Markets are Darwinian. Their march towards effectiveness is steady. They sometimes have to run away from bad construction. A flood of market-changing news from 2022 make it simple to get lost as we look back on the year: Terra and Luna's interconnected implosion, lenders' rediscovery of the importance of duration and liquidity risk, and FTX's fraud proving the need for responsibility separation in all markets. It would be naive to think that this string of occurrences hasn't heightened doubt over the utility and prospects of DeFi initiatives and blockchain technology. We get that, but we don't share that opinion. According to our experience, challenging market occurrences frequently usher in the next stage of development since these fresh problems inspire the development of creative solutions.
Previously, market participants prioritised maximising yield and capturing the convexity to the upside. In the future, they will prioritise tri-party qualified custodians, spot trading with no prefunding, and transparency into reserves and liabilities. This shift in priorities, coupled with the continued efforts of good actors leading from the front, is sure to usher in the next wave of survival of the fittest in crypto markets. Evolution will take place right before our eyes. Let’s make Darwin proud!
Total Crypto Market Cap: $828B (-8.31%)
DeFi TVL: $38.19B (-10.27%)
Stablecoins: $137.66B (-2.53%)
As the upcoming Shanghai hardfork for Ethereum is nearing, CT turned into a frenzy to jump on the latest and shiniest bandwagon, Liquid Staking Derivatives (LSDs). The first Shanghai public testnet will go live by the end of February with a mainnet release scheduled for sometime in March. The upgrade will finally enable withdrawals from Ethereum staking contracts on the beacon chain, which are presently locked.
Ethereum has a variety of use cases in the modern day DeFi landscape such as collateral in money markets or as single-sided liquidity in DEXs. However, when Ether is staked, it can no longer be rehypothecated inside these various protocols hence token holders have to make a tradeoff between opting for the ETH staking yield - and keeping up with protocol inflation - or broad DeFi usage. If you want to take part in Ethereum’s Proof of Stake process and do it yourself then there are a couple of key blockers that might prevent you from doing it such as a minimum threshold of 32 ETH to make a solo validator node but Staking as a Service protocols like Lido solve the problem by creating a new derivative product such as stETH. To understand stETH we need to know what is Liquid Staking first.
Liquid Staking is when the staking process gives you a receipt token that can be traded in the market, normally near 1:1 value of the staked token since you will be able to be redeemed for one in the future.
stETH is the liquid-staked version of ETH provided by Lido Finance. To have stETH, one must deposit ETH in Lido’s platform, and it creates stETH on a 1:1 ratio for you. Lido stake all ETH deposited and splits yield with all stETH holders. The deposit operation can’t be reversed today, so if you want to go back from ETH to stETH you have to sell stETH in the market.
Figure 1 - stETH inner workings diagram.