Lido is a non-custodial mobile pledge service.
The agreement provides liquidity for equity holders’ assets by issuing tokenized derivatives. For Lido’s Ethereum implementation, this includes stETH. The token allows users to obtain collateral income while holding the fungible tokens, allowing holders to deploy their assets throughout DeFi.
How Lido works
Before we dive into LDO tokens, let us take a moment to understand how Lido works-especially Ethereum and stETH.
After users click “deposit” on Lido’s interface, their tokens will be sent to the mortgage contract of the agreement.
These contracts pool all user funds together, and then distribute them to the node operator selected by the DAO in increments of 32 ETH. There are currently 9 of them. These node operators are entities responsible for the management and maintenance of validators, which means that they are the people who make the actual mortgage.
There are some important things to note about this system. First of all, because user funds are concentrated, a substantial reduction in fines will result in the loss of funds for all depositors. The second key point is that node operators do not have access to user funds, but a public verification key that allows them to use another user’s shares to verify transactions. This means that Lido is unmanaged.
In addition to distributing tokens to node operators, the mortgage contract is also responsible for minting and burning Lido’s mortgage derivative stETH. stETH represents a claim against the underlying collateralized ETH and all future earnings. It is worth noting that it is minted at a ratio of 1:1 based on the amount deposited by the user.
The protocol uses the oracle selected by the DAO to monitor the verifier’s balance and reset the user’s stETH balance to calculate the reward.
Currently, 90% of mortgage proceeds belong to depositors, while DAO has a 10% reward. Currently, this fee is 50/50 divided between node operators and cut insurance.
Lido’s value proposition
Now that we understand how the protocol works, we can see the value Lido provides to users.
First, it greatly increases the accessibility of non-custodial mortgages. As we all know, it is difficult for non-technical users to pledge self-custody. It also comes with real bets, as failure to run the validator properly may result in a substantial fine and result in a loss of funds.
Lido simplifies collateralizing ETH, making it as simple as using any other DeFi protocol, transferring technology and risk reduction to world-class operators. Importantly, due to the pooling of user funds, holders with less than 32 ETH required to run a validator can now pledge and earn passive income from the assets they hold.
The stETH token-Lido’s staking derivative-also provides users with a major benefit, allowing them to access the liquidity of its underlying Ethereum. Traditionally, mortgage assets are locked and cannot be used for other purposes. This is especially true at present, because the beacon chain will not enable withdrawals until the PoS merge.
Through stETH, Lido users can obtain staking income, maintain their share in the network, and release the value of their tokens. In other words, stETH can be used as collateral for other DeFi protocols, greatly improving the utility of its collateralized positions.
Now that we understand how Lido works, let’s explore several reasons for its success and the factors that can keep it competitive.
- Liquidity network effect
Due to the “liquidity brings liquidity” nature of staking derivatives, Lido benefits from a strong network effect.
As we all know, liquidity is the king of DeFi. This is because the more liquidity of an asset or protocol, the more likely it is to attract future liquidity, thereby creating a network effect, in which the “liquidity host” continuously increases its economic bandwidth, thereby increasing its utility and making it more effective in DeFi. Deep-rooted in the stack.
This is the dynamic we see on stablecoins. Despite concerns about its reputation, the huge liquidity of Tether’s USDT has allowed it to maintain its dominant position in this market, despite its recent decline.
Source: The Block
This concept may also apply to derivatives such as stETH, because the more liquid stETH has, the more useful it is, and therefore, the more likely it is to attract future liquidity pools.
- stETH integration
The integration of stETH in DeFi is critical to Lido’s success and helps strengthen its network effects.
Lido has managed to establish several key partnerships in this area to support the adoption of stETH. The most prominent are the Curve and ETH-stETH pools, which are incentivized by Lido through LDO rewards. This pool of funds utilizes Curve’s low slippage transactions between similar assets, allowing stETH holders to easily exchange between staking derivatives and “regular” ETH. The fund pool currently holds more than $3 billion in deposits and more than 505,000 stETH, accounting for approximately 66% of the total amount of stETH in circulation.
