What are the opportunities for ordinary investors to come to the Ethereum merger?

Both Lido and Rocket Pool are poised to be major beneficiaries of the liquid staking boom.

Editor’s note: The ETH2.0 merger is an important milestone upgrade for Ethereum, moving from PoW to PoS.

The content of the following articles is for reference only, not investment advice.

Dear Bankless Nationals,

We’ve been talking about “mergers” for the past few weeks.

Obviously this is the biggest thing in the crypto world this year and it cannot be overemphasized.

How will you seize this upside opportunity?

Of course, one of the best ways is to maximize your price exposure to ETH, and you can do this in a number of ways:

  • Staking ETH
  • Mining ETH
  • Go long ETH

There is another angle that Bankless has not fully covered in past introductory articles: staking protocols .

Proof of Stake (PoS) has greatly lowered the threshold for becoming a network validator by reducing the hardware requirements to participate in network security.

Still, becoming a validator is not easy. For example, running a full node requires 32 ETH, which is over $100,000 at current exchange rates. It also requires a certain level of skill, which most people don’t understand very well.

In response to these challenges, we have seen some staking protocols abstract away a lot of technical complexity, and they have even further reduced the capital requirement (to become a validator).

These staking protocols have amassed billions of TVL and will see huge growth as the “merger” approaches.

But will their platform tokens be a good investment as a result?

Today, Ben will take you through Lido Finance and Rocket Pool (hereinafter collectively referred to as “Rocket Pool”) – about their market position, protocol architecture and token economic model.

Token Thursday

Bankless writer: Ben Giove, also a Bankless analyst

Anyone can become a node validator

After years of development and anticipation, Ethereum’s transition from proof-of-work (PoW) to proof-of-stake (PoS) is almost complete, and it is expected to be completed in late Q2 or Q3 2022.

This “merger” will have many broad implications.

First, the “merger” is expected to reduce Ethereum’s energy consumption by orders of magnitude, as the intensive, energy-inefficient “mining” required to secure the blockchain network will no longer be required.

Switching to a proof-of-stake mechanism will also reduce ETH issuance by 90%, while paving the way for future scalability upgrades such as “sharding”.

The impact of the “merger” can also be felt in the application layer, as it will immediately spur the growth of various liquid staking services on the Ethereum network. These protocols eliminate the opportunity cost of user staking, and through the issuance of derivative tokens, their holders can earn staking benefits while continuing to deploy ETH assets across the DeFi space and the wider Ethereum economy.

Chart    Description automatically generated

Ethereum 2.0 Liquidity Staking Balance (Statistics by Time) , Source: Dune Analytics

The stakes (number of stakes) are incredibly high, and liquid staking can become a winner-take-all market because of the network effects involved in threshold capital, liquidity, and integration.

Given that $10.89 billion worth of ETH was staked before the “merger” and stakers were not able to withdraw their assets at this point, it looks like the staked amount will grow to tens, if not hundreds, of billions over the next few years. And that’s not counting the staking economy that is booming in other public chains like Terra, Solana, and Avalanche.

While it’s early days, the two biggest players in this high-growth vertical are Lido and Rocket Pool. While the two protocols offer similar products to their end users, they are very different in terms of architecture, market acceptance, growth strategies, and the design of their native tokens.

So the question is – which of the two will win in the end? LDO or RPL, which is the better investment?

Let’s find out.

protocol design

Observe the differences and trade-offs in the design of the protocol architectures of Lido and Rocketpool.

Lido

For end users, Lido is relatively simple. Holders of ETH (or other L1 assets) can deposit tokens into Lido’s smart contracts to receive stETH at a 1:1 ratio. stETH is a derivative token that (you guessed it) represents a claim to staked ETH allocated to validators. stETH is a Rebase-like token that accumulates inflationary rewards and transaction fees, and can be traded like other ERC-20 tokens.

(Annotation: Rebase is an elastic adjustment to the supply of tokens. Generally, the supply is adjusted by burning tokens or minting new tokens , so that the price is anchored to a certain target.)

This provides users with greater capital efficiency and utility as it allows holders to earn staking yields while continuing to deploy their ETH on other DeFi. When the beacon chain’s withdrawal function is enabled after “merging”, stETH will be redeemable for the corresponding ETH.

