Lido's Big Break?

Ethereum's smart contract dominance has been challenged like never before this cycle. The increased concern that Ethereum is losing users to alt L1s like Solana has led some in the community to advocate for a shift in prioritizing technical improvements to the L1 execution layer over increased rollup data availability bandwidth.

This shift would have major ramifications for the network. It would also have interesting impacts on the revenues of various ETH infrastructure protocols. Today, we're digging into how an ETH priority shift could lead to big wins for liquid staking platform Lido and holders of LDO👇

🤖 Optimizing for Execution

Daily Ethereum L1 transactions have held relatively constant at around 1M mark throughout the past four years, yet transaction fee income has collapsed; Ethereum frequently raked in $20M+ in transaction fees per day in early 2021, but has found itself lucky to gross that much for an entire month in 2024.

Despite clear demand for Ethereum-adjacent blockspace demonstrated through the nearly uninterrupted uptrend to realized L2 transactional throughput, Ethereum captures extremely limited revenues from such activities.

As a result of its rollup-centric roadmap, Ethereum is optimized to provide relatively cheap data availability storage for its L2s. This is the only direct service in the rollup relationship for which Ethereum stakers receive payments, and it produces mere fractions of pennies in earnings from every transaction.

While rollups and L2s provide rapid transaction times and low transactions costs, their users lack the same security guarantees as they would receive on the Ethereum L1, where their transactions are processed by a decentralized group of validators and the integrity of the blockchain is maintained by proven economic incentives schemes, like slashing.

Ethereum’s greatest strength lies in its world class settlement guarantees, which guarantees that any user transactions will be reliably processed (assuming they can afford the requisite transaction fee), and many ecosystem thinkers contend that now is time to couple this core competency with improved L1 execution.

Although the substantial roadmap departure required to achieve this vision will require some contentious changes – like increased hardware requirements or native parallelization – the implementation of such upgrades could reinvigorate Ether’s faltering narrative strength by making the Ethereum L1 the default landing place for all onchain financial transactions of value.

🥩 Simple Staking Economics

While an abrupt shift towards execution prioritization appears unlikely at this very moment, it's an attractive pathway forward for the Ethereum ecosystem to consider.

The forward-looking nature of markets means investors often attempt to “front run” each other by positioning themselves to capitalize on a shift well in advance of its actual occurrence, and in such a scenario, LDO could become a leading out-performer in the weeks ahead.

Recent outperformance in LDO price, up 26% off its August 15 relative lows against ETH, indicates that investors may have identified the brewing bull case for this token.

Refocusing on execution will drive an increased number of transactions to the Ethereum L1, particularly the most desirable variety of computationally intensive high-value DeFi transactions. Individual transaction costs may very well decrease, but total fees generated across all transactions can be expected to increase in this scenario, positively impacting the main variable behind Lido revenues: ETH staking yields.

Additionally, assuming that a usable Ethereum L1 results in measurable increases to blockspace demand while producing desirable second-order effects like net Ether deflation, Ethereum could be become the more obvious smart contract platform choice, from both an investment and usability perspective. If the reclamation of this distinction boosts ETH price, Lido will earn even greater dollar-denominated profits at given levels of onchain activity.

While the conversations around shifting Ethereum's roadmap priorities remain early (and contentious!), it's undeniable that these potential shifts could offer some strong incentives to reinvigorate the L1 as a place where real users will happily pay for strong settlement guarantees to transact. If this grandiose vision could be achieved, there is hope that LDO will finally begin to outperform.