Dear Bankless Nation,
We've been talking an awful lot about liquid staking drama this week, but embedded in these debates are judgments around future market positioning.
This month in the Bankless Token Hub, we issued ratings on a number of liquid staking protocols, including Lido, Rocket Pool and Marinade Finance. View everything in the Bankless Token Hub, available exclusively to Citizens! 📊
- Bankless team
Token Hub | October 2023 Update
In the Bankless Token Hub, our analyst team has amassed coverage of dozens of noteworthy crypto assets, analyzing on-chain and off-chain data to assess whether we're bullish, bearish or neutral on the token's future performance.
Token Hub is updated throughout the month, meaning that Bankless premium subscribers get access to coverage initiations and ratings changes in real time.
🔵 Lido Finance (LDO)
Rating: Neutral
Risk: Medium
Sector: Liquid Staking
Catalyst overview:
TL;DR
- We've revised our rating of LDO from bullish to neutral.
- Lido's staking share of ETH may level off in light of the concerns around ETH stake concentration.
- EIP-7514 is pushing for stake limitations, while EigenLayer is pushing to decentralize staking providers further...
- Lido also appears to be sunsetting its operations on Solana.
Liquid staking has continued to rise as the preferred choice for staking ETH. Lido has had a good run and is leading the way with a 32% share of the total ETH staked.
Nonetheless, the increased ETH being staked has generated apprehensions within the Ethereum community. Experts have pointed out that should over 51% of ETH be staked through liquid staking providers; it may result in unforeseeable economic repercussions.
Moreover, Lido is on track to capture a 33% market share of ETH staked. This threshold is significant because an entity holding control over 33% of the ETH stake might be able to prolong the finality process.
Ethereum plans to integrate EIP-7514 in the upcoming Dencun upgrade to address these apprehensions. EIP-7514 imposes a limit on the churn rate for Ethereum validators, which in turn reduces the pace at which additional ETH can be staked. Consequently, these concerns, coupled with EIP-7514, might curtail Lido's staking expansion and cap its staking share at 33%.
Additionally, EigenLayer has introduced restaking primitives that enable protocols to encourage decentralization, whereby a protocol could exclude Lido's stETH if it seeks to receive rewards for attaining a high level of node decentralization.
Finally, Lido's activities on Solana appear to be nearing their end. A proposal was presented in late September, requesting 1.5 million DAI to cover 12 months of operations. The rationale behind this proposal was Lido's unsustainable financial situation and the limited fees generated on the Solana network.
Price impact:
The demand for liquid staking remains robust, as evidenced by the consistently full validator queue on Ethereum. Nevertheless, considering the apprehensions regarding stake concentration in Lido, the constraints imposed by EIP-7514, EigenLayer's efforts to offer more attractive yields for more decentralized staking providers, and the discontinuation of operations on Solana, there exists the possibility that competitors could outshine Lido in the near to mid-term.
🟠 Rocket Pool (RPL)
Rating: Bullish
Risk: Medium
Sector: Liquid Staking
Catalyst overview:
TL;DR
- Rocket Pool's staking share may continue to grow in light of the concerns around stake concentration in Lido.
- EIP-7514 and EigenLayer are pushing to decentralize staking providers further, and Rocket Pool is positioned to capture market share.
Liquid staking has continued to rise as the preferred choice for staking ETH. Lido is leading the way with a 32% share of the total ETH staked. Other liquid staking providers, including Rocket Pool, only hold 13% of stake.
However, the expansion of ETH staked has raised concerns across the Ethereum ecosystem. Researchers have highlighted that if more than 51% of ETH is staked through liquid staking providers, it could lead to unpredictable economic consequences.
Further, Lido is poised to reach a market share of 33% of ETH staked. Achieving this threshold is noteworthy because an entity with control over 33% of ETH stake could potentially delay finality.
In response to these concerns, Ethereum is set to incorporate EIP-7514 during the forthcoming Dencun upgrade. EIP-7514 restricts the churn limit for Ethereum validators, effectively slowing the rate at which additional ETH is staked. Therefore, these concerns and EIP-7514 may limit Lido's staking growth and cap its staking share at 33%.
