📬 Today’s Send

_{Disclaimer: Nothing we publish should ever be construed as financial advice. We strive to be unbiased, but may have ownership interests in projects mentioned. DYOR.}

📈 Market Movements (May 20 - 27)

BTC $26,764.25 (-1.15% 7D)
ETH $1,826.23 (-0.41% 7D)
BTC Dominance 47.87%

Coin Metrics’ State of the Market: May 18-24

📜 Stories of the Week

Here’s the top stories unfolding right now:

🧪 ADDICTED TO LSD

Lido v2 Live on Mainnet

L-S-and-D are the letters on everyone’s lips right now, so I decided to see what the fuss is all about.

In other news, the Liquid Staking Derivative narrative has caught fire again, and the market can’t seem to get enough. While volatility is accepted as a feature in most DeFi categories, LSDs have been one of the few steady performers. Liquid Staking TVL has been up-only, and with $17.8b locked, it is now the leading category in DeFi by TVL.

Within the sector Lido absolutely dominates, boasting an impressive 73% market share. This won’t be changing anytime soon as LSDs are shaping up to be a winner-takes-all market. Simply put, with ETH staking derivatives the liquidity moat and subsequent network effects accruing to the market leader all but guarantees victory. A virtuous cycle is established as new users are incentivised to stake with the market leader:

While the benefits of this network effect for both users and the Lido protocol are clear, it raises social concerns about power centralisation in the Ethereum ecosystem. Paradigm suggests this concern is overblown, as unlike centralised staking pools decentralised pools can control any share of the network without jeopardising PoS security. However, this comes with one MAJOR caveat: this is the case so long as each individual validator in the DAO is not too big, and the protocol has shed all of its governance functionality. Neither fees, withdrawal credentials, or the validator registry can be changed by human inputs nor allowed to be voted on.

Lido addressed these concerns this week with its v2 upgrade officially launching on Ethereum mainnet. The upgrade brings a host of new features encouraging protocol decentralisation but centers around two main components:

1. Ethereum Withdrawals - Ethereum stakers can now unstake ETH directly through the Lido protocol.

2. New Staking Router Architecture - Lido’s new modular architectural design allows for the development of on-ramps for new Node Operators, ranging from solo stakers to DAOs an Distributed Validator Technology (DVT) clusters.

The implementation of withdrawals has been a core goal of Lido for some time, but Ethereum’s recent Shapella upgrade was the necessary precondition to being able to offer it to users. Post-v2 upgrade, stETH holders now have total freedom to hit the escape hatch and withdraw from Lido at a 1:1 ratio.

While withdrawals will get the most attention as the user-facing aspect of the upgrade, it’s the Staking Router that addresses the largest remaining issue - the management of Lido’s node operator set. Providing a good validator set is key to minimising the risk of misbehaviour, and allowing users to use dApps on Ethereum with the lowest risk of downtime or censorship.

Until now it’s been Lido’s responsibility to ensure a healthy validator set, with a simple approach of selecting operators from those that apply directly. Whether by accident or not, Lido selecting a bad validator set increases the risk of governance capture, a key vector of attack that needs to be decentralised. The Staking Router is a key milestone in progressing towards permissionless validation, and enabling a more robust and diversified validator set. Moving the operator registry to a modular and more composable architecture means anyone can develop on-ramps for new Node Operators, importantly leading to the gradual adoption of DVT in Lido.

An $LDO staking proposal, or something more sinister?

To conclude an eventful week for the Lido ecosystem, a rather polarising proposal was presented to the DAO, suggesting the introduction of a $LDO staking module for revenue sharing:

Recently, I’ve noticed influencers sharing news of this proposal as if Lido fully supports it. However, if you actually read the forum discussion you would see this is not the case.

The proposal sparked heated debate about priorities and values, which naturally vary depending on which bags you hold. While some members expressed serious interest in exploring the idea further, the prevailing sentiment dismissed it as far from a priority and evidently at odds with Lido’s efforts to eliminate remaining trust assumptions.

