#45 Liquid Staking Derivatives, optimism fuel for 2023
LSD heats up the space. Also, the latest developments in Genesis, Solana and Sushiswap, Huobi is in pain, and a recap of 2022 VC money
In this issue of Carbono Insights:
Liquid Staking Derivatives, optimism fuel for 2023
SIX ANGLES
Liquid Staking Derivatives, Optimism Fuel for 2023
We called dibs on the “staking summer” expression. We’re addicted to summers in crypto (”DeFi summer,” “Solana summer,”…), so if staking is going to come with a warm season, as we believe, we want to claim authorship of the meme.
Staking has emerged as the most relevant area at the beginning of 2023. After some hesitation, Ethereum developers finally assigned an ETA for the unstaking of ETH from the Beacon Chain - March 2023.
Only 13% of the circulating ETH is currently staked (stakingrewards.com). Other Proof of Stake blockchains show much higher numbers: Solana (71%), Tezos (76%), and Cosmos (62%) are way ahead. there are reasons to believe that the percentage will increase once withdrawals are allowed.
Staking is one of the most straightforward business models in crypto. You can access rewards by contributing to a network. If there is demand for blockspace, you get paid for putting your money up upfront to secure it.
So we have a core task in crypto that generates rewards with a broad margin for growth, and it’s announcing that one of the most significant entry barriers is going down.
You might have noticed that we’ve started to deliver this newsletter weekly instead of biweekly. One of the reasons to do this is to distribute content slightly differently. You will occasionally find how we use this newsletter to provide quicker interpretations of recent news while we move the more educational content to our Medium page. For example, this post is about how the announcement of the Shanghai fork affects Liquid Staking Derivatives. But if you need a more straightforward explanation, we’ve covered you in this Medium post.
Now that Ethereum has an ETA for withdrawals, one of the biggest barriers that blocked investors from staking has gone down. Subsequently, the market of Liquid Staking Derivatives has gotten excited.
Lido leads the way. It gained the first-mover advantage and is currently responsible for 30% of the entire ETH staked ($16M ETH). But contenders are gaining speed. For example, Coinbase offered staking early, as soon as Ethereum opened the gates of the Beacon Chain. But it wasn’t until June that they launched their LSD, cbETH, which is now the second in market share.
But Coinbase is a centralized institution, and we all know what its reputation is like these days. Lido is decentralized, but Rocket Pool markets itself as decentralized-er. Their rETH is getting traction. So are other alternatives like Ankr, Stakewise, or Frax, all with different recipes for LSD:
different sets of validators and different validator selection criteria
different levels of capital efficiency (APRs)
various methods of revenue distribution or value accrual
As March gets closer, the race is starting to heat up. And after March, more.
This week’s INTERPOLATION is Dall-E’s interpretation of a melting coin, vaporware style.
⬡ Six Angles
We select six topics to illustrate the different angles from which we can approach crypto. We could choose dozens, but six is the atomic number of carbon… and otherwise, we’d be writing for ages.
1. Genesis | Crypto is a Soap Opera
Crypto is starting to look more and more like a good-old Venezuelan soap opera. It would be amusing if it weren’t because it’s real money from real people mismanaged by a bunch of men in the space. Also, the scenes would be boring because they’d all show guys typing on their phones in different moods.
In the last episode, 50% of the Winklevoss twins took to Twitter to claim Gemini’s leadership was “engaging in bad faith stall tactics” regarding their debt. Genesis reportedly owes Gemini $900M.
Cameron frames the situation to make it rhyme with FTX: he accused Barry Silbert (Genesis’ CEO) of using other people’s funds to fund “illiquid venture investments” (…) “all for your own personal gain,” and delivering a coup de gráce by saying that DCG and Genesis aye “beyond commingled.”
Insert dramatic music
Genesis is owned by Digital Currency Group, a conglomerate of crypto companies CEO’d by Barry Silbert, who also owns Grayscale investments. And this is where things get scary for crypto as an industry.