At the same time, EigenLayer has introduced restaking primitives that allow protocols to incentivize decentralization. For example, a protocol may choose to exclude Lido's stETH if it wants to be rewarded for achieving high node decentralization.
Price impact:
Demand for liquid staking is still strong, given that the validator queue has been consistently full since May 2023. However, in light of the concerns around the concentration of stake in Lido, and given EIP-7514's restrictions and EigenLayer's push to provide higher yields for decentralized staking providers, there is the potential for competitors, such as Rocket Pool, to outperform over the near-term.
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🟢 Marinade Finance (MNDE)
Rating: Bullish
Risk: Medium
Sector: Liquid Staking
Catalyst overview:
TL;DR
- Marinade Finance, Lido, and Jito have all achieved remarkable triple-digit percentage increases in their TVL YTD.
- Marinade dominates ~53% of the TVL market share between these three protocols, with Lido capturing 24% and Jito 23%.
- The introduction of Marinade Earn: Season 1, coinciding with Lido's financial struggles on Solana, set the stage for Marinade to capture a portion of the market share.
Liquid staking derivatives (LSDs) continue to play a role in supporting Solana and its DeFi landscape. Platforms such as Marinade Finance, Lido, and Jito have experienced triple-digit percentage increases in their TVL and have become the top three DeFi protocols on Solana in terms of TVL. Marinade dominates ~53% of the TVL market share between these three protocols, with Lido capturing 24% and Jito 23%.
Two recent developments set the stage for market share to move in Marinade's favor. On September 17, 2023, the protocol introduced Marinade Earn: Season 1, a three-month incentives campaign to reward stakers that use mSOL or Marinade Native.
Campaign Details:
- MNDE incentives will be active during Q4'23 or until capped out at 40 million MNDE.
- Every participant will receive one MNDE per one SOL staked over the three months.
- At the end of the campaign, the MNDE will be distributed as locked MNDE with a 30-day unlocking period.
On September 28, 2023, a proposal was submitted requesting 1.5 million DAI to cover 12 months of Lido operations on Solana. The rationale behind the proposal is Lido's unsustainable financial situation and the limited fees generated on the Solana network. Ultimately, it appears that Lido's activities on Solana are nearing an end.
Price impact:
With the launch of an incentive program coinciding with the halt of operations by its closest competitor, Lido, Marinade is poised to seize a chunk of Lido's 24% liquid staking market share.
Since the above developments unfolded at the end of September, Marinde's TVL has surged from ~$105 million to ~$132 million, marking a 26% increase. Despite this growth, Marinde's market capitalization has remained relatively stable, suggesting a potential shift toward a more favorable valuation. This bullish trend has the potential for sustained growth in the coming months.
🔴 Avalanche (AVAX)
Rating: Bearish
Risk: Medium
Sector: L1
Catalyst overview:
TL;DR
- While the Avalanche ecosystem is developing and expanding its subnet landscape, expansion on the C-Chain continues to be relatively uneventful.
- Avalanche C-Chain remains the primary driver for the value accrual of AVAX, which has not sustained value-driving activity since its peak in May 2022.
- The demand for AVAX from subnet security and value-driving activity on the C-Chain does not appear strong enough to change asset performance trajectory over the near to mid-term.
The Avalanche subnet landscape is growing on the heels of several developments that have led to hundreds of subnets in the pipeline (on testnet) and enterprise partnerships, including those with GREE, Loco, T. Rowe Price, and WisdomTree.
However, Avalanche's general purpose EVM chain (C-Chain) remains the primary driver of value accrual of its native token AVAX. Competitive forces continue to put downward pressure on the C-Chain, which has yet to sustain value-driving activity since its highs in early 2022.
Until May 2022, Defi Kingdoms was the C-Chain's top transaction and revenue driver. However, its migration from the C-Chain to an individual subnet put downward pressure on C-Chain daily transactions, transaction fees (by design), and revenue (in AVAX). Since Avalanche burns 100% of transaction fees, the reduction in transaction fees also puts downward pressure on the burn rate of AVAX.
Price impact:
The activity and value applications like DeFi Kingdoms drove have yet to be backfilled despite applications like Uniswap going live on Avalanche in Q3'23.
As it stands, the outlook is such that the rollout of subnets, which expands the Avalanche global validator set, and demand for subnet security has largely become the value accrual mechanism for AVAX.
