In April 2023, after Ethereum successfully completed the Shapella upgrade, the Liquid Staking Derivatives boom surged—media reports said: This is the most anticipated development trend in the digital asset field in 2023.
What is LSD
Liquid Staking Derivatives/Tokens (hereinafter referred to as LSD) is a tool in the blockchain world to help the pledged digital assets release liquidity and improve transaction performance. Its value form is similar to "derivatives (also known as derivatives) Assets)”—that is, the value of LSD depends on the original digital assets, which is an asset type derived from the pledged digital assets.
As a derivative digital asset, the most important feature of LSD is that when the user transfers LSD, the pledged digital assets (ie original assets) will not be actually transferred. It can be seen that LSD also has a certain degree of independence and operation Flexible digital assets.
In terms of expression, LSD is also a token issued in accordance with the ERC-20 standard, the so-called "I Owe You Token (commonly referred to as IOU Token)", which is generally issued on a blockchain or layer other than the pledged original assets. superior.
What LSD does
For many digital asset holders, the use of pledge (Staking) is very important for increasing the source of long-term value of digital assets (such as obtaining rewards).
However, during the pledge commitment period, the pledged digital assets are locked.
If at the same time as the pledge, "derivative digital assets" with similar equivalence can be obtained at the same time, to replace the locked pledged digital assets to participate in circulation, it seems that digital asset holders can guarantee the source of long-term value at the same time, The opportunity to flexibly participate in the market in the near future is also not missed.
Acquisition of LSD
Pledge is closely related to the PoS consensus mechanism. On the blockchain that implements the PoS consensus mechanism, if you want to pledge digital assets, there are many solutions to choose from. Liquid Staking related to LSD is a digital asset pledge One of the solutions.
The general workflow for liquidity staking is straightforward:
First, users pledge designated digital assets to the blockchain through tools that provide liquidity staking services (hereinafter referred to as LSD service tools).
Subsequently, according to the number and type of pledged digital assets, the user will obtain the same type of derivative digital assets as the number of pledged digital assets.
Finally, users are free to use these derivative digital assets.
At present, Lido is the LSD service tool with the largest scale of liquidity staking service assets on Ethereum. It is built on the basis of the beacon chain. When users pledge any amount of ETH through Lido, they can obtain the token named "stETH" according to the quantity of 1:1. Derivative digital assets. In addition to supporting Ethereum, Lido also supports public chains such as Solana, Matic, and Kusama, and has established cooperation with many decentralized financial projects.
In addition to Lido, other well-known LSD service tools include:
Rocket Pool: Provides a decentralized liquid pledge service. When users pledge any amount of ETH through Rocket Pool, they can obtain a derivative digital asset named "rETH".
**StaFiProtocol: **Uses the decentralized protocol built by Substrate to provide decentralized liquid pledge services, and supports multi-signature technology to ensure the security of pledged digital assets.
**Stakewise:**A dual derivative token model is established based on pledged digital assets and pledge rewards to isolate risks.
RISKS OF LSD
The liquid staking solution related to LSD is actually not a new thing that has emerged recently, but why did it suddenly become more popular after Ethereum completed the Shapella upgrade, and the discussion heat soared?
In fact, the root cause of the above situation is not only the industry's optimistic advantages, but also the fundamental risks.
One of the biggest changes brought to Ethereum by the Ethereum Shapella upgrade is that the ETH pledged by the verifier on the chain can be freely withdrawn. Facts have shown that such a function gives digital asset holders stronger market confidence.
After the Shapella upgrade is completed, as of May 2023, the scale of pledged assets on the Ethereum chain has not been greatly reduced. On the contrary, the newly added pledged assets after the upgrade have increased significantly, which naturally drives the industry's interest in derivative digital assets. After all, through liquidity staking, not only can the utilization efficiency of digital assets be improved, but also the risk that pledged assets cannot be liquidated can be hedged.
It can be seen that the soaring popularity of LSD comes from both the strong need of digital asset holders to actively participate in the pledge, and the strong need to avoid the risk of immobility. However, the derivative nature of LSD will also make it a digital asset with a very high market risk index.
Regulators have already warned of such risks. In February 2023, the U.S. Securities Regulatory Commission’s punishment on Kraken, a digital asset trading platform, mentioned that the returns promised by Kraken “have nothing to do with any economic reality” and that the trading platform provided “concerns about its financial status and whether it is There’s zero insight in terms of having a way to pay for what’s being pitched in the first place.”