Although Lido is an unmanaged protocol, it is not permissionless . Instead, the relevant validators are selected by the Lido DAO through governance voting, which in turn receives a portion of the revenue from staking. This pattern does enhance the scalability of the protocol and minimize complexity. However, while the DAO has various incentives to take “non-malicious” actions, it does centralize power among LDO token holders, thereby making the protocol more “centralized”.

Rocket Pool

From a user perspective, Rocket Pool is the same as Lido: Holders can deposit their ETH to earn “rETH,” a Rebase-derived ERC-20 token that represents a claim to potential ETH.

Rocket Pool differs from Lido in the process of selecting validators. Compared to “leaving the decision to the token holder”, the Rocket Pool protocol is permissionless. (This means) anyone can create a “mini pool” to become a node operator in the network. To do this, node runners need to deposit 16 ETH — half of the 32 ETH originally required to become a validator, with the remaining 16 ETH coming from deposits from protocol users. In addition, mini-pool operators will be required to stake RPL tokens equivalent to 1.6 ETH as a backup in the event of a major slash event.

The RocketPool model adjusts the incentives between them and the protocol by requiring node operators to stake RPL, and minimizes trust assumptions by automating the process of joining the network.

Annotation: “Trust assumption” can be understood as the cost of trust under centralization .)

However, this comes at the expense of scalability . Unlike Lido, which can distribute ETH to validators at any time without limit, the growth of Rocket Pool is limited by the network threshold of 16 ETH and depends on the constant availability of new node operators.

gist

While Lido and Rocket Pool feel like the same thing, there are significant differences in their internal mechanics when it comes to admitting new validators into the network.

Compared to Rocket Pool, Lido’s model comes at the expense of increased trust assumptions and is therefore inherently more scalable and capital efficient as validators do not need to stake their ETH to match user deposits.

Strategy & Market Acceptance

Now that we understand the inner workings of these two protocols, let’s take a look at their strategy, growth, and position in the market competition.

Lido

Lido has experienced tremendous growth since its launch in December 2020. The protocol has amassed over 3.5 million ETH from 33,600 unique depositors, worth about $10.3 billion at current exchange rates, and accounts for about 28% of the total ETH staked across the Ethereum Beacon Chain. It accounted for 88.1% of all ETH in the entire liquid staking service market, cementing Lido’s dominance in this segment.

Chart, line chart    Description automatically generated

Source: Lido Kanban by Nansen

Lido’s success is also partly due to its multi-chain scaling strategy. In addition to Ethereum, the protocol also supports liquid staking for Terra, Solana, Kusama, and Polygon’s native tokens, correspondingly LUNA, SOL, KSM, and MATIC. This diversity has amassed about $9.66 billion in various deposits for the protocol, with stLUNA/bLUNA currently the largest liquid staking solution on Terra and stSOL the second largest in the Solana market.

Chart    Description automatically generated

Source: DeFi Llama

Thanks to LDO incentives for liquidity providers and spending millions in bribes to CVX holders every two weeks, Lido has also managed to build an incredible depth of liquidity on Curve for stETH, which is currently Over $5.1 billion has been locked in the stETH-ETH pool. This not only improves the convenience for holders to exchange back “pure” ETH, but also enhances the price peg of the token and the network effect of the protocol, making stETH the largest liquid collateral derivative token.

Likewise, Lido has successfully secured various integrations in DeFi, enabling stETH to be used as collateral in money markets like Aave and Fuse, and to mint stablecoins like DAI.

Rocket Pool

Launched in November 2021, 11 months after Lido, Rocket Pool has amassed over 173,000 ETH from over 2,300 unique depositors, or about $571 million at current exchange rates. This equates to 5% of all liquid staking ETH shares — well behind Lido, but also more than 2x higher than the next closest competitor, StakeHound.

 

Source: Dune Analytics

Unlike Lido, Rocket Pool does not pursue a multi-chain strategy – instead, the protocol chooses to focus on Ethereum. While this specialization may help the project cement itself in this niche and make it beloved by the Ethereum community, it will ultimately limit the available market for Rocket Pool compared to its main competitors total.