In addition to Curve, the agreement also cooperates with DiversiFi, ARCX and 1inch.
In addition to establishing liquidity for exchanges, Lido has also begun to make stETH a widely accepted form of collateral. stETH can be used as collateral in smaller currency markets, such as Inverse Finance’s Anchor, and Rari Capital’s Fuse in two different active pools.
However, plans to include stETH in Aave and make it Maker’s collateral are underway.
- Staking service entry barriers
The new staking agreement faces extremely high barriers to entry.
Between the complexity of interacting with the beacon chain, reducing risk, and being unable to fork mortgage assets to ensure the orderly operation of the system, it is very difficult to operate and maintain mortgage services.
Due to their size, existing companies like Lido can enhance their products in ways that new players cannot. An example of this is getting a sharp cut in insurance, because Lido was able to cooperate with Unslashed Finance to purchase insurance for 196,479 ETH, which is about 26.5% of the total shares, with a fine of up to 5%.
In addition, due to its huge resources, Lido may also be able to adopt advanced MEV strategies to increase the returns of stakeholders, thereby increasing their competitiveness against potential challengers.
- Intellectual capital
Lido benefits from an incredibly powerful group of intellectual capital. Lido has a skilled and capable core team, with many outstanding members from all walks of life as contributors and community members, including UpOnly hosts Crypto Cobain, Tim Beiko and Hasu. In addition, the agreement has been supported by many top investors in the field, such as Paradigm, Three Arrows Capital and ParaFi Capital.
- Market size (TAM)
We cannot talk about Lido without mentioning its market size.
The staking industry is expected to explode in the next few years, and even TradFi institutions such as JP Morgan also predict that the revenue of staking will grow to US$40 billion by 2025.
We don’t need baby boomers to tell us why this is possible: due to the rewards provided by staking and the incentives for users to keep their share of the network, most of the supply in the PoS network may eventually end up being collateralized.
Although the merged Ethereum will almost certainly become the largest market for staking providers, Lido’s TAM includes all PoS networks. In addition to providing liquid ETH collateral, Lido currently provides the same services for LUNA holders on Terra, and plans to expand to Solana and possibly Polkadot.
These other chains not only represent Lido’s growth opportunities, but also position LDO tokens as cross-chain diversifiers in investor portfolios.
LDO token economics
Let’s take a look at the LDO token itself.
The sole purpose of LDO (although very important) is to govern the agreement. At present, there is no direct mechanism to drive the value of tokens, such as repurchase or staking mechanism that locks in supply, which means that LDO is more similar to traditional growth stage equity.
Nevertheless, token economics can still play an important role in influencing its price changes.
- Token distribution
The total supply of Lido is 1 billion tokens. At the time of release, 36% was allocated to the DAO vault, 35% was allocated to team members (including founders, initial protocol developers and future employees), 22% was allocated to investors, and 6.5% was allocated to pledge verifiers and withdrawal keys Signer.
The last three groups of tokens have a one-year lock-up period, followed by a one-year vesting period.
As we have seen, this means that 63.5% of the total supply is allocated to the insiders of the agreement. Because of this, it can be said that the control of Lido is still highly concentrated. In addition, the lock-up period is about to expire, and there is a risk of permanent downward pressure on LDO prices due to the sales of these parties. Although this effect may not be felt strongly during a bull market, it may exacerbate the decline if the market turns bearish.
- Token release
Together with the allocation, the released volume plays a key role in determining the level of selling pressure that the token may face. This is an area of uncertainty for LDO holders because there is no pre-set timetable for token issuance. Instead, the decision to issue or distribute tokens (for example, through a liquidity mining plan) is at the discretion of the DAO. Currently, there are active liquid mining plans on Curve, ARCx, 1inch and DiversiFi.
Although this means that there will not necessarily be sustained release-based selling pressure, it leads to some interesting dynamics. For example, only 2.8% of the total LDO supply is circulating on the open market.
In addition to creating a huge difference between the market value of the offer and the fully diluted valuation, this also means that the token may be more susceptible to sharp price fluctuations or releases.