In no uncertain terms, Hasu (strategic advisor to Lido) voiced his strong disagreement, even going as far to suggest that foul play was involved.

As it turns out, the community had some pretty compelling evidence to support this suspicion 🍿 

Personally, I find it difficult to see this proposal as anything other than self-serving and reckless. The Lido core team has made their vision very clear: to contribute to the decentralisation and security of the Ethereum network. As the largest protocol within the leading category of DeFi, Lido is far too important to the ecosystem to haphazardly start introducing ponzinomics. Introducing revenue-sharing will only result in value-extraction, and ultimately distort the incentive structures of the Ethereum network to the detriment of just about everyone.

Competition Heats Up for (LSD) Summer

With the Shapella upgrade in April finally enabling stakers to withdraw their ETH, it would have been reasonable to expect a mass exodus of patient validators cashing in their chips. Instead, we’ve seen the complete opposite - April and May saw back-to-back record highs in ETH deposits across the ecosystem, and weekly ETH staked has gone parabolic.

This influx of capital has seen an explosion of building activity, both for new liquid staking derivatives as well as ‘LSDfi’ protocols layering on top. Competition is fierce, with new staking derivatives launching from all corners of the industry: exchanges, lending protocols, stablecoin providers, and more. The list grows longer everyday, but who has a real shot at stealing market share from the big three? stETH, cbETH and rETH command a combined $15.5b TVL, controlling 93% of the market.

Here are three of the notable entrants poised to make a splash:

$BETH (Binance)

Binance wasted no time joining the action, launching their liquid staking token $wBETH (Wrapped Beacon ETH) on April 27. Binance is now the second major exchange to having its own liquid staking token, trailing behind Coinbase’s cbETH launch back in August 2022.

In the Binance model ETH can be staked 1:1 for BETH (no fees), and then wrapped into wBETH for moving cross-chain. Just like cbETH, wBETH works under the cToken model, where staking rewards accrue daily to stakers and exchange rates are adjusted accordingly (for redeeming back to BETH).

In classic CZ fashion, Binance has gone ultra aggressive with its wBETH growth strategy, leveraging DeFi protocols in ways we’ve never seen an exchange do before. To attract liquidity a wBETH-ETH pool has been created on Curve (current TVL $9.1m), and a proposal has been submitted to add the pool to Curve’s Gauge Controller. Taking it one step more degen, Binance is joining the CRV wars, BRIBING incentivising vlCVX holders on Convex with wBETH rewards (11.381 $wBETH on Votium right now). Rumour has it that Binance has acquired 1.8m CVX from Terra via OTC deals, which, if locked, would give them 3.27% of the total vlCVX supply. This would make Binance the #8 holder of vlCVX, right beneath… checks notes… pennilesswassie.sismo.eth (is this even legal? KEK).

In its first month wBETH has performed strongly, with a total of 70.9k wBETH tokens minted and a current TVL of $132.3m (6th among all LSDs). With the degen liquidity they’re about to absorb from the DeFi ecosystem, these numbers are poised to grow quickly. Coinbase’s cbETH may have a head start with a TVL of $2.17b, (2nd among LSDs), but with the SEC breathing down their neck, it’s hard to imagine Brian Armstrong BRIBING vlCVX holders anytime soon. Until now, Coinbase hasn’t faced a real competitor in the centralised liquid staking market, and with Binance’s larger userbase and fewer restrictions, I could easily see the Cartel stealing this one.

$frxETH (Frax)

Being the astute gigachads they are, Frax stayed several steps ahead of the competition by making their moves early. The frxETH staking derivative soft-launched in October ‘22, and they deployed several Curve pools in March (over a month before Shapella). This precise timing coupled with the generous LP rewards offered since, clearly demonstrates two things:

1. Frax has a deep understanding of the Ethereum network and its evolving dynamics.

2. Frax has strong conviction LSDs are core to that future.

Another point of conviction for fraximalists is keepin’ it simple. On the surface, their LST model appears surprisingly basic, almost like Lido with extra steps. Users deposit ETH to receive frxETH → users stake frxETH to receive sfrxETH → sfrxETH holders earn staking rewards. In isolation, the whole “frxETH is an ETH-pegged stablecoin” positioning seems like nothing more than a marketing ploy. However, with some knowledge of the wider Frax ecosystem the light bulb suddenly goes off. The secret sauce of frxETH lies in its innovative AMO design and how it leverages the existing Frax flywheel for greater yield and DeFi interoperability.

