The Ethereum Merge transitioned the Ethereum network to a proof-of-stake consensus mechanism. However, the Merge didn’t enable ETH stakers to unstake their ETH from the Beacon Chain. Unstaking is a feature that arrives with Ethereum’s next upgrade, Shanghai, scheduled for April 12, 2023. As of April 10, 2023, over 18.1mm ETH has been staked on the Beacon Chain, worth over $34.2bn. There has been much speculation about what will happen to this ETH when it can be unstaked. One opinion is that it will be the source of sell pressure; another is that more ETH will be staked by users that now feel comfortable staking their ETH with the certainty of being able to unstake; a third view is that staked ETH will be unstaked and deposited into Liquid Staking Derivatives (LSD) to access and use the value of the underlying staked ETH in the broader DeFi ecosystem.
We can only speculate on the market’s response to Shanghai, but considering 71.6% of ETH stakers are underwater on their staked ETH as of April 10, 2023, according to @Hildobby’s Dune Analytics Ethereum Beacon Chain Deposits dashboard, a rush to the exits seems unlikely. Furthermore, Galaxy Digital classifies unstaking into two categories: full and partial withdrawals. Full withdrawals are withdrawals of the entire balance of staked ETH, including rewards and the base amount of 32 ETH, and partial withdrawals are withdrawals of only staking rewards. Each withdrawal type has its own queue that they are processed in, the exit and withdrawal queues, respectively. Ultimately, this means that not all ETH will unlock at once. Estimates from Galaxy Digital and Coin Metrics place the timeframe for partial withdrawals between 4 to 10 days due to the number of withdrawals that can take place per block. Lucas Outumuro, Head of Research at Into The Block, states, “It would take approximately 100 days for one third of validators to exit if they all attempt to exit simultaneously, translating into ~$80-$100M worth of ETH being withdrawn per day.”
The anticipation of the Shanghai upgrade has significantly contributed to the popularity and appreciation of LSD protocols as investors attempt to front-run the upgrade. Of course, this could lead to a buy-the-rumor sell-the-news liquidity event among LSDs. On the other hand, Shanghai should allow LSDs to capture TVL, strengthening their place in the Ethereum ecosystem.
Why Use LSDs?
Solo ETH staking has several limiting factors that cause ETH holders to use LSDs. First, solo staking requires technical knowledge to set up a validator node and a minimum of 32 ETH stake. Additionally, staked ETH is not liquid. However, by using LSDs, protocols issue their own staked ETH token. These staked ETH tokens can be used throughout the DeFi ecosystem, where support has been integrated, enabling access to previously siloed capital and improved capital efficiency.
Many projects fit the LSD narrative, and more are pivoting to get a piece of the LSD narrative pie. This report will cover established and speculative opportunities in the LSD sector by analyzing opportunities based on their fundamentals and technicals. Projects highlighted by this report will include Lido, Frax, Blockswap Network, StakeWise, Manifold, 0xAcid, Hord, Stafi, and other LSD protocols that have not yet launched tokens.
Market Cap: $2.115b | Fully Diluted Valuation: $2.437b
Circulating Supply: 867,557,659 LDO | Max Supply: 1,000,000,000 LDO
LDO is the largest ETH LSD platform in the space, with a TVL of nearly 6 million ETH. They offer an ETH staking APR of 4.7%, which is more than the second and third largest platforms: Coinbase and Rocket Pool. Their stETH is not currently redeemable for the underlying ETH, causing some uncertainty related to the maintenance of 1:1 ETH peg price. stETH is Ethereum native but can be wrapped to bridge to other EVM chains. Additionally, Lido relies on a few validators to stake their ETH, causing centralization amongst the Ethereum Network, ultimately a flaw.
Note: We are using Lido as the benchmark for LSD protocols; at a valuation of $2.437bn, we believe it will have less room to grow than others in this sector. However, we do need to consider how other services compare to Lido when speculating on their value.
LDO is the governance token for Lido. Nearly all LDO tokens have been vested, and inflation will not be an issue here.
LDO Rallied significantly in January 2023 with a broader reversal in the market combined with the excitement related to Ethereum’s Shanghai upgrade. However, since mid-January, it has failed to break above ~$3.00. If LDO can continue to hold above ~$2.00 and confirm bullish market structure, a potential upside extension target of ~$4.44 could be in play. Otherwise, if the $2.00 level fails with a daily close below the lows in that area, the next level of interest for long opportunities would come in the $1.25 region.