The yield certificate service model provided by Kraken is essentially similar to liquid pledge. For digital asset holders, the risks faced by the two are similar.
Risk 1: Information Transparency
Danny Ryann, a researcher at the Ethereum Foundation, said in the article "LSD Risk": "The LSD protocol has inherent problems when it exceeds the consensus threshold." He believes that now derivative digital assets are concentrated in individual service channels, such as Lido, which actually forms a similar monopoly situation. As such, when critical consensus thresholds are crossed, there will be significant risks to the Ethereum protocol and associated pooled assets.
Monopoly, that is, excessive centralization, which will reduce the transparency of multi-party information, will not only make it difficult for digital asset holders to obtain accurate and comprehensive market information, but excessive centralization will directly reduce the willingness of service providers to disclose information , to a certain extent, will also directly increase the risk of liquid pledge services.
Risk 2: Supervision
When a class of digital assets is too liquid, speculative transactions are prone to occur. However, because the value of derivative digital assets is attached to the original assets, in the speculative market, the bubble of its value will be more obvious. At this time, derivative digital assets can not only avoid risks, but also create risks. It will even impact the original asset market. Regulatory authorities will also implement stricter management measures for derivative digital assets, and even take measures to prohibit or shut down this business.
HOLDER TIP
The popularity of LSD will continue. Digital asset holders must fully understand the relevant risks and actual market conditions, and make prudent decisions based on their own conditions. They must do the following daily:
Continuous monitoring: Regularly monitor the market situation of LSD, track market trends, news and any updates from platforms or projects, in order to make informed decisions about holding or using derivative digital assets.
**Prudent research: **When using liquid staking services, prudent and comprehensive research must be conducted, including a full understanding of the security, reputation, fees, and released projects and asset sizes of LSD service providers. Avoiding liquid staking only through a single solution, decentralized management of digital assets that need to be pledged can be carried out.
View Original
The content is for reference only, not a solicitation or offer. No investment, tax, or legal advice provided. See Disclaimer for more risks disclosure.
What risks do users need to pay attention to when LSD injects a boost into the blockchain?
In April 2023, after Ethereum successfully completed the Shapella upgrade, the Liquid Staking Derivatives boom surged—media reports said: This is the most anticipated development trend in the digital asset field in 2023.
What is LSD
Liquid Staking Derivatives/Tokens (hereinafter referred to as LSD) is a tool in the blockchain world to help the pledged digital assets release liquidity and improve transaction performance. Its value form is similar to "derivatives (also known as derivatives) Assets)”—that is, the value of LSD depends on the original digital assets, which is an asset type derived from the pledged digital assets.
As a derivative digital asset, the most important feature of LSD is that when the user transfers LSD, the pledged digital assets (ie original assets) will not be actually transferred. It can be seen that LSD also has a certain degree of independence and operation Flexible digital assets.
In terms of expression, LSD is also a token issued in accordance with the ERC-20 standard, the so-called "I Owe You Token (commonly referred to as IOU Token)", which is generally issued on a blockchain or layer other than the pledged original assets. superior.
What LSD does
For many digital asset holders, the use of pledge (Staking) is very important for increasing the source of long-term value of digital assets (such as obtaining rewards).
However, during the pledge commitment period, the pledged digital assets are locked.
If at the same time as the pledge, "derivative digital assets" with similar equivalence can be obtained at the same time, to replace the locked pledged digital assets to participate in circulation, it seems that digital asset holders can guarantee the source of long-term value at the same time, The opportunity to flexibly participate in the market in the near future is also not missed.
Acquisition of LSD
Pledge is closely related to the PoS consensus mechanism. On the blockchain that implements the PoS consensus mechanism, if you want to pledge digital assets, there are many solutions to choose from. Liquid Staking related to LSD is a digital asset pledge One of the solutions.
The general workflow for liquidity staking is straightforward:
First, users pledge designated digital assets to the blockchain through tools that provide liquidity staking services (hereinafter referred to as LSD service tools).
Subsequently, according to the number and type of pledged digital assets, the user will obtain the same type of derivative digital assets as the number of pledged digital assets.