The value accrual from expanding the validator set is much different and may take longer than what comes from revenue and burning transaction fees on the C-Chain. It is also significantly dependent on the value proposition and success of subnets.
Until a significant number of subnets provide and demand security, AVAX becomes a more substantial part of the subnet landscape or catalysts for activity return to the C-Chain; the outlook is bearish for Avalanches' native token.
🟣 Polygon (MATIC)
Rating: Neutral
Risk: Medium
Sector: L1
Catalyst overview:
TL;DR
- Our rating of MATIC has been revised from bullish to neutral.
- The recent SEC regulatory actions may continue to put downward pressure on the price of MATIC.
- The anticipated Polygon 2.0 upgrade, with its reduced fees and inflationary token supply dynamics, may also exert downward pressure on value accumulation over the near to mid-term.
During Q2’23, the SEC characterized MATIC as a security in lawsuits against Binance and Coinbase. The suits led to MATIC's removal from exchanges like Robinhood and eToro, contributing to MATIC’s market cap decline of 41% over the quarter. The downward trend continued with another 21% decline through September 26, 2023.
As part of the anticipated Polygon 2.0 upgrade, the Polygon PoS chain will transition into a zkEVM validium over the coming months. With a zkEVM validium, transaction data is made available off-chain, resulting in lower fees on the PoS chain.
A new native token, POL, is also part of the Polygon 2.0 upgrade. The new POL token will be a 1:1 upgrade of the existing MATIC token and inherit MATIC's 10 billion supply. However, Polygon's new token economic model removes the finite 10 billion supply cap. Instead, POL will switch to an inflationary model to incentivize validator participation and fund a community-governed treasury.
Price impact:
The recent SEC regulatory actions may continue to put downward pressure on the price of MATIC.
Further, with Polygon 2.0, downward pressure on revenue generation and value accrual may result from its lower fees.
Finally, the launch of POL introduces an inflationary model of uncapped supply. These economics may put additional downward pressure on value accrual over the near term.
Ultimately, time is needed to see how the regulatory climate surrounding MATIC plays out and for the benefits of Polygon 2.0 to take hold.
🔵 Fantom (FTM)
Rating: Bearish
Risk: Medium
Sector: L1
Catalyst overview:
TL;DR
- After a strong Q1'23, FTM was silenced when cross-chain router Multichain was exploited at the end of Q2'23.
- Since the exploit, several applications have shut down, and Fantom's TVL and market cap have been crushed by 84% and 38%, respectively.
- Fantom DeFi remains battered, and until more infrastructure is integrated and investment in the ecosystem renews traction, we're bearish FTM.
Fantom introduced its Ecosystem Vault and Gas Monetization program in late 2022/early 2023. The initiatives changed network parameters, and Fantom's burn rate of transaction fees changed from 30% to 5%. The 25% allocation in fees burned is instead reallocated to its Ecosystem Vault for future investment and to the Gas Monetization program to provide a stream of income for developers.
At the onset of these programs, the market responded positively, and FTM rebounded 162% during Q1 2023, likely catapulted under the assumption that the ecosystem would receive capital for growth.
However, the zest was silenced when cross-chain router Multichain was exploited at the end of Q2 2023. Given Fantom's dependency on Multichain at the time, the aftermath of the debacle significantly impacted Fantom's fundamental value-driving DeFi ecosystem.
After the exploit, several applications were forced to shut down, including one of Fantom's largest DeFi protocols, Geist Finance. Fantom's TVL dropped from ~$455 million as of March 31, 2023, to ~$74 million by September 24, 2023 (an 84% decline). Looking ahead, the Fantom network is faced with reestablishing its primary revenue-generating DeFi ecosystem.
Price impact:
The Ecosystem Vault and Gas Monetization program put downward pressure on value accrual by burning less supply. Given that the initiatives also require projects to meet certain criteria and growth milestones before receiving capital and the Multichain exploit has hindered most projects on the network, investment in the ecosystem may take time.
Ultimately, catalysts for revenue-generating activity on the Fantom network do not appear on the near to mid-term horizon. The outlook for value accrual to the network and its token holders appears bearish over the next several months until the Fantom network integrates more diverse infrastructure around its ecosystem.
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