Frax Finance (FXS)
Market Cap: $645mm | Fully Diluted Valuation: $903mm
Circulating Supply: 71,230,396 FXS | Max Supply: 99,822,984 FXS
Frax Finance is a stablecoin protocol that issues three stablecoins FRAX, FPI, and frxETH. Frax also has three sub-protocols, Fraxlend, a lending facility for Frax-based stablecoins; Fraxswap, a native AMM; and Fraxferry, a protocol to transfer native issued Frax Protocol tokens across blockchains.
Frax’s LSD Product
Frax’s LSD consists of frxETH and sfrxETH. frxETH is a token loosely pegged to ETH, while sfrxETH is a version of frxETH that accrues staking yield. All profit from Frax Ether validators is distributed to sfrxETH holders, who can redeem their yield by converting sfrxETH back to frxETH. frxETH and sfrxETH are available on Arbitrum, BNB Smart Chain, Ethereum, Fantom, Moonbeam, Optimism, and Polygon.
FXS, veFXS, FPIS, & veFPIS
FXS is Frax’s utility token with governance capabilities. FXS is designed to have a deflationary supply as long as the demand for FRAX, one of Frax’s stablecoins, grows. Additionally, the relationship between FXS and FRAX is such that as the market cap of FXS increases, so does the system’s ability to keep FRAX stable, aligning value accrual to the FXS to token with the stability of FRAX.
Frax has also adopted a veCRV model with veFXS that allows holders to lock FXS for up to 4 years to acquire more veFXS that can be used to participate in governance and gauge farming boosts. veFXS also accrues value through Frax’s LSD product through a 10% fee on sfrxETH staking rewards, 80% of which is distributed to veFXS holders and 20% of which is sent to the Slashing Insurance Fund.
FPIS is the governance token of the FPI stablecoin that is pegged to a basket of real-world consumer items as defined by the US CPI-u average. FPIS also has a veToken system, as FPIS can be locked to obtain veFPIS similar to veFXS. Even with the existence of FPIS, FXS is still economically linked to FPI as FXS accrues value proportional to the aggregate growth of the entire Frax economy.
Since veFXS accrues value from Frax’s LSD, this report will focus on the distribution and vesting schedule of FXS below.
According to the FXS vesting schedule from TokenUnlocks, there are approximately 6mm tokens left to vest, which is ~6% of the maximum supply. Therefore, with most of the FXS tokens in circulation, the price impact of the remaining inflation should be negligable.
FXS is retesting the top of a long previous weekly range after a strong initial breakout from it. We are looking for entries around the $8 level, and watching to see that FXS holds $7.35.
Blockswap Network (BSN)
Circulating Supply: 1,822,000,000 BSN | Max Supply: 5,000,000,000 BSN
Founders: Matt Shams — Founder
Blockswap Network is a platform that offers a liquid staking service for Ethereum (ETH) that allows users to stake their ETH without having to run their own validator node. The platform provides a more accessible, profitable, and decentralized staking service than its counterparts. Additionally, Blockswap offers the ability to create your own LSD network (called a stakehouse) with unique business logic declared by you. Others can deposit into your stakehouse and begin earning yield. You may choose to take a cut of this yield. One of the key features of Blockswap Network is its dETH, a yield-bearing, multi-chain ETH-pegged token redeemable for underlying ETH and requiring no bridge to migrate chains. Users can mint dETH by staking ETH in Blockswap’s Liquid Staking Derivative (LSD) protocol, and it can be burned to reclaim the original ETH deposit.
The dETH is collateralized and pegged to ETH, just like stablecoins such as USDT and USDC. However, unlike WETH, dETH requires no bridge and is yield-bearing. Users can migrate their dETH through Blockswap, which can burn the user’s dETH on one chain and simultaneously mint new dETH for the user on the destination chain. This process is free of gas fees and much more secure than bridges. Additionally, dETH users receive rewards from the Ethereum network’s staking incentives, currently amounting to around 5% APR.