What is frxETH?

The Frax ether token is an ether-pegged stablecoin, backed 1:1 by ETH. Holders can stake frxETH for sfrxETH to earn Ethereum staking rewards, or choose instead to use the token for liquidity provision on Curve or other DeFi apps. The two-token model is the critical difference between Frax and Lido. Lido has just one token (stETH) because it rebases to reflect staking rewards. The problem with stETH and rebasing tokens is that it breaks a lot of DeFi functionality, as some DeFi protocols don’t support rebasing tokens natively. Holders risk losing out on a portion of daily staking rewards if they choose to provide stETH as liquidity across such platforms - the token can only be made DeFi-compatible through wrapping. Furthermore, stETH holders do not benefit from rewards in the form of appreciated token value, which was the rationale behind the $LTO staking proposal made earlier.

Frax’s model eliminates risks associated with rebasing and simplifies DeFi integrations. The frxETH stablecoin doesn’t rebase and is fully backed by ether and the protocol’s AMO multisig (algorithmic market operations). If users prefer staking rewards, they can stake for sfrxETH, which also benefits from price appreciation (like the Yearn vault token).

The secret to frxETH’s juicy yields is the frxETH AMO and its liquidity flywheel.

The purpose of the AMO is to:

• Generate overall ETH/frxETH liquidity;

• Grow protocol-owned liquidity (POL) + farming revenue;

• Capture arbitrage profits.

As it’s a comprehensive, we won’t delve into it in this article. To learn more about the specific mechanisms of the AMO, I recommend reading this article (wayback machine archived) and this thread.

frxETH Performance

Frax’s flywheel has been spinning to great effect, generating the fourth highest TVL in the LSD market with $409m staked ETH. Staked Frax Ether has also consistently ranked among the highest yield-generating LSDs, with a current APR of 4.97%. The TVL of the frxETH pools on Curve is approximately $230.7m, spanning 16 different trading pairs.

Sam Kazemian has been quite transparent about Frax’s strategy, which is underpinned by the concept of stablecoin maximalism. Sam posits “most crypto will converge to become stablecoin issuers in the long-term”, and in such a world, a stablecoin’s success should be measured by its monetary premium - its inherent utility.

Frax is focused on building stablecoins, and $frxETH is a form of stable ether, joining its two other stables: $FRAX and $FPI. With the existence of Fraxlend, Fraxswap, Fraxferry, Curve liquidity pools, and an intent to pursue a Fed Master Account, the hope is that this suite of services will engender demand and that elusive monetary premium.

$yETH (Yearn)

Never one to follow the crowd, the OGs over at Yearn have a long track record of blazing new trails. With all the sage self-awareness they’ve gained over the years, they’re wise enough to know that if you’re going to use LSD for expansion, you should quit being shy and take a heroic dose - maybe 5x the standard.

Of all protocols covered here, Yearn has taken the most unique approach. Due to a lack of perceived competitive advantage over existing protocols, the idea of creating a Yearn-themed LSD was rejected in favour of an LSD of LSDs.

In a nutshell, yETH is an Ethereum token backed by a basket of LSDs. Initially, this basket is set to include 5 different LSDs - likely all the blue-chips. By itself yETH doesn’t earn yield. yETH is intended to maintain a 1:1 peg with ETH, and must be staked for st-yETH to receive yield. 1 yETH corresponds to 1 ETH staked in the underlying LSDs, and to receive LSDs, it must be burned. In exchange for staking, users will earn compounded yETH from the underlying LSD’s yield as well as other protocol rewards such as swap fees and bribe yields.