As mentioned earlier, governance is critical to Lido’s operation—perhaps more important than other agreements. This is because in addition to voting on standard project matters (such as treasury allocation), LDO holders are also responsible for selecting node operators to handle the verification of user rights, and oracle providers to help ensure the correct rebasing and allocation of stETH .
Lido governance meets this need for active management, because since December 2020, 83 proposals have been formally voted on-chain through Aragon, the platform used to handle DAO operations.
Of these proposals, 70 have been passed, and 13 have either not reached a quorum or have been completely rejected. According to DeFi standards, Lido’s voter participation is also very high, with an average voter turnout rate of 55.9 million tokens, accounting for 5.59% of the total supply.
However, an in-depth study of some voting indicators suggests that the concerns surrounding centralized governance may be justified.
For example, 79 out of 83 votes are unanimous because all tokens vote in the same way. In addition, 22 proposals received the same turnout. For example, the total number of votes for the seven proposals is exactly 52.718 billion. This shows that despite the high nominal participation, a small number of holders may participate in governance and may have a huge impact on the direction of the agreement.
On-chain operations and financial indicators
Let’s look at some on-chain indicators to evaluate Lido’s performance and competitive positioning.
- Deposits and market share
Since its launch in 2020, Lido has experienced tremendous growth. The agreement currently holds more than 738,000 ETH, accounting for 11.11% of all ETH on the Beacon Chain.
This makes Lido the largest non-custodial staking entity, and its overall scale is second only to Kraken.
Source: Dune Analytics
In recent months, the agreement has also seen a sharp increase in this share. Since April 2021, this proportion has more than doubled from 5.2%. This indicates that Lido may see signs of product market fit.
Source: Dune Analytics
In addition to increasing its share of the overall staking cake, Lido also cannibalized the share of other non-custodial solutions at a similar rate. Since April 2021, the agreement’s share of these deposits has increased from 52% to 80.5%. This further proves that Lido is rapidly becoming the clear market leader in the field of non-custodial mortgages.
Source: Dune Analytics
- Agreement revenue
As mentioned earlier, Lido generates income by charging fees on mortgage incentives that depositors receive. The fee is currently 10% and is divided equally between the payment node operator and the cut insurance. This means that the revenue of the protocol is driven by the fees charged, the number of assets pledged, the income earned by the validators, and the price of ETH in U.S. dollars.
Source: Token Terminal
Since its launch in December 2020, Lido has generated USD 3.02 million in agreement revenue, which is approximately USD 4.53 million on an annual basis. Although compared with other DeFi protocols, this seems very low, but it is worth pointing out that the income of Beacon Chain staking, Lido’s income only includes issuance, and does not include transaction fees and MEV returns. Finally, although it is very active, Lido does not currently receive any income from Terra staking.
Source: Token Terminal
On closer inspection, we can see that Lido’s daily income has hit a record high and has now exceeded $40,000. Interestingly, we can also see that during the recent market sell-off of cryptocurrencies, compared with some other projects, Lido’s revenue decline is not serious. For example, while revenues from agreements such as Uniswap and Compound fell by 92% and 86% respectively during this period, Lido’s “only” fell by 40%.
These data points indicate that compared with other projects, Lido’s revenue may be less susceptible to market and DeFi activities. It also illustrates how Lido can benefit from the secular nature of Staking: regardless of market conditions, holders want to pledge their ETH, which means Lido will be able to grow in any context.
Since the independent online launch, more than 9,500 addresses have deposited funds to Lido. Despite the strong overall growth, in-depth research on user metrics has attracted some attention.
Source: Dune Analytics
Most of the pledge funds come from a few large shareholders. More than 325,000 ETH (44%) can be attributed to only 14 users who deposited more than 10,000 ETH, while another 231,000 (35%) can be attributed to another 67 users who deposited 1,000-10,000 ETH.
Source: Dune Analytics
This means that 0.69% of depositors account for 79% of deposits, which shows that Lido’s customer base and sources of income are highly concentrated and dependent on this small group of holders. Although “run on Lido” will not happen in the short term due to the lack of withdrawals on the Beacon Chain, it does deserve attention.
Discount flow assessment
Next, we will analyze the discounted cash flow model on Lido and LDO tokens.