Blockswap also offers a MEV (miner extractable value) rewards system, where users can mint SLOT tokens upon staking their ETH with Blockswap. The SLOT tokens represent a share in a validator’s MEV rewards, and half of the SLOTs for a given validator are sold in the market. Users can buy or sell SLOT tokens independently of their staked ETH position, which allows them to speculate and accrue MEV revenue independently. This is unique as many liquid staking options do not redistribute MEV rewards to their stakers.
A key positive of stakehouses is that they promote the decentralization of validators in the Ethereum Network. Remember, we mentioned that this is a major flaw in Lido’s current service (lack of decentralization). Blockswap could serve as a tool for the largest LSD service providers as they may choose to navigate their massive TVL to stakehouses where their ETH can be dispersed across multiple validators.
BSN is a governance token for the DAO that controls been allocated 53% of the total supply. As it stands, 5.44% of the max supply is circulating, and of that remaining 94.56%, 27% is allocated to the treasury and will vest over the next three years and eight months.
There is no liquid market for the BSN token currently. Therefore there is no reliable valuation at this point.
Market Cap: $38,655,337 | Fully Diluted Valuation: $164,491,869
Circulating Supply: 234,998,465 SWISE | Max: 1,000,000,000 SWISE
SWISE offers liquid ETH staking in its simplest form. Users deposit ETH to mint sETH2, which is an Ethereum native ETH derivative. Users don’t have to worry about de-pegging of sETH2 as it is 1:1 redeemable for the underlying ETH. sETH2 holders will receive staking rewards in rETH2, which is also 1:1 redeemable for ETH. Unfortunately, sETH2 is not omnichain native and would have to be wrapped to be bridged to another chain.
SWISE is the governance token for the StakeWise DAO, which will govern the following:
- fees paid by stakers
- commissions paid to node operators
- onboarding and offboarding of oracles and node operators
- principles of liquidity mining campaigns
- whitelisting of gauge contracts
- Insurance Fund payout triggers
- approval of contract changes for the introduction of new features and more
SWISE is 23.4% circulating and is meant to be 100% circulating in about two years. This heavy inflation weighing on it could explain why it has failed to enter serious price discovery in its lifetime.
SWISE is reacting bullishly to Pump Chaser Zone + horizontal support confluence following a weekly breakout. This gives hope that a breakout of this life long range is possible.
Manifold Finance ($FOLD)
Market Cap: $47,725,266 | Fully Diluted Valuation: $59,922,829
Circulating Supply: 1,592,890 FOLD | Max Supply: 2,000,000 FOLD
Founder: Sam Bacha — Founder
Manifold Finance is a multifaceted protocol offering services such as MEV, Secure RPC, and now Liquid ETH Staking. The latter will be the focus of today’s analysis. According to Manifold’s recent community meeting, we should expect all mevETH features to roll out over the next 3–6 months. mevETH is the ETH derivative that Manifold is offering and contains some impressive key features. Other than Blockswap Network’s dETH, mevETH is the only ETH derivative that is omnichain native (to our knowledge). Leveraging the power of Layer Zero, this is a valuable improvement to security and cost when navigating across various chains. mevETH bears yield not only from validator rewards but MEV revenue. We should speculate that this will result in a slightly increased APR for stakers relative to other LSD competitors.
We believe that as a full stack Ethereum block building/MEV/validation service, Manifold has an advantage in the LSD sector as their three services have a symbiotic relationship. Their LSD service is off to a promising start before even launching; Cream Finance has committed to moving 25,000 ETH from crETH2 to mevETH, meaning they will have the 8th largest TVL of all ETH LSD projects before the public has even had the opportunity to stake with mevETH.
FOLD is a governance and revenue-sharing token. Revenue is to be extracted from all Manifold Finance services and paid to FOLD stakers. 79.6% of the max supply is circulating, meaning FOLD will experience little inflation from here on.
FOLD is currently trading underneath ~$37.50 resistance. Should FOLD flip ~37.50 and confirm a large weekly double bottom, further upside is expected. However, should Ethereum’s Shanghai upgrade result in a sell-off among LSD governance tokens, a dip in FOLD to the $24 range could provide a good entry. However, if it loses $24, the next logical level to look for longs is around $16.60.