Grayscale launched the Grayscale Bitcoin Trust (GBTC) in 2013. For years, buying GBTC shares was a no-brainer, and investors kept piling up until Grayscale held over 635K. If you want to know all the nitty-gritty of the design flaws and regulatory perspectives of GBTC, we wrote the definitive recap here.
For now, let’s stick to the soap opera.
The real risk is that “Genesis creditors will push it into bankruptcy and take remaining DCG assets.” These are not our words: it’s a quote from a tweet by Su Zhu, founder of the disgraced fund Three Arrows Capital.
Su also claims that Genesis/DCG partnered with FTX/Alameda to attack Luna in May. A claim that has been supported by Do Kwon, founder of Terra.
Insert dramatic music
2. Venture Capital | VC 2022 Funding Recap
VC funding in 2022 kept slowing down as the year progressed, but it still ended above all previous years except 2021, according to Coingecko, with over $21B invested in crypto companies.
According to Messari reports (paid content alert), infrastructure projects (base layers) is the category of VC investment that has shrunk less. Centralized Finance projects used to be the main money magnets, but successive crises have probably diminished their attractiveness.
3. Huobi | More Exchanges in Distress
“There are some third-tier exchanges that are already secretly insolvent,” said Sam Bankman-Fried in June 2022. I don’t think he meant FTX, though.
These days there’s a third-tier exchange showing signs of distress. Huobi is a centralized exchange founded in China in 2013 that sits at #10 in the ranking by traded volume, with ~$350M daily. Huobi recently announced a 20% workforce cut, and shortly after, had to receive a $100M transfer in stablecoin from felt like an emergency injection. It’s not easy being a centralized exchange these days.
The money presumably comes from Justin Sun, Huobi advisor and founder of Tron. However, the links Sun draws between Tron and Huobi are where things get interesting. Tron is the #3 blockchain by TVL, according to DeFiLlama, with $4B, and it’s the home of USTT. This stablecoin was initially designed to emulate Terra’s UST moments before the disaster.
Having someone like Justin Sun having your back used to look like insurance. Now it looks like a contagion vector.
4. Silvergate | Real Bank Gets a Bank Run
Remember when people said FTX had suffered a bank run of ~$8B? Or when Binance suffered a similar run of a similar size a few weeks later? Well, those were not bank runs because neither FTX nor Binance are banks. However, Silvergate is, and it’s recently suffered a bank run of a very similar amount.
Silvergate was crypto’s #1 bankserving b2b crypto needs. Silvergate connects institutional investors and exchanges through its Silvergate Exchange Network. Those institutional investors have now withdrawn their deposits, and according to declarations from the bank’s executives, this is not a panic reaction. It looks more like a breakup. “Our customers have taken a huge pause,” Chief Executive Alan Lane said.
Institutional investors are sending a bottom signal.
5. L1 | Solana Gets Help From a Rescue Doge
We’ve recently reported on the ordeal Solana was going through. Once the most potentially threatening Ethereum killer, it got severely hurt when SBF, one of Solana’s strongest ambassadors, fell from grace.
Solana’s founders have been trying to lift the spirits with a sort of press tour (Solana Exec Says Platform Still Gaining New Users Despite FTX's Collapse), and they even got a breath of fresh air thanks to Vitalik. Still, there’s nothing like a little help from a friend, especially if it’s the man’s best friend.
Bonk! is the “first dog coin for the Solana ecosystem.” A dog-themed memecoin that has managed to bring spirits back up. See below The Defiant’s chart of % change of different chains in the last days.
So far, the change is only justified by good old degens flipping tokens, but we should have learnt by now not to underestimate the power of memes.
6. Dexes | Sushi’s New Token Design
Decentralized Exchanges are one of the most outstanding success cases of DeFi as the plumbing for a new financial system. But if we measure them as traditional businesses with sustainable business models and operations, Dexes need an extreme makeover. We’re with DeFi Dad on this.
Sushi keeps making the headlines in this direction. They recently announced the deprecation of their Kashi lending platform and MISO token launchpad to focus on exchange efforts. And shortly after, head chef Jared Grey shared the new tokenomics design, which announces that Sushi kicks off the pursuit real yield for its LPs