The logic behind this design choice is to minimise risks of depegging/slashing events through diversification. The protocol functions as a dynamic, Curve-style stable asset pool, but differs in that each asset has a target weight as a percentage of total pool assets, and a band within which it can fluctuate. Another distinction is its alignment with Yearn’s unique competitive advantages:

• An existing war chest of CRV tokens, making it simple to incentivise liquidity for their planned Curve pool

• Expertise in liquidity management and yield optimisation strategies

• A solid reputation within the DeFi ecosystem

• Close relationships with numerous influential DeFi protocols

  • yVaults are already soon to receive rewards from Alchemix, Qidao, Alluo and more

The yETH launch date is currently unknown but expected to launch very soon - within a couple weeks

Other interesting LSDfi projects and news

Projects:

_{Note: As with any hot narrative, there will inevitably be a huge number of scam projects. Be safe and do your own research.}

The LSDfi narrative continues to strengthen. Here are some worthwhile projects to monitor:

🐦️ Swell Network ($swETH) - Ethereum liquid staking protocol

• Swell went live May 24th, officially launching the Swell DAO with its “Swell Voyage” campaign.

• $swETH is the #11 LSD by TVL, with $31.86m locked.

• Venture-backed by Framework Ventures, Maven 11 Capital, Apollo Crypto, Mark Cuban and others.

• Curve proposal for a frxETH / swETH gauge recently approved

• Swell Network Dune Analytics dashboard

🐦️ Origin Protocol ($OETH) - ETH vault yield aggregator

• Launched on Ethereum mainnet May 17th

• OETH is backed by liquid staking tokens instead of stablecoins or just ETH.

  • Users can deposit wETH, stETH, rETH or frxETH to earn optimised yields on LSDs.

  • Users can also deposit ETH and sfrxETH through Origin’s Zap function.

  • OETH is redeemable for underlying collateral at any time.

• Collateral is optimised between either validator rewards or liquidity provision on AMMs.

• The Castle Chronicle notes that smart money activity has been detected in $OGV (Origin’s governance token)

• Proposal for a frxETH / swETH gauge on Curve is now effectively approved after voting

• OETH uses 20% of yield generated by the protocol to buy and vote-lock more CVX to guarantee bribe rewards on Convex.

🐦️ unshETH ($unshETH) - Marketplace for staked ETH liquidity

• Diversified liquid staked ETH basket, backed by underlying LSDS (rETH, wstETH, cbETH and sfrxETH). Stakers earn yield from staked ether, swap fees, and mint/redeem fees.

• Promotes validator decentralisation by increasing competition among LSD protocols.

• Total Value Locked $40.2m - $33.4m on Ethereum, $7.44m on BNB Chain (Dune Analytics).

• unshETH is also an Omnichain token, on both Ethereum, BNB Chain, and now live on Arbitrum. The protocol is undergoing its third audit with Paladin Security

• Users can lock their $USH (governance token) for $vdUSH, earning boosted APRs from partner protocols, and gaining the ability to vote on the composition of LSDs, USH incentives, and fee parameters.

🐦️ Gravita Protocol ($GRAI) - Borrowing protocol for ETH LSTs

• Builds off Liquity’s model, essentially a fork

• To borrow, you need to open a Vessel (vault) where you deposit LST collateral against which you can borrow Gravita’s stablecoin $GRAI

• Last week $GRAI minting was enabled using wETH, rETH, wstETH and blUSD

• gud TL;DR thread

🐦️ Parallax Finance - LSD Yield Aggregator

• Focused on yield aggregation, offering composable yield strategies as its token

• Fastest-growing yield aggregator on Arbitrum

• No token yet

🐦️ Lybra ($LBR, $eUSD) - Interest-bearing omnichain stablecoin backed by LSDs

• Lybra’s $eUSD is an interest-bearing stablecoin with a 1:1.5 collateral ratio (1 eUSD is backed by $1.5 of ETH/stETH). Users deposit ETH/stETH to mint eUSD.