Market Cap: $11.7mm
Circulating Supply: 12,832 ACID | Max Supply: unlimited
0xAcid is an Ohm fork that aims to maximize the return on ETH LSDs and is packed full of ponzinomics. 0xAcid accumulates Ethereum LSDs through bond sales of the ACID token and distributes rewards generated from the 0xAcid’s treasury, consisting of Protocol Controlled Liquidity and ETH LSDs, to esACID to ACID stakers and lockers in the form of wstETH and inflationary esACID.
0xAcid also aims to launch a lending application as an additional revenue stream for the protocol in Q2 2023. The lending application will let users borrow wstETH using ACID as collateral. Users will be able to borrow up to 40% of their collateral with a liquidation threshold of 50%. In the event of a liquidation ACID collateral will be burned.
0xAcid also has an investment objective to unwind the protocol when ETH reaches $10,000, at which point the treasury will be distributed to ACID holders.
ACID is 0xAcid’s governance and utility token. ACID is used to participate in the governance of the protocol through the 0xAcid’s Snapshot, can be staked to earn wstETH and esACID, and can be locked to earn esACID and vest esACID. Vesting esACID requires users to lock ACID at a 2:1 ratio of ACID to esACID, and currently takes 60 days to completely vest esACID. The mechanics of vesting were recently altered through governance, extending the initial 30-day lock to 60 days while also modifying other parameters. A breakdown for staking and locking acid is included below.
- Earn wstETH rewards — Current APR: 82.06%
- ACID remains liquid
- Some dust esACID accrues as well. According to the 0xAcid team, this is because the team did not change the staking contract after the governance proposal discussed above passed.
- The 0xAcid team claims the esACID reward is relatively negligible compared to the emissions from locking, which is accurate, but we cannot help but think of Peter Gibbons, Michael Bolton, and Samir’s penny-shaving scheme from Office Space.
- Earn esACID rewards — Current APR: 1 Month: 220% — 1 Year: 2415%
- Vests esACID at a 2:1 ratio over 60 days
@0xplok created a Dune Analytics 0xAcid dashboard that shows ACID holders preference for Staking vs Locking.
These charts indicate a preference for locking ACID among ACID holders as there has been a relatively steady increase in the percentage of ACID locked.
ACID’s distribution and Vesting schedule are included below.
The 0xAcid team claims the team allocation is staked and locked for one year. The DAO Treasury is staked but not locked. esACID emissions are currently set to 500 per day.
ACID has been ranging between ~$980 and ~$736 since March 28. It is testing the bottom end of this range. Entries along the bottom of the range or after acceptance above ~$980 appear to be the clearest opportunities at this time.
Market Cap: $4.2mm | Fully Diluted Valuation: $15.1mm
Circulating Supply: 88,615,986 HORD | Max Supply: 320,000,000 HORD
Hord is an LSD protocol where users can stake ETH to receive hETH representing their staked ETH. Hord plans on launching the Hord DEX, Viking DAO, Private Pools, and Champions Pools to complement their ETH LSD product. Hord’s LSD product allows users to stake ETH without minimums and combines ETH staking rewards, MEV rewards, and HORD rewards to generate rewards at a current rate of 18.5% APR.
Hord remains a speculative LSD opportunity, with a TVL of merely $431k. However, Hord’s LSD product soft launch only recently occurred on February 27, 2023, and Hord plans on launching its other products in the future, which are a pivot from its initial purpose of being a crypto ETF platform with tokenized crypto strategies. I have my own concerns related to Hord having impressively little to show for itself for being around since April 2021. That being said, the soft launch of the Hord LSD product is live, and Hord’s other products should be on the way, hopefully. Descriptions of upcoming Hoard products are included below.
- Hord DEX: Listings aim to include hETH and tokens from the Champion’s Pools and Viking DAO, even during vesting periods
- Private Pools: Allow hedge funds, VCs, DAOs, and Financial firms to manage their funds on-chain.
- Champions Pools: Allow anyone to create or follow tokenized investment portfolios
- Viking DAO: Designed to invest in pools of up to 20 early-stage projects, private sales
The HORD token is the governance and utility token of the Hoard platform on Ethereum and exists as a pegged token on BNB Smart Chain. It is used to participate in governance, can be staked to reduce platform fees, earn veHORD, receive access to Champion pools, and reward users.
The vesting schedule on Hord’s website is currently outdated. All early buyer tokens have already been distributed, with 40% of the team allocation being distributed over the next two years.
