to common DeFi Lego gameplay to improve yield rates, considering a few methods:

1. Choose LSTs with multiple use cases/partners.
2. Increase capital efficiency through leverage.
3. Participate in L2 products (some L2 products have L3 for multiple nesting).
4. Participate in new project IDOs or reward activities (low safety, but considerable returns).

Using a two-layer nesting approach can basically increase staking yield rates to over 10%, and readers can design strategies suitable for themselves based on their risk tolerance.

After research, it was found that projects capable of maintaining sustainability generally share one characteristic: low yield rates. Many rely on their own tokens or other project tokens (e.g., Frax using Curve) for certain subsidies. If the yield from ETH to LST is foundational, coming from Ethereum staking rewards, then where does the yield from L2 and L3 based on LST come from?

After research, it can be summarized as:

【1】Token incentives: self-token subsidies/other tokens subsidies.

【2】Borrowing fees: some stablecoins.

【3】LP liquidity pool fees.

【4】Derivatives hedging.

【5】Eigenlayer charges service providers to subsidize staking nodes.

【6】Product transaction fees/commissions.

……

From the stability of income sources, we can basically judge the stability of L2/L3 yields. Only methods 【1】, 【4】, and 【6】 can align with the nature of high yields, while 【4】 and 【6】 have strong uncertainties in operation. Therefore, 【1】 will be the mainstream method for a long time to come, but there are significant differences in details during specific usage. However, for projects to survive long-term, adopting method 【1】 requires excellent tokenomics.

I personally believe that quality projects should combine real yields + application scenarios + good tokenomics. Currently, L2 has seen the emergence of real yield projects led by PENDLE and veToken projects, which basically meet the above conditions.

L2's LSD

From the table, we can see many projects deployed at the L2 level, with the top 3 decentralized staking LSTs: wstETH, rETH, and fraxETH being counted.

|--------------|------------------|--------------|-----------------| | Non-ETH Chain\LST | wstETH 2,028,607 | rETH 458,397 | fraxETH 229,062 | | Polygon | 5,348 | 71 | 3,302 | | Arbitrum | 65,753 | 5,929 | 5,302 | | Optimism | 40,570 | 12,226 | \ | | Gnosis Chain | 1,294 | \ | \ | | BNB Chain | \ | \ | 2,352 | | Fantom | \ | \ | 301 |

The number of top 3 decentralized staking LSTs on different chains (Source: blockchain explorers provided by coingecko)

In terms of total volume, Arbitrum has the highest quantity, and the research results show that the most L2-level products are also built on Arbitrum. Although there are many LSTs on Optimism, the number of projects specifically built for LST is far less than the number of DeFi projects providing liquidity pools. The transaction fees on L2 are lower, allowing for faster transactions, and the number of holders is also continuously increasing. Therefore, there is reason to be optimistic about the development of L2 on Layer 2. The earlier the deployment, the more opportunities there are to seize the liquidity of LST on L2.

User Segmentation

Different users have different needs for staking, but the basic elements include safety, yield rates, degree of decentralization, token economics, UI/UX, and ease of use.

Currently, L0 level has fewer projects due to late token issuance and high technical barriers, with many early VC investments; at the L1 level, leading projects have emerged, and many whales/big holders have basically staked ETH at the L1 level and participated in L2; the L2 level has gold miners from various sources, but from the TVL of L1 and L2, taking Lido's stETH as an example, the total amount is 7.383M, while the staked quantity in LSDFi can be estimated at around 150K, indicating that there is still significant market space in L2.

（It is recommended to track more detailed data; the complexity of the data here is too high, and simplifications were made during analysis）

Each factor attracts/retains users with different capital amounts differently. I believe that future newcomers at the L1 and L2 levels will fully grasp each element.

【1】Safety: team personnel and internal management, auditing, fund custody, etc.

【2】Yield rate: differentiation, sustainability, and diversification of yield types.

【3】Degree of decentralization: custody methods, DVT technology, token concentration.

【4】Token economics: whether it can ensure utility while balancing supply and demand, or even being in short supply.

【5】UI/UX: whether it can provide a clear and concise interface and how high the user threshold is.

【6】Ease of use: whether the product's purpose can be clearly communicated to users.

Project Inventory

Basic project information has been placed in the Google Sheet; please configure according to your own risk preferences.

For example, I personally have a smaller amount of funds, and my strategy pursues high yields. I have only participated in one L1 leader/L1 newcomer, while the rest are L2 real yield projects and L3 projects, with a small amount of participation in new project launches.

(The above does not constitute financial advice)

Conclusion

Most LSD projects use LSD Summer as a slogan, benchmarking against DeFi Summer. From the above analysis, it is basically impossible to benchmark, but a Summer does exist. Tracing back to the source, the entire LSD ecosystem is based on POS token currency standards, which also means that LSDFi users need to understand Web3, and most are on-chain projects. Tokens have not yet been listed on exchanges, and yields are currency-based, meaning that participants in LSD are users with certain experience in Web3, and participants are only a small part of this small user group. External users have very limited entry.

Moreover, liquidity has been consistently scarce in the bear market. During DeFi Summer, there were no NFTs, GameFi, or BRC20s. Now, liquidity entering the crypto market must first be divided among various tracks. Although LSD is a hot track in the DeFi sector, it cannot capture most of the DeFi liquidity. Therefore, apart from hot speculation, the real Summer may arrive alongside the bull market.

Due to space constraints, I did not introduce some particularly outstanding projects. Some have enriched their products through strong collaboration capabilities, while others have entered halfway, expecting an explosion of LSD hotspots, and have delivered impressive results. This directly proves the importance of teams. The highly homogenized L1 and L2 tracks require both technological innovation and the efforts of project teams. With the Cancun upgrade approaching and the bull market cycle about to arrive, whether new products can be designed or products targeting different assets can be developed may be issues many projects need to consider.

Cross-layer products have emerged in each level, which may be a future trend. After seizing the share of this layer, utilizing advantages to develop other layers is also a choice for business expansion. Expanding to Layer 2 still seems to be a suitable choice, and many projects are already in planning for development, looking forward to their emergence.

As stakers and investors, facing a rich array of products, I personally suggest first recognizing your risk preferences, then choosing products with higher safety (those with more attention and no security incidents, etc.) to build strategies. Recently, Rug projects and scam projects have emerged, so vigilance is necessary.

Disclaimer: All projects mentioned in this article do not constitute investment advice, and I hold tokens from some projects, which presents a conflict of interest, and the analysis has a certain degree of subjectivity.