• Key Stats:

  • $88.95m stETH deposited, $34m+ eUSD borrowed and in circulation, 11k ETH converted to stETH, $88k eUSD yield paid to holders

  • $LBR price $1.74, circulating supply 6.29m, market cap $10.77m

  • Dune dashboard

• Announced v2 plans, including:

  • Expanding supported LSD collateral (rETH, stETH2, wBETH, swETH and tapETH).

  • Making its first move cross-chain with Arbitrum, and will be omnichain by integrating LayerZero

  • Tokenomics upgrades: LBR to become deflationary via burns, small portion of supply going to reserves.

• Testnet next month, and mainnet scheduled between July and August

🐦️ Pendle ($PENDLE) - DeFi Yield Trading Protocol, enabling Yield Tokenisation (separation of yield & principal) and Discounted Assets

• Really gud project - worthy of its own article.

• Revelo Intel: Complete project breakdown and timeline of Pendle.

🐦️ Equilibria - Yield booster on top of Pendle

• What Convex is to Curve, Equilibria is to Pendle

• Equilibria tokenomics revealed

🐦️ Penpie - DeFi platform providing Yield & veTokenomics boosting on Pendle

• Focused on accumulating vePENDLE to get governance rights + increased yield from Pendle Finance

🐦️ Agility - LSD Liquidity Layer & Trading Platform

🐦️ Assymetry Finance - safETH token backed by basket of LSTs

🐦️ Stader Labs - Non-custodial and secure liquid staking

• Live on Hedera, Polygon, BNB, Fantom, Near & Terra 2.0

• Launching $ETHx, claimed to maximise staking rewards on ETH

🐦️ StaFi Protocol - Cross-chain Staking Derivatives Protocol

News:

• Metamask is expected to facilitate direct staked ETH withdrawals on both Lido and RocketPool

• Celsius exited their entire stETH position after the v2 upgrade, representing 95% of the total 450k ETH withdrawn.

• Ankr is preparing to introduce its liquid staking solution to Tenet, a new L1 protocol backed by a basket of LSDs

• Aave discussing the possibility of converting its treasury $wETH holdings into stETH and rETH to improve the yield of the DAO to around 68% APR

• “Do you need to think twice before restaking your assets?” (Unchained Podcast w/ founders of EigenLayer & Lido)

  • Vitalik fires back with new article, arguing “dual-use of validator staked ETH is fundamentally fine, but attempting to ‘recruit’ Ethereum social consensus for your application’s own purposes is not”.

  • The article explains why a certain subset of techniques bring high systemic risks to the ecosystem and should be discouraged - “Don’t overload Ethereum Consensus”

• ETH staked has risen 4.4M since the Shapella upgrade

• The next generation of stETH pool is live on Curve. With a reliable price oracle finally in place, it’s possible we may see a crvUSD LSD coming soon.

🤯  EVERYTHING ELSE

• Maker founder Rune releases Endgame roadmap

  • Comprised of 5 major product launches, involving a new brand, new stablecoin and governance token, and 6 new SubDAOS.

• Pulsechain, Richard Heart’s L1 went live on mainnet along with the PulseX DEX and Pulse Bridge.

  • Pulsechain is a fork of the entire Ethereum system state, airdropping a copy of all ERC-20s on PLS (PRC-20s).

  • According to DEX Screener Pulsechain currently has the 4th highest 24H volume of all L1s ($225.7M). At one point it surpassed BSC, sitting in the #2 spot.

  • At present, Pulsechain has a TVL of $417.9m, ranking #8 among all Chains one spot behind Avalanche (DeFi Llama).

  • $PLS is confirmed to be listing on OKX this week.

  • Truly one of the most fascinating experiments in crypto right now. Richard Heart is a black sheep on this side of CT, but what he’s doing right now is impressive and you would be wise to pay attention. I will write a full article on the Pulse ecosystem very soon.