The model makes main assumptions and uses conservative parameters. It is more to reflect the possible underestimation of Lido relative to its growth potential, rather than a final declaration of its value.
The model uses a discount rate of 40%, which is consistent with the interest rate used by venture capitalists to reflect the high risks associated with early-stage investments. In addition, it uses a terminal growth rate of 2%, which is consistent with global GDP growth.
For growth estimates, the model assumes that the total amount of mortgaged ETH will increase by 30% every year, from 7.3 million mortgages today to 20.9 million in 2025. It also assumes that the price of ETH grows by 30% every year, which means it will rise from the current $3,000 to $8,568 in 2025.
Finally, the model uses Justin Drake’s prediction of a 6% long-term ETH mortgage yield and assumes that the acquisition rate of Lido DAO will remain at 10%.
Using these parameters, we can calculate that the intrinsic value of the LDO is US$13.96, which means that its circulating market value is US$396 million and the FDV is US$13.9 billion.
The current trading price of LDO is $4.74, which means that if you trade at the intrinsic value of the model, there may be a 194% upside potential.
- Relative valuation
Now, let us see how Lido is valued relative to some of its peers.
This is a tricky job, because its most direct competitors, such as centralized exchanges and other liquid mortgage services, such as Rocket Pool, are either companies (mainly private companies), or in terms of the latter, they have not yet online. Therefore, we will use other market-leading DeFi projects that generate agreement-level revenue in different areas, such as currency markets, stablecoins, and peer-to-peer perpetual contracts.
On the basis of price/TVL, Lido’s transaction price seems to be higher than other DeFi agreements, with a ratio of 1.41, which is much higher than the next closest agreement, SushiSwap. This may indicate that Lido is overvalued relative to these other agreements, or that the market may assess its liquidity at a higher rate.
- P/E ratio and P/E ratio/growth
When looking at PE, Lido seems to be overvalued compared to the group. The transaction income of this agreement is 870 times its income (based on the annualized agreement income of the past 180 days), which means that its transaction multiple is more than 3 times that of the next closest token AAVE, and it is SUSHI and MKR’s Nearly 25 times.
However, looking at Lido’s price/revenue relative to its growth, it is a different story. Due to its incredibly high growth rate of 1918%, the PEG of LDO is only 0.45, which is consistent with PERP and AAVE.
This means that despite the high price-to-earnings ratio, Lido’s valuation is calculated at market prices relative to its growth rate.
Risk factors to consider
Like any other encrypted asset, Lido bears huge risks. Let’s highlight the main content we cover throughout the article, as well as some other potential areas of focus.
- Protocol trust hypothesis
Although Lido is non-custodial, the agreement is not completely trustless. Since ETH 2.0 has limited collateral functions when Lido is launched before July 15th, approximately 81% of deposits are not non-custodial. On the contrary, the withdrawal keys (private keys that control the ability to withdraw pledge funds) of these assets are controlled by the 6/11 multi-signature scheme, with well-known DeFi community members and entities acting as signers. If these signers are compromised, decide to collude or mishandle their keys, a large part of the user’s funds will be at risk, which may adversely affect the price of LDOs.
- User/revenue concentration
Most of Lido’s deposits and income sources are concentrated in a small group of users.
- Centralization of governance
LDO tokens are supplied, so governance rights are concentrated on a small group of stakeholders.
- Token release
LDO has an undefined release of tokens and a very low total supply of tokens in circulation.
- Regulatory risk
The regulations in the US Infrastructure Act may impose unruly supervision of POS validators, which may increase the difficulty of finding high-quality node operators.
Despite the existence of a serious centralization vector, with its useful products, wide variety of moats, large TAMs, strong competitive positioning, and potentially undervalued tokens, Lido has excellent fundamentals. The former problem can be solved over time and is a deliberate design choice for launching on the mainnet.
In other words, as more infrastructure around Eth2 goes online and merges, the market for decentralized mortgage providers has not yet consolidated. But now we have to ask:
Can LDO help steal the limelight from the JPEG frenzy?
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/underestimated-non-custodial-mobile-pledge-agreement-lido/
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