Diagram    Description automatically generated with low confidence

Source: Dune Analytics

Despite being live for less than six months, Rocket Pool has only recently started to see an increase in rETH integration. For example, the recently launched Curve pool for rETH-wstETH has attracted over $126 million in TVL, even though the pool has no secondary incentives. If Rocket Pool learns from Lido’s gameplay and provides secondary RPL incentives or bribes in the pool, there will be an opportunity to develop rETH and deepen its liquidity in the market.

gist

While Rocket Pool has experienced strong growth in the months following its launch, Lido remains the clear leader in the market for Ethereum liquid staking services. Additionally, Lido’s TAM is much larger than its competitors, benefiting from its focus on the multi-chain market.

Annotation: TAM, Total Addressable Market, describes the “total available market”.)

Token Economic Model

Now that we understand the differences between Lido and Rocketpool in terms of protocol design and market acceptance, let’s take a look at their token design and economic model.

Lido

LDO is Lido’s governance token. As mentioned above, LDO is currently only used for governance, and holders can use it to choose node runners, and the distribution of fees between them and the DAO treasury. While the protocol has generated $21.2 million in revenue over the past year, none of that revenue is currently going to token holders, as 10% of the protocol’s staking rewards are split equally between node operators and Slash Insurance.

Despite Lido’s excellent fundamentals, the coin currently faces a number of headwinds in terms of continued “value capture.” For example, there is no natural demand for the token due to its lack of utility in the protocol. Additionally, LDOs face natural selling pressure from miners and stakeholders seeking to lock in gains, as they are used for liquidity incentives and bribe payments.

This lack of demand drive to offset the release of tokens suggests that tokens may struggle to retain value when projects are “not on the narrative,” as is now the case with the impending “merger.” We may be seeing early signs of this dynamic. While LDO has managed to outperform RPL’s Q1 2022 performance over the past month (up 88% vs. 40% for the latter), it is still 48% away from its all-time highs, while its 2022 high The competitor’s native token is only 41% off its all-time high.

Rocket Pool

Like LDOs, RPLs are used for governance. However, as mentioned earlier, the token is used as Slash insurance, and node operators need to stake 1.6 ETH worth of RPL to participate in the network.

This provides utility to the RPL and ties the demand for the token to the growth of the network. As more user deposits and node operators come online, more RPL will need to be staked accordingly. This use positions RPL as a commodity token with utility (albeit with governance rights), rather than a pure “crypto-native equity” like LDO. The benefit of this utility is that it helps to alleviate inflationary pressures after the release of RPL, which is paid to node operators to increase their returns, thus making them more attractive for staking on the network.

gist

While Lido has incredibly strong fundamentals and seems likely to ride on the narrative ride of Ethereum’s “merger”, LDO in its current form is stymied by the coin’s lack of utility and buy pressure. May be difficult to maintain value over an extended period of time.

Additionally, Rocket Pool’s token design is more value-added, while RPL benefits from market demand and organic buying pressure commensurate with its network growth.

Summarize

Both Lido and Rocket Pool are poised to be major beneficiaries of the liquid staking boom.

Rocket Pool’s design is optimized to minimize trust assumptions, and its focus on Ethereum is likely to make it a top player in the space, while Lido has obvious advantages in terms of scalability, growth strategy, and competitive positioning Advantage.

In addition to this, the token design of Rocket Pool is more value-added, as the usage of the protocol grows, it will benefit from the (market) organic demand for the token, while the LDO token may be released at the same time as the Troubled by the lack of natural buying pressure.

This leaves us with an interesting conclusion – while Lido may end up being a more successful product, it may not be a better investment than RPL.

As experienced cryptocurrency investors have learned time and time again: Tokens are tokens, and protocols are protocols .

Are you saying this will continue?

About the Author

Ben Giove is an analyst at Bankless. He is the former president of Chapman Crypto and an analyst for the Blockchain Education Network (BEN) Crypto Fund, a student-run cryptocurrency fund built on the Set protocol. He is also a proud member of BanklessDAO and the solution expert behind the GMI index.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/what-are-the-opportunities-for-ordinary-investors-to-come-to-the-ethereum-merger/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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