• Ledger’s CEO responds to backdoor accusations over latest firmware update ”Ledger Recover”

  • Confirms that if subpoenaed by the government, they would turn over the three encrypted shards, giving them access to your wallet

  • The service is optional - users who are uncomfortable with the update can continue using their device without it

  • Trezor sales soar 900%.

• GMX v2 testnet is live

• Worldcoin raises a $115m Series C, funded by Blockchain Capital, a16z, Bain Capital Crypto & others.

• FTX offloads derivatives unit Ledger X to MIAX for $50m, while recent bankruptcy filings reveal plans for a rebooted “FTX 2.0”

• Balancer launches concentrated liquidity pools in collaboration with Lido and Gyroscope Protocol.

• Synthetix flips GMX in trading volume after launching an incentive program.

• QuickSwap (the leading Polygon DEX) launches QuickPerps, their new decentralised Perps Exchange

🦎 TODAY’S SPONSOR - NATIVE

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What does this actually mean? It means that projects now have the tools to create THEIR OWN in-app DEX, allowing them to transact directly with their community! For example, let’s say I was the Founder of NFTitties and I wanted to create my own DEX… let’s call it TittySwap. Would that be possible? Yes, it’s already been done!

So how can you get exposure to Native?

🚨 From May 1st - May 15th, Native held a trading competition, with the opportunity to earn 1 of 4 tiered NFTs that will play a SIGNIFICANT role in their governance token distribution… 👀

The Clash of the Traders results are now live! Check your rank at https://www.native.org/competition/ and search for you wallet address on the Leaderboard page. The Emojis at the front of your wallet address indicate the NFT you have won:

💎 Diamond Rank Chameleon NFT
🥇 Gold Rank Chameleon NFT
🥈 Silver Rank Chameleon NFT
🥉 Bronze Rank Chameleon NFT

Further instructions on how to claim your NFT will be shared soon!

🦎 Visit the Native website for more details.

🕵️‍♂️ The Weekly Raid by DeFi Raiders

Every week Rel3ntless from DeFi Raiders shares his favorite early-stage projects.

🐦 Vone Protocol - Interest-free borrowing utilising $ARB.

From the platform that houses $VUSD, an over-collateralised stablecoin native to the Arbitrum network. Interest-free borrowing is certainly enticing…

🧵 A thread on Vone.

🐦 Dionysus Finance - DEX launching on Polygon.

Alpha testing ongoing that can earn an airdrop at launch. Airdrop plus high yields at launch could be a good opportunity to make money.

🐦 Hoyu IO - Permissionless money market that accepts any asset as collateral.

The evolution of money markets is happening quickly and the ability to offer any asset with liquidity as collateral is the next major step.

🐦 Ordinals Anon - Privacy centric NFT project on Bitcoin.

Privacy + $BTC… what more do you want?

DEGEN PLAY OF THE WEEK

DYOR, ape at your own risk!

🐦 Karrot: Debasing project on zkSync, recently launched.

🧵 A thread on Karrot.

🎙 Hunting for Alpha Recap

Another week, another top-tier project. This week, Artemis hosted Revest Finance, a flexible and highly configurable toolset for creating financial NFTs (FNFTs)

🕵️‍♂️ REVEST - PROGRAMMABLE MONEY.

🔊 Re-watch the full Twitter Space Recording below.

🔊 Or listen to the full episode on Spotify.

 🏹 Community Updates

💪 Community Alpha

• Artemis and friends have begun hosting a weekly Twitter Space to spill even more alpha. These Spaces are unrecorded, so turn on your notifications!

• Vulcan’s Blacksmith launching soon.

• Snake’s megathread on Web3 Gaming Ecosystem blows up.

• Chadnik drops a thread on the Native Rebellion

And that’s all for this week.

Until next time,

Sending Alpha 🥂

Thanks again to our sponsor Native. Native is crypto’s invisible DEX layer, turning exchange into a feature any app can add in 1 day. See for yourself at native.org.

_{Hunting Alpha is an exclusive community for the next generation of alpha hunters. Check out what we’re building here.}