Finally, users are free to use these derivative digital assets.
At present, Lido is the LSD service tool with the largest scale of liquidity staking service assets on Ethereum. It is built on the basis of the beacon chain. When users pledge any amount of ETH through Lido, they can obtain the token named "stETH" according to the quantity of 1:1. Derivative digital assets. In addition to supporting Ethereum, Lido also supports public chains such as Solana, Matic, and Kusama, and has established cooperation with many decentralized financial projects.
In addition to Lido, other well-known LSD service tools include:
Rocket Pool: Provides a decentralized liquid pledge service. When users pledge any amount of ETH through Rocket Pool, they can obtain a derivative digital asset named "rETH".
**StaFiProtocol: **Uses the decentralized protocol built by Substrate to provide decentralized liquid pledge services, and supports multi-signature technology to ensure the security of pledged digital assets.
**Stakewise:**A dual derivative token model is established based on pledged digital assets and pledge rewards to isolate risks.
RISKS OF LSD
The liquid staking solution related to LSD is actually not a new thing that has emerged recently, but why did it suddenly become more popular after Ethereum completed the Shapella upgrade, and the discussion heat soared?
In fact, the root cause of the above situation is not only the industry's optimistic advantages, but also the fundamental risks.
One of the biggest changes brought to Ethereum by the Ethereum Shapella upgrade is that the ETH pledged by the verifier on the chain can be freely withdrawn. Facts have shown that such a function gives digital asset holders stronger market confidence.
After the Shapella upgrade is completed, as of May 2023, the scale of pledged assets on the Ethereum chain has not been greatly reduced. On the contrary, the newly added pledged assets after the upgrade have increased significantly, which naturally drives the industry's interest in derivative digital assets. After all, through liquidity staking, not only can the utilization efficiency of digital assets be improved, but also the risk that pledged assets cannot be liquidated can be hedged.
It can be seen that the soaring popularity of LSD comes from both the strong need of digital asset holders to actively participate in the pledge, and the strong need to avoid the risk of immobility. However, the derivative nature of LSD will also make it a digital asset with a very high market risk index.
Regulators have already warned of such risks. In February 2023, the U.S. Securities Regulatory Commission’s punishment on Kraken, a digital asset trading platform, mentioned that the returns promised by Kraken “have nothing to do with any economic reality” and that the trading platform provided “concerns about its financial status and whether it is There’s zero insight in terms of having a way to pay for what’s being pitched in the first place.”
The yield certificate service model provided by Kraken is essentially similar to liquid pledge. For digital asset holders, the risks faced by the two are similar.
Risk 1: Information Transparency
Danny Ryann, a researcher at the Ethereum Foundation, said in the article "LSD Risk": "The LSD protocol has inherent problems when it exceeds the consensus threshold." He believes that now derivative digital assets are concentrated in individual service channels, such as Lido, which actually forms a similar monopoly situation. As such, when critical consensus thresholds are crossed, there will be significant risks to the Ethereum protocol and associated pooled assets.
Monopoly, that is, excessive centralization, which will reduce the transparency of multi-party information, will not only make it difficult for digital asset holders to obtain accurate and comprehensive market information, but excessive centralization will directly reduce the willingness of service providers to disclose information , to a certain extent, will also directly increase the risk of liquid pledge services.
Risk 2: Supervision
When a class of digital assets is too liquid, speculative transactions are prone to occur. However, because the value of derivative digital assets is attached to the original assets, in the speculative market, the bubble of its value will be more obvious. At this time, derivative digital assets can not only avoid risks, but also create risks. It will even impact the original asset market. Regulatory authorities will also implement stricter management measures for derivative digital assets, and even take measures to prohibit or shut down this business.
HOLDER TIP
The popularity of LSD will continue. Digital asset holders must fully understand the relevant risks and actual market conditions, and make prudent decisions based on their own conditions. They must do the following daily:
Continuous monitoring: Regularly monitor the market situation of LSD, track market trends, news and any updates from platforms or projects, in order to make informed decisions about holding or using derivative digital assets.
**Prudent research: **When using liquid staking services, prudent and comprehensive research must be conducted, including a full understanding of the security, reputation, fees, and released projects and asset sizes of LSD service providers. Avoiding liquid staking only through a single solution, decentralized management of digital assets that need to be pledged can be carried out.