From a weekly perspective, HORD retested the midpoint of its macro double bottom and is ranging between ~$0.077 and $$0.035. Beyond ~$0.077, the next major level lies around $0.11.
From a daily perspective, HORD somewhat resembles the price action of FXS. HORD held ~$0.035 as support and bounced to a daily level around ~$0.0525 and is consolidating under resistance. If HORD can reclaim the ~$0.0525 level, ~$0.077 appears to be the next logical target; otherwise, A retracement to $0.035 is the next level of interest to consider entries.
- According to DefiLama, Stafi offers 6.7% APR on ETH staking (2% higher than Lido). Please note that it is important to do your own research to assess how sustainable this rate is.
FIS broke out of an accumulation range on high volume and proceeded to react bullishly upon retesting that range high. It is now consolidating at a reasonable entry level.
EigenLayer — EigenLayer is an Ethereum protocol that introduces restaking, which enables users to stake ETH or liquid staking tokens and opt-in to EigenLayer to restake their ETH or liquid staking tokens to extend cryptoeconomic security to additional applications on the network to earn additional rewards. EigenLayer’s mainnet is not yet live, and it does not have a token at this time.
Geode Finance — Geode Finance is a protocol that aims to decentralize the liquid staking landscape by providing a permissionless staking library that enables organizations to create their own public or private staking pools while reducing development and R&D costs and maintaining a trustless and decentralized system. Geode is only live on Avalanche but will be launching on Ethereum. Geode also does not have a token at this time.
Equilibria — Equilibria will be a yield booster on top of Pendle. Equilibria has not yet launched.
– Diva is an Ethereum LSD protocol that uses distributed validator technology (DVT) to connect stakers and operators to help decentralize Ethereum staking. With Diva, operators can run their DVTs with as little as 1 ETH. Diva does not have a token at this time.
– Ether.fi is a liquid staking protocol where stakers keep control of their keys while delegating staking to node operators and earning rewards through a system that includes Staker bond holders, Staker LSD Holders, and Node Operators. Ether.fi has not yet launched a token but has a governance section of their docs that includes references to the ETHFI token.
– Index Coop is a DAO that offers index products such as the DeFi Pulse Index, Metaverse Index, Ethereum Flexible Leverage Index, and a series of staked ETH indexes, including Gitcoin Staked ETH Index, Diversified Staked ETH Index, and the Interest Compounding ETH Index. Index Coop also has the INDEX governance token that holders use to vote on proposals and govern the direction of Index Coop.
Ethereum’s Shanghai upgrade will unlock ETH that has been staked by validators and their accumulated rewards. The public’s initial reaction to the unlock is fear of potential sell pressure as the previously illiquid ETH becomes liquid. However, withdrawn ETH is likely to migrate to LSD protocols as 71.6% of stakers are underwater on their ETH deposits as of April 10, 2023, based on the price of ETH at the start of their stake. It is unlikely that these validators will be in a rush to sell their ETH and will instead deposit this ETH into LSD protocols to access the capital they have earned while continuing to earn rewards and use the value in the broader DeFi ecosystem. Shanghai enables validators to access the value of their ETH, improving capital efficiency. LSDs that become widely adopted, as stETH already has, should lead to the appreciation of their associated governance tokens. The protocols discussed in this piece present both established and speculative opportunities.
Ethereum’s Shanghai upgrade is rapidly approaching, scheduled for April 12, 2023. This event could be a significant buy-the-rumor sell-the-news liquidity event that could cause a sell-off among LSD protocols providing strong buying opportunities after the upgrade as many of the leading LSD tokens have appreciated significantly ahead of the Shanghai upgrade. However, the Shanghai upgrade is fundamentally bullish for LSD protocols, as many LSD protocols should see an increase in their TVL as ETH moves into these protocols.
Disclaimer This commentary is provided as general information only and is in no way intended as investment advice, investment research, a research report or a recommendation. Any decision to invest or take any other action with respect to any digital assets and/or securities discussed in this commentary may involve risks not discussed herein and such decisions should not be based solely on the information contained in this article. Past performance is not indicative of future results. Please note that products, platforms, or other items mentioned in this article may be prohibited in the US and other restricted jurisdictions.
Publication: Magnus Capital